I want to hire a contractor. What tax rules apply to contractors vs employees?

If you're thinking about hiring, one of the first things you'll need to figure out is whether to go for a contractor or an employee. This decision impacts not only how you oversee the work but also your legal and tax responsibilities. 

In Australia, contractors and employees are treated quite differently when it comes to tax law, so getting a handle on the rules from the start can help you avoid costly mistakes and keep your cash flow in check.

What’s the difference between a contractor and an employee?

The main difference between a contractor and an employee is that contractors work for themselves and are their own bosses, while employees work in someone else’s business [1].

What tax rules apply when I hire a contractor?

Hiring a contractor can help you save time and resources, but it’s crucial to get a grip on the tax rules that come into play. 

Depending on how you bring the contractor on board and the kind of payment involved, you might need to think about things like PAYG withholding, GST, super, and payroll tax.

Do I need to withhold tax from contractor payments?

No, you typically don’t have to withhold tax from payments to independent contractors [2]. If they have an ABN and invoice you for their work, they’re responsible for managing their own tax.

However, there are a few exceptions:

• No ABN withholding. If they don’t provide an ABN on an invoice (or don’t have one), you withhold tax at the top marginal rate and send it to the ATO.
• Voluntary withholding agreement. Some contractors choose to have PAYG withheld to avoid big tax bills at year-end.
• The contractor is actually an employee. If they effectively work like an employee—for example, if they have set hours, can’t delegate work, or are integrated into your team—the ATO may classify them as one, and you’re required to withhold PAYG.

Do contractors charge GST, and can I claim it?

Contractors may charge GST if their annual turnover exceeds $75k (although some may register for GST voluntarily even if they’re below the threshold). You can claim the GST you pay a contractor, as long as you too are GST-registered and the expense was for your business. 

Do I have to pay super for contractors?

You generally don’t have to pay super for independent contractors. However, there are some exceptions where the ATO may treat contractors as employees for super purposesI, if:

• They’re paid mainly for their labour (as opposed to delivering a specific outcome)
• They have to do the work personally and can’t subcontract it
• The contract operates like an employment relationship (even if they have an ABN)

The contractor also has to be a sole trader. If you’re contracting through a company, trust, or partnership, you typically don’t have to make super contributions [3].

Do contractors count towards payroll tax?

Contractors are generally treated as "deemed employees" for payroll tax purposes if they’re working under a relevant contract, unless they:

• Aren’t a sole trader
• Are paid a fixed price for a result or project (not for hours worked)
• Can subcontract the work. 

However, each state in Australia has its own payroll tax laws, so it’s worth checking your state revenue office for specific guidance.

Can I deduct contractor payments as a business expense?

Yes, you can usually deduct payments to independent contractors as a business expense, as long as:

• The expense is directly related to running your business (for mixed-use expenses, only the business portion is deductible)
• The contractor provided a valid ABN
• You’ve kept records of the payment, like invoices and contracts

What happens if the ATO reclassifies a contractor as an employee?

If the ATO determines that a contractor should have been treated as an employee, you may become retrospectively liable for super contributions, PAYG withholding, and payroll tax. 

This is why it’s important to structure contracts carefully, follow ATO guidance, and keep thorough records of invoices and payment arrangements.

What tax rules apply when I hire an employee?

Hiring is always exciting, but it also brings along some important tax responsibilities, like making sure that your employees’ wages are taxed correctly, that super contributions are made, and that all other payroll-related obligations are taken care of.

Do I need to withhold tax from employee wages?

Yes, as an employer, you’re legally required to withhold tax for your employees’ wages (including bonuses, commissions, and allowances) through PAYG withholding [4]. 

The amount you need to withhold depends on each employee’s TFN and tax scale, and for each pay run, you must report it to the ATO on Single Touch Payroll (STP).

Do I have to pay super for employees?

Yes, by law, you have to pay a minimum amount of super to your employees, which, as of November 2025, sits at 12% [5].

There’s no minimum pay threshold; super must be paid to all employees regardless of how much they earn. This includes:

• Full-time, part-time, and casual employees
• Temporary residents
• Company directors
• Family members working in your business
• Employees receiving a super pension or annuity while still working

Do I need to pay payroll tax for employees?

It depends on your state and how much you pay in wages. As of 2025, these are annual payroll tax thresholds [6]:

• ACT: $2,000,000
• NSW: $1,200,000
• NT: $2,500,000
• QLD: $1,300,000
• SA: $1,500,000
• TAS: $1,250,000 
• VIC: $1,000,000
• WA: $1,000,000

If you hit these thresholds, you’ll need to register for payroll tax and pay it at your state’s rate. Even if you’re under, it's smart to keep an eye on your total wages so you don’t get caught out.

Are there additional taxes or levies I need to consider?

Yes, besides PAYG withholding, super, and payroll tax, there are a few other taxes and levies employers may need to account for:

• Fringe Benefits Tax (FBT): If you provide benefits to employees, like cars, entertainment, or low-interest loans, FBT may apply [7].
• Workers’ Compensation Levies: These vary by state and cover insurance for employees who get injured or become sick from their work.
• Training levies: Some states (including NSW, WA, and SA) require contributions to training funds, particularly for businesses in the building and construction industry.

Can I claim employee wages as a business expense?

Yes, you can typically claim employee wages, salaries, and associated costs as a business expense, as long as you meet all your tax and super obligations. 

The expense does need to be ordinary (meaning, typical within your industry) and necessary for running your business. Plus, you need to have records to substantiate it (like timesheets, payslips, and receipts).

Finance tips to make hiring easier

Being well-prepared can help you dodge cash flow issues, keep up with tax regulations, and grow your team in a secure way. Here are some handy tips:

• Know when to choose employees vs contractors. Consider the nature of the work, level of control, and business risk. Contractors are usually best suited for project-based or specialised work, while employees are better for ongoing, integrated roles.
• Plan your budget and cash flow. Hiring staff or contractors affects your cash flow, so make sure you account for all costs involved. If you need an extra hand covering these expenses, a business term loan or line of credit can help. Get a quote today and let Valiant take the financial strain out of hiring the right people for your team.
• Know your tax obligations upfront. Understanding what you must pay for before you hire someone can prevent headaches in the future. We’re talking super, PAYG withholding, and payroll tax.
• Use clear contracts. Protect your business and avoid unexpected costs by having clear, well-structured agreements. For employees, outline roles, pay, super, and other employment terms. For contractors, specify project outcomes, deliverables, and payment terms.
• Plan for growth and flexibility. Hiring can be seasonal or project-based, so make sure you have the financial resources to adjust your workforce as needed. Using flexible financing options, like a line of credit, can be a great way to handle busy times without stretching your cash flow.

Access funding to grow your team

Take the stress out of covering hiring costs with Valiant. Our platform compares loans from over 90 lenders to connect you with ones that work with your unique needs.

We manage the paperwork, handle the application, and help get your funding sorted, so you can focus on growing your business and bringing the right people on board. Reach out today.

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