Contractor vs Employee Calculator

Contractor vs employee: the true cost comparison

The headline salary or day rate rarely tells the full story. An employee on AU$85,000 costs the business AU$100,000-110,000 once you add superannuation (12%), workers compensation insurance, payroll tax (if above threshold), annual leave, personal leave, leave loading, and training. A contractor at AU$650/day for 220 working days costs AU$143,000 in direct payments, but the contractor provides their own tools, insurance, and super.

The real question is not which is cheaper. It is whether the arrangement is genuinely a contractor relationship under ATO and Fair Work rules. Getting this wrong exposes the business to back-dated superannuation, PAYG withholding, leave entitlements, payroll tax, and penalties that can exceed the cost difference several times over.

Worked example: site supervisor, construction

A Melbourne construction company needs a site supervisor. They are comparing an employment arrangement against a contractor arrangement for the same role.

*If the contractor is paid principally for personal labour and skill, super guarantee may still apply. See below.

The employee costs AU$628 per productive day. The contractor costs AU$700. The contractor is 11% more expensive per day worked, but the business avoids management overhead, HR obligations, and the commitment of permanent employment. Whether the premium is worth it depends on the duration of the engagement, the flexibility the business needs, and whether the arrangement passes the ATO's classification test.

ATO contractor vs employee: the multi-factor test

The ATO does not use a single test. It assesses the overall relationship across several factors, and the ATO's employee or contractor guidance sets out the key indicators:

• Control: Does the business control how, when, and where the work is done? An employee is told how to do the work. A contractor is engaged to achieve a result and decides how.
• Delegation: Can the worker delegate or subcontract? An employee cannot. A genuine contractor can hire someone else to do the work.
• Tools and equipment: Does the worker provide their own tools? Employees typically use the employer's equipment. Contractors bring their own.
• Financial risk: Does the worker bear financial risk for the work? A contractor who quotes a fixed price and wears cost overruns is bearing risk. An employee paid by the hour is not.
• Basis of payment: Employees are paid for time worked. Contractors are paid for a result or a deliverable.

No single factor is decisive. A worker can have an ABN, issue invoices, and still be classified as an employee if the overall nature of the relationship is one of employment. The High Court's decisions in CFMMEU v Personnel Contracting (2022) and ZG Operations v Jamsek (2022) confirmed that the written contract terms are the primary starting point, but the ATO still looks at how the arrangement works in practice.

Super guarantee for contractors

Since 1 July 2022, the superannuation guarantee applies to contractors who are paid wholly or principally for their personal labour and skill, regardless of whether they have an ABN or quote GST. This catches a large number of arrangements in construction, IT, and professional services where the contractor is effectively a single-person operation doing the work themselves.

If super applies to a contractor, the business must pay the 12% SG rate on top of the contracted amount (or the contract rate is treated as inclusive of super, reducing the contractor's take-home). At a day rate of AU$700 for 220 days, the super obligation is AU$18,480 per year. Missing this turns a cost-saving contractor arrangement into an underpayment liability. Use the super calculator to estimate the obligation.

Sham contracting penalties

Sham contracting is when a business misrepresents an employment relationship as a contractor arrangement to avoid employee entitlements. Under the Fair Work Act, penalties are up to AU$93,900 per contravention for individuals and AU$469,500 for companies. Beyond the penalties, the business faces back-payment of:

• Superannuation guarantee charge (including interest and administration fees)
• PAYG withholding that should have been deducted and remitted
• Leave entitlements (annual leave, personal leave, long service leave)
• Payroll tax on the reclassified payments
• Workers compensation premiums

For a construction business with five misclassified contractors over three years, the combined back-payment, penalties, and interest can exceed AU$500,000. The ATO and Fair Work Ombudsman both actively audit contractor arrangements in high-risk industries including construction, transport, and IT.

TPAR reporting obligations

If your business pays contractors for services in building and construction, cleaning, courier, IT, security, or road freight, you must lodge a Taxable Payments Annual Report (TPAR) with the ATO by 28 August each year. The TPAR reports the ABN, name, and total payments to each contractor. The ATO cross-references TPAR data against the contractor's income tax return to detect underreported income.

Getting TPAR data right requires your AP system to track contractor payments separately and record the correct ABN for each payee. If contractor invoices are processed alongside supplier invoices without a classification step, extracting the TPAR data at year-end becomes a manual exercise across 12 months of transactions. For businesses processing high volumes of subcontractor invoices, see freight and construction invoice processing for how AP automation handles this.

Frequently asked questions

How does the ATO decide if someone is a contractor or employee?

The ATO assesses the overall relationship using multiple factors: who controls the work, whether the worker can delegate, who provides tools, who bears financial risk, and how payment is structured. No single factor is decisive. Having an ABN or issuing invoices does not automatically make someone a contractor if the working arrangement resembles employment.

Do I have to pay super for contractors?

Since 1 July 2022, super guarantee applies to contractors paid wholly or principally for their personal labour and skill, regardless of ABN status. If the contractor does the work themselves rather than delegating to employees or subcontractors, super likely applies. The rate is currently 12% of the contractor's earnings.

What are the penalties for sham contracting?

Fair Work penalties are up to AU$93,900 per contravention for individuals and AU$469,500 for companies. On top of penalties, the business must back-pay super, PAYG withholding, leave entitlements, payroll tax, and workers compensation premiums for the period of misclassification. Both the ATO and Fair Work actively audit high-risk industries.