In a recent case, an employer was liable for $150,000 of tax that should have been withheld on payments to sub-contractors, in addition to a penalty of 25 percent for failure to withhold. Although the business was liable for $182,500, it could have been much worse; the penalty could have been 100 percent of the tax not deducted.

This situation isn’t as unusual as it sounds. Just because an individual has an ABN and issues you a tax invoice, it doesn’t mean they’re a sub-contractor. The key is their relationship with your business: employees work in your business and are part of your business, while contractors run their own business and simply provide services to your business.

In this case, the ‘sub-contractors’ were in fact employees—working individually and off-site but essentially a part of the business.

If you’re not sure whether your workers are technically employees or sub-contractors then you could be at risk. Remember, you also have a responsibility to pay superannuation on payments as well as worker’s compensation and payroll tax. If you are making a payment to a company, you don’t need to deduct tax but could be subject to payroll tax.

Use the ATO Employee / Contractor Decision Tool to find out whether your workers are employees or sub-contractors for tax and super purposes. If you’d like to discuss your particular circumstances to prevent any issues in the future, please contact us.