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Although you may consider a worker to be a contractor, they may actually be your common law employee.

It’s important to consider the question of whether or not a person is a contractor or an employee because some contractor payments are exempt from payroll tax. These exemptions cannot be considered in situations where the person is an employee.

While the term employee is not defined, in most instances it is not difficult to determine if a person is an employee or a contractor. However, in some cases the nature of the relationship between the person and the business engaging them needs to be analysed in more detail.

Generally, only an actual person can be considered an employee. If the person engaged conducts their business via a company or a trust, they are not considered an employee. However, payments to them may still be taxable under the contractor provisions.

Other factors to be considered in establishing whether someone is an employee or contractor include:

  • the degree to which control and direction is exerted by the business over the person
  • the nature of the contract and the practical relationship between the business and the person
  • whether the contract is focused on achieving an ultimate result, rather than what is provided during the performance of the contracted task
  • whether the person engaged is carrying on an independent business
  • whether the power to delegate or subcontract some or all of the contract exists
  • who bears the risk associated with the contract
  • who provides the tools, materials and equipment required to fulfil the contract.

These and other factors are set out in greater detail in Revenue Ruling PTA-038.

Last modified: 20 November 2023
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