6 Contractor Myths That Might Cost You Your House
Over the last few blog posts I have been working my way through what I think is an important topic for business owners – Is your contractor really a contractor or an employee. It’s important because if you get it wrong you may not only lose your business, but you could potentially lose your house. So far, I have covered the definitions of Contractor and employee, the indicators that help correctly define the arrangement, and the risk of getting that definition wrong. In this post, I want to dispel some of the myths around this issue that may be putting business owners at risk and could potentially be stopping you from seeking out the right advice from an Accountant or HR expert.
Myth 1: A business name means I am a contractor, right?
False. Having a business name means nothing, really, in terms of the relationship. All this means is that they have spent $60 at the department of fair trading.
Myth 2: Once a contractor always a contractor
This is a common myth that business owners often rely on when defining the relationship. They think that if they were a contractor on another job that means they will be a contractor on every job. This is a big miss. It needs to be looked at on a case-by-case basis. You really need to be asking the question every time, for each job. Run the ATO decision making tool every time as there may be different terms of the engagement that means a different outcome for each job. Even If you get it right nine times out of ten, that one time may cost you big time.
Myth 3: Workers who are used for their specialist skills or qualifications should be engaged as contractors.
This is a tricky one. In some cases, in conjunction with other aspects of the engagements, it could be enough to say, yes you are a contractor but on its own, it doesn’t. mean they are. Just because someone you get in has a fancy title and is a specialist, if all the other criteria on that spectrum drags them down to the employee section, then they are an employee every time. This is one where I would not only do your homework but gets some solid advice.
Myth 4: They said they wanted to be a contractor
It concerns me that some business owners rely on this one and it needs to be busted. “He said he had an ABN so he must be a contractor” – you can agree whatever you like. It doesn't override the laws of the land. It may suit you both to do it, but when someone comes and has a look at the arrangement, and they will, then it's all going to go pear shaped. What is important to understand is that the person who wants to be the contractor bears no risk there. You hold all the risk of coming to that agreement with them if it's not a contractor arrangement. Don’t get caught having to backpay five years’ worth of super because someone said they wanted to be a contractor.
Myth 5: They sent me an invoice, they must be a contractor
This just means they have got an invoice book, or they've got software. This myth is busted quicker than them having a business name. Again, we've got to go back to the guidelines (link ATO page) and the indicators (link indicator blog). Being handed an invoice is just one action in the relationship, to determine the true nature of the relationship it is important to weigh up all the actions and this one doesn’t have a lot of weight.
Myth 6: But we have a contract
Obviously, that means they are a contractor. False. If anything, if it isn’t a true contractor relationship, documenting all aspects of the relationship and signing off will just make the job of an Auditor easier. As with all these myths, on their own, they have no weight and are not an indicator.
I hope this helps to dispel some of those myths because I've heard those before. I've heard those statements and questions and it's just simply not the case. Remember it's you, as the person, not the business, engaging this person, that wears all the risk. There is zero risk at their end. I would encourage people that even if maybe they read the above and they've got a bit of fear that we've been doing the wrong thing. Well, don't just stick your head in the sand and go, it's too late. Act now. If you start doing things right now, you may not get an order for what's happened in previous years. It's never too late to do the right thing or to review how you're doing it. That might mean some uncomfortable conversations but it's never too late. The starting point, which won't cost you a cent, go and jump on the ATO decision tool. That'll give you a lot of confidence going forward, or it might make you feel uneasy. If it makes you feel uneasy, then I would strongly suggest you reach out to someone such as your Accountant or a HR expert
How do you get the right advice?
A starting point, which won't cost you a cent, is to go and jump on the ATO decision tool. That'll give you a lot of confidence going forward, or it might make you feel uneasy. If it makes you feel uneasy, then I would strongly suggest that you book some time with your Accountant, don’t stick your head in the sand, because if you are exposed, depending on the size of that exposure, you need to find out what actions you need to take to minimise that exposure or to mitigate the risks. Knowledge is power. Once you know where you stand, you can fix it. You can change tax, you can pay super, etc. You can do what you need to do. If you put your head in the sand, it will catch up with you and The ATO may not be friendly when they audit your arrangement.
If you do find yourself wondering if your contractor is really a contractor, reach out to one of our experienced Business Advisers for some advice on (02) 4353 3889