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 (2025-26) | Usually self-funded — employer may be obligated in some cases |
| GST | Not applicable | Must register if turnover > $75,000/year |
| Annual leave | 4 weeks paid leave per year (minimum) | No paid leave — you only earn when you work |
| Sick leave | 10 days personal/carer's leave per year | No paid sick leave |
| Long service leave | Accrues after 7–10 years with same employer | Generally not applicable (varies by state/industry) |
| Workers compensation | Covered by employer's policy | Not covered — needs to arrange own cover (income protection, public liability) |
| Tax deductions | Limited to unreimbursed work-related expenses | All genuine business expenses deductible |
| Income security | Unfair dismissal protections apply | Contract terms govern — no unfair dismissal protection |
| ABN required | No | Yes — to invoice clients and avoid 47% withholding |
Am I an employee or contractor?
The label on your contract doesn't determine your status. Since the Closing Loopholes reforms commenced on 26 August 2024, the Fair Work Act looks at the whole of the relationship — how the work actually operates in practice, not just the written terms. 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 for a definitive assessment.
ABN vs TFN
A tax file number identifies you; an Australian Business Number identifies your business activity. Employees only need a TFN. Contractors need both — the TFN for the tax return, the ABN to invoice clients.
| 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 at the top rate until provided | Clients must withhold 47% from payments |
| Cost to get | No charge, via the ATO | No charge, via the Australian Business Register |
Tax obligations as a contractor
Income tax — self-assessment
No tax is withheld from contractor invoices (unless you enter voluntary withholding arrangements). You lodge an annual return and pay tax on net profit — revenue minus deductible expenses. If you expect to owe more than a small amount at tax time, the ATO moves you onto quarterly PAYG instalments. The tax return checklist helps once you start invoicing and claiming expenses.
GST — quarterly BAS
If registered for GST, you lodge a Business Activity Statement quarterly (or monthly/annually by choice), remitting GST collected from clients minus GST credits on business purchases. Registration is mandatory above $75,000 turnover; the GST calculator handles the 10% add/remove arithmetic.
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 super contributions guide covers caps and the concessional rules.
Converting a contractor rate to an equivalent salary
This is where people underquote. A contractor day rate has to fund costs an employee receives on top of salary:
As a starting point, multiply the salary you want to replicate by 1.35–1.40: matching a $120,000 package usually means about $162,000–$168,000 in contractor revenue before expenses. 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
- • Losses can offset other income
Cons
- • Full personal liability
- • No income splitting
- • Higher tax at top incomes
Best for: Starting out / lower income
Company (Pty Ltd)
Pros
- • Limited liability
- • Flat corporate tax rate below top personal rates
- • Credibility with large clients
Cons
- • ASIC fees and admin
- • No CGT discount on company gains
- • Retained profits taxed personally on distribution
Best for: Established, higher-income contractors
Trust
Pros
- • Income splitting across family members
- • Asset protection
- • Flexibility
Cons
- • Complex and expensive to set up
- • Must distribute all income annually
- • ATO scrutiny of distributions
Best for: Family businesses with multiple beneficiaries
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. If you are engaged primarily for your labour (rather than a result) and you work under a contract wholly or principally for your personal labour and skills, the engaging business must pay super contributions on your behalf — even if you invoice through an ABN. If you are a genuine business contractor providing a result-oriented service through a company or trust, you generally manage your 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 if your annual turnover exceeds $75,000. Once registered, you add 10% GST to your invoices and remit the GST collected to the ATO (less any input tax credits). Many contractors register voluntarily even below the threshold to appear professional and to claim input tax credits.
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?
Yes. Contractors can claim all genuine business expenses: home office costs, professional subscriptions, tools and equipment, work-related travel, business insurance, and accounting fees. Employees can only claim work-related expenses not reimbursed by their employer, which is usually a narrower scope.
Do I need an ABN to contract?
You need an ABN to invoice for goods or services. Without one, clients are required to withhold 47% tax from your payments (the top marginal rate plus the Medicare levy). Registering an ABN is free through the Australian Business Register website.
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.