You have been asked by your employer to apply for an ABN as they want to hire you as a subcontractor.
What you need to do to be able to subcontract?
There are a few things you will need to take care of:
- Apply for an Australian Business Number (ABN)
- Apply for GST registration (if necessary)
As your accountant, we would advise you on this.
- Set up a competent bookkeeping system or software
Many subcontractors choose to use QuickBooks Online (QBO). QuickBooks Online like many other programs link to your business bank account and can track all of your expenses, process invoices, produce reports to calculate profit and loss etc. At Canny Accounting we are able to offer wholesale prices for a QBO subscription and have staff members more than capable of assisting you with setup and maintenance of the program. We find QBO to be one of the most cost effective and easy to use programs. We also have clients who have chosen to use Xero and MYOB and we can easily assist you with those as well.
Canny Accounting can provide you with all the help you need in the above steps. We have an accounting and bookkeeping team dedicated to assisting you with setting up and maintaining your new business.
One of the most common mistakes we come across with subcontractors, is not putting aside a percentage of income to cover tax, GST (if applicable) and superannuation.
If you were an employee, your employer would take care of this for you. They subtract the tax withheld and superannuation amount from your wage. Then the amount paid into your bank account is all yours to spend as you please. This however, is not the case for a subcontractor. You are paid the full amount for the job you have completed. It is then up to you to put aside an amount to cover your income tax, superannuation and if applicable, GST for your Business Activity Statement (BAS).
We recommend at least 30% of your income should be set aside to cover these expenses. The remaining 70% is then for you to use to cover your wage and day-to-day business expenses.
Are you a subcontractor or should you actually be considered an employee?
There are many myths about what classes a worker as a subcontractor. The big one being the “80% rule” or the “80/20 rule”. This implies that a worker cannot work for one business more than 80% of the time. As this should otherwise consider them an employee.
This however, is incorrect. In the myths and facts stated by the ATO the 80% rule relates to personal services income (PSI) and can change how a contractor:
- Reports their income in their own tax return.
- Claims some business-like deductions.
It’s not a factor a business considers when they work out whether a worker is classed an employee or contractor.
There are several factors used to determine the difference between a subcontractor and an employee. Such as the basis of payment. An employee is paid on commission, time worked, etc. A contractor is paid for completing a job based on an initial quote.
Another factor is equipment, tools and other assets. An employee has tools provided to them by the employer, receives an allowance or has a reimbursement agreement in place. A contractor provides all their own equipment and tools etc.
It is against the law to treat employees as contractors. Businesses that do this are taking the risk of receiving penalties and charges if caught.
How Canny Accounting can help
Canny Accounting are more than happy to assist you if you have any queries about making the transition from employee to subcontractor or how you should be classed. Get in touch with us.