Subcontractor or employee? Why it matters for your tax and payroll

In the trade industry, it’s common to bring on extra help as subcontractors—especially during busy periods. But just because someone has an ABN and invoices you doesn’t automatically mean they’re a genuine subcontractor in the eyes of the ATO.

And if they’re not? You could be liable for super, tax, leave entitlements, and more.

What's the issue?

The ATO doesn’t care what you call someone. They look at the actual working relationship.

If a subcontractor operates like an employee (even if they’re invoicing you), you may be responsible for:

• Superannuation

• PAYG withholding tax

• Leave entitlements

• Payroll tax

• Workers’ compensation

  
  

And if you don’t get it right? You could face serious penalties, plus the cost of backpaying entitlements.

Questions to help you determine the relationship

Here are some key questions the ATO asks when assessing whether someone is a true subcontractor or an employee:

1. Do you control how, when, and where they work?

2. Do they rely solely or mostly on your business for income?

3. Do you provide the tools, materials, or equipment?

4. Are they paid hourly, not by quote or result?

5. Can they send someone else to do the job, or must they personally complete the work?

The more “yes” answers you have, the more likely the ATO will see them as an employee.

Why its risky to get it wrong

Aside from the legal and financial consequences, misclassifying a worker can:

• Disrupt your cash flow if you suddenly need to pay super or wages backdated months (or years).

• Damage your relationship with the worker.

• Attract unwanted ATO audits and Fair Work scrutiny.

• Impact your business reputation if you're seen as dodging employment obligations.

How to manage it?

1. Use the ATO’s tool: The Employee/Contractor Decision Tool is a free, quick resource to help you make the right call.

2. Set clear agreements: If they’re a subcontractor, ensure they have their own ABN, business insurance, and genuinely operate independently.

3. Seek advice early: Don’t guess - ask your accountant or HR adviser to help you structure these arrangements correctly.

This isn’t just red tape - it’s critical to your business’s long-term financial health. Misclassifying workers can lead to big fines, tax bills, and reputational damage. Getting it right ensures your team is looked after and your business stays compliant. Sign up for our Small Business Foundations Course to learn more today.