Types of employment and tax?

Question

so you are either emplyed and give your TFN to the employer and he/she withholds the tax , supper and that is called PAYG or you are an independent contractor with an ABN...so you give your ABN number on your invoice to your employer and then he/she pays you in full and that is up to you to declare your income and pay your tax at the end of the finantial year and the employer uses that ABN number to claim GST for his/her own tax return....Is this right?

Answer 1

Yes... if you are an "employee" - you must supply a tax file number (TFN) to your employer.  Your employer will then withhold (usually 31.5%) of your taxable income and pay it to the Government - called PAYG (pay as you go).  Your employer is also reponsible to pay (currently 9%) of your pretax amount into the superannuation fund of your choice (Super Benefit).

If however, you are classified as a "contractor"... the person sub-contracting to you ("employing you") is only entitled to withhold tax if you DO NOT give them an ABN (Australian Business Number).  Without an ABN, it becomes the "employer's" responsibility to submit a BAS (Business Activity Statement) to the ATO (Australian Taxation Office).  You will only receive the "after tax" amount (ie less the applicable 10% GST).  However, if you hold an ABN, it is your responsibility to submit a quarterly BAS.  And the ATO WILL find you if you don't.  Everything's electronic, so don't think it's "up to you to declare your income".  So yes... with an ABN, you "claim" the GST credits on your return.

So an "employee" pays "income tax" (via PAYG).  A sub-contractor pays "business tax" (via BAS)... and the business taxation rates vary and are calculated over a three year period.  So even though your "income" may be low one year, you'll still pay at the originally calculated (ie higher) rate.

The MAIN difference though -- as an employee, you are entitled to Sick and Annual Leave.  As a sub-contractor, if you don't work -- you don't get paid.  So while the "hourly rate" may look nice on paper, remember that sub-contractors are not entitled to any "benefits" from the person/company "employing" them.  Sub-contractors are classified as "self-employed"; so if you are injured (whether working or at home), you had better have good health insurance -- as well as disability insurance; to cover all the bills that are still going to accumulate (such as rent/mortgage, utilities, etc.), even though you are not "gainfully employed".

If you are contemplating employment versus self-employment, I strongly suggest you get the facts from a qualified accountant or taxation specialist.  They'll be able to give you an accurate idea of which form of "income generation" is better in your situation.

Answer 2

All is correct with Safryre, except that 31.5% is a variable amount, according to how much you earn.

With regard to superannuation, this amount is paid in addition to what you have earned so that it is not entirely YOUR pre-tax amount, or you can speak to your employer about having extra taken out (in addition to compulsory 9% employer contribution), or if you are a contractor, you could speak to your accountant (or trusted Financial Advisor) about superannuation policies and each policy type's benefits (you would have those amounts taken out through Direct Debit or Billpay, instead of by employer).

Always, the best way to find out something complex like taxation, is to ask someone who definitely knows (Certified Praticising Accountant or directly to the the Australian Tax Office). I would probably speak to a CPA, as they will devote more time to you.