Side-by-side comparison
| Feature | Employee | Contractor |
|---|---|---|
| Tax withheld | PAYG withheld by employer | Self-managed — pay quarterly instalments or at tax time |
| Superannuation | 12% paid by employer (2026-27) | Usually self-funded — employer may be obligated in some cases |
| GST | Not applicable | Register when current or projected GST turnover is at least $75,000 |
| Annual leave | Permanent employees accrue paid leave; casuals generally do not | No NES paid leave unless the contract provides it |
| Sick leave | Permanent employees accrue paid personal/carer's leave; casuals generally do not | No NES paid personal/carer's leave |
| Long service leave | State or territory rules and coverage apply | May apply only where a law, award or contract covers the arrangement |
| Workers compensation | Usually covered by the employer's policy, subject to local law | Coverage depends on the jurisdiction and working arrangement |
| Tax deductions | Eligible unreimbursed work-related expenses | Eligible business-use share, with records and apportionment where needed |
| Income security | Unfair-dismissal coverage depends on eligibility and service | Contract and general-law rights apply; employment protections may apply if misclassified |
| ABN required | No | Quote one when carrying on an enterprise; no-ABN withholding exceptions can apply |
Am I an employee or contractor?
The label on your contract doesn't determine your status. From 26 August 2024, the Fair Work Act's whole-of-the-relationship test applies to a constitutionally covered business: it looks at how the arrangement operates in practice, not just the written terms. It is not universal — state-referred, pre-commencement and start-of-relationship opt-out rules can affect which test applies. For tax and super the ATO applies its own common-law test, which weighs the legal rights in the written contract — so your status can differ between the two regimes.
Contractor indicators
- You set your own hours and can work for multiple clients
- You quote for a specific result, not time
- You bear financial risk (e.g. fix defects at your cost)
- You supply your own tools and equipment
- You can subcontract or delegate the work
Employee indicators
- The business sets your hours and you mainly work for it
- The work is ongoing and integral to the business
- The business provides equipment and training
- You are paid by time (hourly/weekly), not by result
- You cannot subcontract the work
No single factor is decisive. Source: ATO — Employee or independent contractor, including the ATO's decision tool to help assess the arrangement. Complex or disputed cases may need tailored advice.
ABN vs TFN
A tax file number identifies you; an Australian Business Number identifies an enterprise. Employees use a TFN. A person running an eligible enterprise may also need an ABN to quote to payers, while some private or hobby activities do not qualify for an ABN.
| Aspect | TFN | ABN |
|---|---|---|
| What it identifies | You personally, for tax | Your business activity |
| Who uses it | Employees (and everyone, for tax returns) | Sole traders, companies, trusts that invoice |
| Tax handling | Employer withholds PAYG each pay run | You invoice gross and manage your own tax |
| If you don't provide it | Withholding can apply until a TFN declaration is made | Payers generally withhold 47%, unless a no-ABN exception applies |
| Cost to get | No charge, via the ATO | No charge, via the Australian Business Register |
Sources: ATO — No ABN withholding and the Australian Business Register eligibility guidance.
Tax obligations as a contractor
Income tax — self-assessment
Tax can be withheld under some arrangements, but many contractors pay tax through PAYG instalments or at assessment. You lodge an annual return and pay tax on net profit — revenue minus eligible business deductions. The ATO may enter you into PAYG instalments based on your circumstances; the cycle and amount are not the same for every contractor. The tax return checklist helps once you start invoicing and claiming expenses.
GST and BAS reporting
If registered for GST, you report and remit GST on the reporting cycle that applies to you. Some businesses report monthly, some quarterly, and annual reporting is available only in limited circumstances. Registration is required when current or projected GST turnover reaches $75,000; the GST calculator handles the 10% add/remove arithmetic.
Source: ATO — Registering for GST.
Superannuation — your responsibility
Unless a client is legally required to pay your super (see FAQ below), you fund it yourself. A practical starting point is to set aside at least 12% of gross income so you are not falling behind an employee on the same earnings. The ATO contractor-super test explains when a client must contribute. The super contributions guide covers caps and the concessional rules.
Converting a contractor rate to an equivalent salary
A contractor day rate needs to fund costs an employee may receive on top of salary. The comparison is a budgeting exercise, not a rule of thumb that fits every role:
Build a rate from your expected billable days, unpaid leave, super, insurance, administration, equipment and periods without work. Before accepting a rate, run it through the contractor calculator to compare the headline day rate with the after-tax reality.
