Independent Contractor vs Employee in Australia: How the Tests Work

Short answer: An employee works in someone else’s business; an independent contractor runs their own business and sells a result. The ATO weighs control, the right to delegate, how you are paid, who supplies the tools, who carries the risk, and whether you are part of the client’s business. For tax and super a genuine written contract carries the most weight, while the Fair Work Act also looks at how the work actually happens. An ABN changes nothing, and a contractor paid mainly for labour is still owed 12% super.

The same question is answered under two sets of rules. The ATO applies its test for income tax, PAYG withholding and super; the Fair Work Act applies the whole of relationship test for wages, leave and unfair dismissal. This guide covers both for the 2025–26 and 2026–27 income years. If you are setting up to contract, start with how to become a sole trader and how to apply for an ABN.

What is an independent contractor, and how is it different from an employee?

An employee serves in the business that engages them; an independent contractor provides services to that business while running a business of their own.

An employee works as a representative of the employer’s business, and the profit or loss is the employer’s. A contractor works to further their own business, sets the price, and keeps the margin or wears the loss. A subcontractor is simply a contractor engaged by another contractor, like a plumber brought in by a builder; the same tests apply.

How does the ATO tell a contractor from an employee?

It looks at six indicators across the whole working arrangement, and no single one decides it.

Indicator	Points to employee	Points to independent contractor
Control	The business has the legal right to control how, where and when you work	You choose how, where and when, subject to reasonable direction
Delegation	No right to delegate or subcontract	The contract lets you delegate or subcontract to others
Payment	Paid for time worked, per item or by commission	Paid a fixed fee to achieve a specific result
Tools and equipment	The business provides all or most of them	You provide them, without an allowance or reimbursement
Risk	The business carries the commercial risk	You carry the risk of injury costs or defects in your work
Integration	You serve in the business as its representative	You provide services to further your own business

The ATO’s employee or contractor guidance includes a decision tool. Two examples. Josh, a carpenter, works 38 hours a week on a builder’s sites, paid by the hour, with the builder’s materials and no right to send someone else: that points to employee. Lena, a tiler, quotes a fixed $9,800 for a bathroom, brings her own tools, fixes defects at her own cost and sometimes sends her offsider: contractor.

Does the written contract decide it?

For tax and super, largely yes, if the contract is comprehensive and genuine; for workplace rights, not on its own.

Tax and super. Following two 2022 High Court decisions, TR 2023/4 says that where the parties have put the terms of their relationship comprehensively into a written contract and it is not a sham, the legal rights and obligations in that contract decide whether the worker is an employee. How the work is done in practice matters only to establish the terms or to show a sham. Calling someone a contractor does not make them one if the rights and obligations say otherwise.

Fair Work. Since 26 August 2024, the Fair Work Act uses the whole of relationship test: the real substance, practical reality and true nature of the relationship, including how the contract is performed in practice.

A worker earning more than the contractor high income threshold can give the business a written opt-out notice, and the start of relationship test, which looks at the contract, then applies instead.

Period	Contractor high income threshold
1 July 2025 – 30 June 2026	$183,100
From 1 July 2026	$190,100

The same threshold limits who can ask the Fair Work Commission for an unfair contract term remedy: contractors earning over it cannot apply.

Does having an ABN make you a contractor?

No. The ATO is blunt that an ABN makes no difference to whether a worker is an employee or a contractor for a job.

Some businesses ask employees to get an ABN to avoid PAYG withholding and super. Misrepresenting employment as contracting is sham contracting under the Fair Work Act, and since the 2024 changes a business defending a claim must show it reasonably believed the worker was a contractor. Getting it wrong also brings PAYG withholding penalties and the super guarantee charge, which can carry an extra penalty of up to 200% of the charge.

For a genuine contractor the ABN matters for another reason: if you do not quote one, the payer may have to withhold tax at the top rate. See how to find your ABN if you have mislaid yours.

Do contractors get super?

Usually not, but a contractor paid wholly or principally for their labour counts as an employee for super and is owed the super guarantee.

The ATO’s test is met where:

• you are paid wholly or principally for your personal labour and skills
• you perform the work personally
• you are paid for hours worked, rather than to achieve a result.

The contract has to be with you as an individual, not through your company, trust or partnership. Where the test is met, super is owed on the labour component of your invoice even though you quote an ABN.

