Why the rates are not comparable at face value
An employee's salary comes with paid annual leave, personal leave, public holidays and employer super. A contractor is usually paid only for the time they bill and funds all of those themselves. A contractor rate therefore needs to be noticeably higher than the equivalent employee hourly rate just to break even.
A worked example
Take a $100,000 salary. Add 12% super and the employment is worth $112,000 a year.
An employee is paid for 52 weeks. Remove four weeks of annual leave, ten public holidays, ten sick days and two weeks between contracts and a contractor might bill about 42 weeks. At 38 hours a week that is $70.18 an hour or about $533 a day – compared with $50.61 an hour for the employee.
Costs contractors carry
On top of unpaid time, contractors commonly pay for:
- professional indemnity and public liability insurance;
- income protection insurance, since there is no paid sick leave;
- accounting and bookkeeping;
- equipment, software and training;
- time spent finding work and doing admin.
Tax, GST and super
Contractors generally have no tax withheld and pay it themselves, often through quarterly PAYG instalments. Business expenses can be deductible. If your GST turnover reaches $75,000 you generally must register for GST and charge it on top of your rate.
Having an ABN does not automatically make you a contractor. If you are paid mainly for your labour, the business engaging you may still need to pay super guarantee for you.
Employee or contractor is a legal question
Whether you are an employee or an independent contractor depends on the rights and obligations in your contract, not on what the arrangement is called. If you are unsure, check the ATO's guidance or get advice.