Sham contracting red flags
Sham contracting — disguising employment as contracting to avoid super, leave, and workers compensation — is illegal under the Fair Work Act and attracts civil penalties. Warning signs:
- You were told to "get an ABN" for what is otherwise a normal job
- Same desk, same hours, same manager as employees — different paperwork
- You're paid an hourly rate with no quote, no invoice terms, no ability to delegate
- A former employer re-engaged you as a contractor to do the same work
If this looks familiar, the Fair Work Ombudsman investigates sham arrangements. Source: Fair Work Ombudsman — Sham contracting.
Common contractor structures
Sole trader
Pros
- • Simplest setup
- • No ASIC fees
- • Direct control of business income
Cons
- • Full personal liability
- • Non-commercial loss rules can defer losses
- • No income splitting
Best for: A straightforward business after advice on risk and tax
Company (Pty Ltd)
Pros
- • Separate legal entity
- • Potentially limited liability
- • Company tax is generally 30%; a lower rate can apply to eligible base-rate entities
Cons
- • ASIC fees and admin
- • No CGT discount on company gains
- • Dividends and franking credits affect shareholder tax when profits are distributed
Best for: A business where commercial, PSI and tax advice supports the structure
Trust
Pros
- • Can distribute trust income under the deed
- • Potential asset-protection benefits
- • Flexibility for a genuine business
Cons
- • Complex to administer
- • Undistributed income can be taxed to the trustee at the top rate
- • PSI and anti-avoidance rules can limit distributions
Best for: A genuine business after specialist legal and tax advice
A structure is not a tax shortcut
Personal services income rules can attribute income from an individual's labour back to that individual, even where a company or trust invoices the client. Losses for sole traders can also be deferred under the non-commercial loss rules. Choose a structure for commercial reasons as well as tax, and obtain tailored advice before changing one.
Working out the downstream tax effect
To compare how wages, deductions, and tax rates fit together across these structures, the income tax guide covers the personal side.
Frequently Asked Questions
Do I have to pay super as a contractor?
It depends. A business generally has to pay super for an individual contractor when the contract is wholly or principally for that person's labour, the person must perform the work personally rather than having a contractual right to delegate it, and payment is for the labour rather than a result. An ABN does not change that test. A contractor engaged through a company, trust or partnership, or genuinely contracted to deliver a result with a right to delegate, generally manages their own super.
What daily rate is equivalent to a $100,000 employee salary?
As a sense-check, start with annual salary divided by about 220 working days, then add a loading for super, leave, insurance, admin, and downtime between contracts. On a $100,000 salary, that usually lands around $614–$636 a day, but the right figure depends on how steady the work is and which costs you are carrying yourself.
Do contractors pay GST?
You must register for GST when your current or projected GST turnover is at least $75,000, unless an exception applies. If registered, charge GST only on taxable supplies and claim credits only for eligible business purchases. You can choose to register voluntarily below the threshold, but doing so creates reporting obligations and is not simply a marketing choice.
What is sham contracting?
Sham contracting is when an employer disguises an employment relationship as an independent contracting arrangement to avoid paying entitlements like super, leave, and workers compensation. It is illegal under the Fair Work Act. The ATO and Fair Work Ombudsman both actively investigate sham arrangements.
Can I claim more tax deductions as a contractor?
Contractors can generally claim the business-use share of expenses incurred in earning their assessable business income, provided they keep records. A private or mixed-use expense must be apportioned, and some costs have special rules. Being a contractor does not make every purchase deductible. Employees can also claim eligible unreimbursed work-related expenses, subject to their own rules.
Do I need an ABN to contract?
You need an ABN when you are carrying on an enterprise and need to quote it to a payer; an ABN does not by itself make you a contractor. A payer will generally withhold 47% when an ABN is not quoted, but exceptions apply, including some private or hobby supplies and a valid no-ABN statement. Register only if you are entitled to an ABN.
Can I have an ABN and a TFN at the same time?
Yes, and most contractors do. Your tax file number identifies you personally for PAYG employment income; your ABN identifies your business activity for invoicing. Working a salaried job under your TFN while freelancing under an ABN is common — each income stream is reported in the same tax return.