The super guarantee rate is 12% for 2025–26, and stays 12% from 1 July 2026, now calculated on “qualifying earnings”. Under Payday Super, from 1 July 2026 it must reach the worker’s fund within 7 business days after each payday. Josh, invoicing 38 hours at $65 an hour, bills $2,470 a week for labour; the builder owes 12% of that, $296.40, into his fund each week. Lena, paid a fixed price for a result, generally falls outside the test and looks after her own super.

What changes for tax and paperwork?

As an employee your employer handles the tax as it goes; as a contractor you do it yourself.

	Employee	Independent contractor
Income tax	Withheld from every pay	You set it aside, or agree to voluntary withholding
ABN	Not needed for the job	Quote it, or the payer may withhold at the top rate
GST	None	Register at $75,000 GST turnover; taxi and ride-share from the first fare
Activity statements	None	Lodge a BAS if registered for GST or on PAYG instalments
Super	Paid by the employer	Your own, unless paid mainly for labour
Leave	Paid leave, or a casual loading for casuals	None: no sick or holiday pay

A business generally does not withhold from a contractor’s payments unless no ABN is quoted or the contractor asks for a voluntary agreement to have tax withheld. Otherwise expect PAYG instalments once you have a tax history, covered in sole trader taxes, and invoices that meet the ATO’s rules, covered in how to invoice as a sole trader.

Contractors who mostly sell their own time also meet the personal services income (PSI) rules. If more than half of what you earn under a contract is for your personal effort or skills, it is PSI, and unless you self-assess as a personal services business some deductions are limited. You qualify by meeting the results test for at least 75% of your PSI, or by passing the 80% rule (under 80% of PSI from one client and their associates) plus one of the other tests.

What should a contractor agreement include?

Terms that describe the relationship you actually have, because under both tests the substance counts more than the template.

• the parties, with each side’s legal name and ABN
• the result being delivered, rather than hours of availability
• the price and how it is set (fixed fee or quote), invoicing and payment terms
• your right to delegate or subcontract
• who supplies tools, equipment and materials
• responsibility for fixing defects, and the insurance you hold
• how either side can end the arrangement.

A “contractor employment agreement template” that says “contractor” on the cover, then sets your hours, supplies your tools and bars subcontracting, describes an employee. business.gov.au lists a contractor’s other responsibilities, and the Australian guides collect the rest.

…and where does Keel fit?

A contractor’s business shows in the paperwork: quotes for a result, invoices with your ABN, receipts for your own tools.

Keel: Invoice Maker & Receipts, by Ilura Technology OÜ, is an iPhone app for people who work for themselves. An accepted estimate becomes the invoice in one tap; receipts, expenses and mileage sit under the job; and “who owes you” prepares reminder drafts you review and send yourself. Records stay on the iPhone: no account, no bank connection, no cloud sync, and the App Store privacy label reads “Data Not Collected”. Keel does not decide your status, lodge a BAS or connect to the ATO. It is free with no invoice limit; Keel Lifetime is a one-time purchase ($249.99 USD, shown in local currency on the App Store). Keel on the App Store.

Frequently asked questions

Can I be an independent contractor if I only have one client? Yes. One client does not by itself make you an employee, because the ATO weighs all six indicators together. But if 80% or more of your personal services income comes from that client, you fail the 80% rule, and you need the results test or an ATO determination to stay outside the PSI rules.

What is the meaning of subcontractor? A subcontractor is a contractor engaged by another contractor rather than by the end customer, such as an electrician brought onto a job by the builder. The title does not settle their status: the same six indicators decide whether they are independent, and super can be owed if they are paid mainly for labour.

Do I have to pay super for a contractor I hire? Yes, if the contract is with them as an individual and wholly or principally for their labour: paid for personal labour and skills, done personally, and paid for hours rather than a result. The rate is 12%, and from 1 July 2026 it must reach their fund within 7 business days after each payday.

Does a contractor agreement make someone a contractor? Not by its label. For tax and super, a comprehensive written contract that is not a sham is decided on the rights and obligations it creates, so a contract that sets hours, supplies tools and bars delegation describes an employee. Under the Fair Work Act, how the work actually runs is considered too, unless a high earner has opted out.

What happens if a business treats an employee as a contractor? It can face the super guarantee charge, with an extra penalty of up to 200% of the charge, and penalties for failing to withhold PAYG. Under the Fair Work Act it also risks sham contracting penalties and claims for unpaid wages and leave, and its defence depends on showing it reasonably believed the worker was a contractor.

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This article is general information, not tax, legal or employment advice. Consult a qualified Australian adviser.