Becoming a contractor

Quick guide to becoming a contractor

• Verify if you’re an independent contractor or an employee

  Contractors have different rights and obligations to employees, so it's important to understand your working conditions.
  
  The Australian Taxation Office (ATO) Employee/contractor decision tool can help you identify the implications of your working relationship for taxation and superannuation purposes.

• Know your entitlements as a contractor

  It's important to understand your entitlements as an independent contractor.

  • Superannuation. Some independent contractors are entitled to superannuation. If you aren't covered by employee contributions, you may choose to arrange your own super contributions.
  • Pay, leave and redundancy. Unlike employees, independent contractors are not entitled to conditions such as annual leave, sick leave and redundancy entitlements unless these are specified in the contract. You will also need to negotiate what you get paid with your hirer.
  • Workplace health and safety (WHS) laws. As an independent contractor, you are entitled to a safe and healthy workplace and are required to comply with the duties set out in the Workplace Health & Safety Act for your state or territory. Read more about workplace health and safety.
  • Workers compensation insurance. As an independent contractor, you may not be entitled to compensation unless you have arranged your own accident protection insurance. Read more about different types of Business insurance.

• Know your tax obligations

  There are special tax rules for independent contractors to ensure you don’t use business structures to avoid your income tax obligations. You may also have to arrange to pay your own tax. It's important to speak with your accountant or the Australian Taxation Office (ATO) to ensure you understand your tax obligations.

  • Tax File Number (TFN). A TFN is a unique number issued by the ATO, used to administer tax. If you are operating as a sole trader you must use your individual TFN. If you are part of a partnership or a registered company you will need to apply for a separate TFN. Apply for a TFN.
  • Australian Business Number (ABN). Independent contractors need to have an ABN to use when dealing with other businesses. If you do not have an ABN before undertaking work, your hirer may legally withhold the top rate of tax, plus the Medicare levy, from your payment. Apply for an ABN.
  • Goods and Services Tax (GST). As an independent contractor, you will probably need to register for GST. It's applied to most goods and services sold or consumed in Australia, so – depending on your income - it's likely your service will be subject to GST. Register for GST.
  • Personal Services Income (PSI). If you operate as a sole trader, you are entitled to claim certain expenses as tax deductions necessary to earn your income. The PSI rules may affect the deductions you can claim. If you operate as a partnership, the partnership is entitled to claim certain expenses as tax deductions that are necessary to earn the partnership income. Each partner must pay tax based on net income. The PSI rules may affect the allocation of income and expenses between partners.
  • Companies, trusts and the PSI. If you operate as a company or trust, the PSI rules may affect you. The rules cover such issues as retaining income in the company, splitting income and some deductions. The ATO website tells you how to determine whether your income is classed as PSI.
  • PAYG instalments. PAYG is a system for making payments or ‘instalments’ each quarter towards your expected income tax obligation. PAYG instalments are generally paid by independent contractors who earn a certain amount of income. The ATO will write to tell you if you must pay PAYG instalments. Find out if you need to register for PAYG instalments.
  • Voluntary withholding tax arrangements with your hirer. You may be eligible to enter into a voluntary agreement with the hirer that will enable the hirer to withhold tax for you. This may simplify the administration of your taxation. More information on this option is available from the ATO.

• Register for licences

  Before starting work in any industry as a contractor, you should ensure that you are properly trained and licensed to do the job.
  
  Australian Business Licence and Information Service (ABLIS) helps you find the government licences, permits, approvals, registrations, codes of practice, standards and guidelines relevant to your industry and location.

• Arrange insurances

  As a Contractor you are generally responsible for your own insurance cover and, like any business, you bear the commercial risk for losses suffered from any work performed. Depending on what was agreed in your contract, both you (contractor) and the hirer may each have your own liability insurance and workers’ compensation obligations.
  
  Liability insurance protects you in cases where you are found liable for damages to others, such as:

  • a third-party death or injury;
  • loss or damage of property or monetary loss because of your negligence;
  • damage or loss because of advice you gave, or your provision of unsafe products or services.

  
  You can take out several different types of liability insurance including public or product liability and professional indemnity.
  
  You should also consider obtaining personal accident and illness insurance so you’re financially secure should any accident or illness prevent you from working.
  
  Consult an expert in the field to help you determine and obtain the covers you need.
  
  For more information, visit Business insurance.

• Understand contracts and invoices

  As an independent contractor, you may enter verbal and written contracts to do work for other individuals, businesses, government bodies or organisations. A contract could be made simply because of a handshake deal to do a job where the only thing in writing is a quote on the back of an envelope.
  
  Whatever the form of your agreement, if you commit to providing a service to a hirer for money, you have entered a contract - you are promising to do a job for the hirer and the hirer is promising to pay you for it.
  
  Find out more about the types of contracts used by independent contractors.
  
  When you have completed the work - or a portion of the work if your agreement includes that - you will invoice the hirer. Your invoice should include items such as:

  • rate of pay and duration (if applicable)
  • GST component
  • date the service was provided
  • your details including name, address, phone number and email address
  • description of the service provided
  • any expenses you incurred under the contract your ABN
  • an invoice number and any other details the hirer requires.

  
  If you are registered for GST, your invoice will be a ‘tax invoice’, which must contain certain information depending on the nature and value of the supply you make.
  
  Read more about GST and tax invoices.

• Practice good record keeping

  Clear and organised record keeping is vital for good business management and is also a legal requirement. Under tax law, you must keep business registration records and must be able to explain your business transactions.
  
  You need to keep records relating to income tax, GST, payments to sub-contractors and payments to other businesses for at least five years. Records may be kept electronically or in hard copy.