Contractor vs Employee - What’s The Difference

Over the past few years, there has been a clear shift in the way people are employed in the workforce. Whilst most are still traditionally employed by an employer, there is a trend for contractor work and self employed contracting, or freelancing, taking place.

A lot of people think of self employed as running your own home business or small business providing a goods or service. But this also takes into consideration contractors who are hired by a company to undertake a service or project. They appear to be acting as an employee, but they are very much in a different field.

Who is an Employee?

An employee works for an employer to provide a labour to their business. They are employed under a full time, part time or casual arrangement and will receive benefits such as leave loadings, superannuation contributions and work cover. They are a member of the company who has employed them.

Who is a Contractor?

A contractor, or self employed freelancer, is not an employee of the company they are working for, they are contracted to them to provide a service or project. As a contractor, they are not bound by the working conditions of the company hiring them or entitled to benefits. Basically this means as a contractor or self employed freelancer, you are responsible for your own leave payments, superannuation contributions, work cover and of course tax.

What are the benefits of being an employee?

There are a number of benefits of being an employee as most of us are aware. In Australia, there is a range of legislation at both a State and Federal level designed to protect workers and their safety making being an employee more secure and appealing. These include:

Unfair dismissal and unlawful termination protection
Minimum pay rates
Minimum working conditions
Leave entitlements
No personal liability if there is a defect in your work
Cover by a relevant workers’ compensation scheme in event of injury or illness while at work
Tax and super contributions are usually factored into your salary and payment entitlements arranged prior to you being paid your salary.

What are the benefits of being a contractor?

There are both economic as well as ‘personal’ benefits to being an independent contractor. A lot of people enjoy the sense of freedom and personal responsibility of being your own boss. Productivity often increases, and stress can be decreased with the control over working hours and projects committed to. Benefits include:

By default, you own your own intellectual property (‘IP’) (unless the contract says otherwise)
Potential tax benefits (although the ‘personal services income’ rules under the tax legislation may negate these benefits)
Potential to be paid more on a per project basis, plus you get the benefit of your own efficiency. You can set your own rate / salary.
Independence
Flexibility of work hours and work location
Creation of your own business and branding, which may later be sold (as ‘goodwill’)

As appealing as being a contractor or self employed may be however, there are factors that need to be taken into consideration. These include:

You are responsible for paying your own tax at tax time.
If you are earning more than $75,000 per year, you need to be registered for GST and submit quarterly statements. Find out more on registering for GST here (link blog)
You will not be contributing to an employer based superannuation fund.
You need to arrange your own work cover as well as personal and business insurances.

So, before you make the transition from an employee to contractor or self employed, make sure you factor in the pros and cons and if in doubt, always speak with your accountant to discuss your tax implications.