Most of us don’t get a choice, but if you’re a contractor thinking of becoming an employee, or an employee thinking of becoming a contractor it’s good to know what you’re getting yourself in for.
Tax time can be confusing. It makes you re-think things you know and face things that you’ve got no idea about. It’s also important that you get it right first time, to avoid penalties or delays later on.
One of the major ways that your tax return will vary depends on if you are a contractor or an employee. You should know which you are, and which return type you are filing.
What is an employee?
An employee is someone who works for a business to perform a specific duty in an open ended, permanent contract. The employee is expected to complete their role and in return their employer will take care of all of the practicalities of employment, including superannuation, payroll tax, sickness and annual leave.
What is a contractor?
Contractors are typically self employed people engaged by a company or individual for a specific task, which they often do for an agreed price and with a pre-arranged time frame. Contractors don’t work for anyone exclusively, but rather work for themselves and as such are responsible for a lot of the duties that an employee may not have.
Why do businesses need employees?
Businesses employees complete tasks that are open ended and constantly required for the running and growth of their business. Most workers are employees of their business. They typically have set hours, set salaries and set bonuses built into their contract. They tend to get superannuation, leave hours and more stability with their contract.
Why do businesses use contractors?
Business use contractors to perform tasks that are only required seasonally or for short periods of time. For example, if a window broke, it would make more sense for a business to contract a glazer to fix the single window, rather than employing one. Businesses may use contractors to cover particularly busy periods, such as shops over Christmas or holidays perks in the summer. A lot of businesses have temporary projects where it would be a lot more cost efficient to use a one-off, contractor.
What are the pros and considerations of employment?
- Regularity and routine.
- Salary and benefits.
- Tax usually taken from pay-cheques.
- Not usually possible to set own hours.
- Set amount of annual leave.
- Often have to travel to office.
What are the pros of considerations of being a contractor?
- Can set own hours.
- Often able to work from home or remotely.
- Variety of work and hours.
- No fixed income or benefits.
- Responsible for own tax and finances.
Which is better?
It isn’t really a case of which is better, or which is worse, it’s usually more a case of which works better for the individual. Some people enjoy the routine and regularity of having employment, while some people prefer the freedom and variety of being self employed.
It’s also important to consider where you are in your life, for example, if you don’t have a family then you may prefer and have the time to be an employee, whereas if you have a young family or other commitments, you may prefer the flexibility of being a contractor.
In summary, it isn’t really about which is better or which is worse, it is more about the type that works better for you and for your industry. Both have positives and negatives, and while one might suit one personality type, others will prefer the other.