Subcontractor vs Employee: How to Tell the Difference in the Trades

How does the ATO decide between a subcontractor and an employee?

Subcontractor vs employee is decided by the working relationship, not by the label in the contract or by whether the worker holds an ABN. The ATO says an employee serves in your business and works as its representative, while an independent contractor provides services to your business and works to further their own business. Whether a worker is a contractor or employee affects your PAYG withholding and super obligations, and you are responsible for classifying them correctly. The ATO states that incorrect classification can lead to penalties.

The ATO's guidance on this topic was last updated in December 2024, so check ato.gov.au for the current version.

What does the contract have to do with it?

Following the 2022 High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek, the ATO looks at the legal rights and obligations in the contract. Any label the parties use, such as independent contractor, does not determine the outcome. Conduct and work practices are generally not relevant unless they vary the contract.

The ATO says the traditional indicators still matter, but no single one is decisive and they should not be used as a checklist. Employees and contractors typically differ in these ways:

• Control: an employer has the legal right to control how, where and when work is done. A contractor chooses how, where and when, subject to reasonable direction.
• Integration: an employee works as a representative of your business. A contractor works to further their own business.
• Payment: an employee is paid for time worked, a price per item or a commission. A contractor is generally paid a fixed fee for a completed result.
• Delegation: an employee must do the work personally. A contractor can usually subcontract or delegate.

Who is always an employee in the trades?

The ATO states that apprentices, trainees, labourers and trades assistants are always treated as employees. Only a natural person can be an employee, so if you hire a company, trust or partnership to do the work, the relationship is a contracting one for tax and super purposes.

Illustrative example only: a builder engages a tiler on an hourly rate, directs the hours and site, supplies the tools and does not allow another person to be sent in their place. Those terms point towards employment. A separate bathroom renovator quotes a fixed price for a defined job, supplies their own tools, fixes defects at their own cost and may bring their own crew. Those terms point towards a contractor. A real arrangement needs the full contract reviewed.

Do you have to pay super to a subcontractor?

Sometimes. The ATO explains that you must pay super for contractors who are deemed employees for super purposes, including a worker engaged under a contract that is wholly or principally for their labour. If you believe a worker is an independent contractor, you can choose to pay them super to avoid the superannuation guarantee charge, which should be recorded in the contract.

This is a common point of risk in the trades, where a contractor may be paid mainly for their own labour. Review each engagement rather than assuming ABN holders are outside the super rules.

What if you are the contractor?

If you are the worker, the personal services income rules may apply to what you earn. The ATO's results test asks whether, for at least 75 per cent of your income of this kind, you are paid to produce a specific result, provide your own equipment or tools, and fix mistakes at your own cost. Being paid an hourly or daily rate makes the first condition unlikely to be met.

The ATO also states that these rules do not change whether you are a contractor, or your entitlement to an ABN or GST registration.

What reporting applies when you pay subcontractors?

If your business is primarily in building and construction and you have an ABN, you must lodge a Taxable payments annual report (TPAR) for payments to contractors or subcontractors for building and construction services, by 28 August each year. The ATO treats a business as primarily in the industry if 50 per cent or more of its business income or activity relates to those services. Payments to employees are not reported in the TPAR.

Could other laws or recent changes affect the answer?

Yes. This article covers tax and super. Workplace laws, workers compensation and state payroll tax each have their own rules, and they may reach a different conclusion. We did not identify a Budget change to the ATO's tests in the 2026-27 material we reviewed, but confirm current guidance before you rely on a classification.

Would a free 30-minute session help?

If you are unsure how to classify the people working in your business, we can review your arrangements and explain your options. ANH Accounting is a Sydney advisory firm and a Registered Tax Agent (26258346). You are welcome to book a free 30-minute session, with no obligation.