If you’re running a building and construction business, one of the first big decisions you’ll face is whether to bring someone on as an employee or engage them as a subcontractor.
It might seem like a simple decision based on flexibility or cost, but it has a big impact on how you handle bookkeeping, payroll, superannuation, and compliance.
While subcontractors may feel like the easier option, especially when it comes to matters such as leave entitlements or administration, the ATO and Fair Work are paying closer attention than ever. Getting the classification wrong can lead to back pay, penalties, and a significant amount of unnecessary stress.
Let’s dive into the core distinctions from a bookkeeping and payroll perspective, highlighting the nuances that can make or break your compliance.
The Differences Between Employees Vs. Subcontractors
You need to understand how the ATO distinguishes between employees and subcontractors before you can get your books and payroll correct.
Because it’s not just about what you call them.
Employees
Employees are part of your team. They work regular hours, use your equipment, and are paid wages or a salary.
You’re responsible for their PAYG withholding, superannuation, and leave entitlements (like sick leave and annual leave). You also carry legal responsibility for the work they do under your direction.
Subcontractors
Subcontractors (or independent contractors) run their own businesses. They typically have their own ABN, work on specific projects for a fixed price, and provide their own tools and equipment. They invoice you for completed work, not for the hours worked.
They manage their own tax, GST, and super (if applicable). They can take on other jobs, choose when and how they work, and even outsource parts of the job if they want.
But the key difference is control. Employees work under your direction, while subcontractors have more freedom in how the work gets done.
How Your Decision Impacts Tax, Super and Bookkeeping
Here’s a side-by-side look at the key differences between employees and subcontractors, so you know exactly what to budget for, report, and stay compliant with, especially when it comes to tax, super, and payroll obligations.
| Category | Employees | Subcontractors |
| Tax Obligations | You deduct income tax (PAYG) from wages and remit it to the ATO. Requires accurate payroll processing and reporting. | They pay their own income tax. You pay them the gross amount. You must still record payments, and for certain industries (e.g. construction, IT), report via the Taxable Payments Annual Report (TPAR) by 28 August each year. |
| Superannuation | Legally required to pay the Superannuation Guarantee on their behalf. Needs to be budgeted and processed through your payroll system. | Not always exempt. You may need to pay super if they’re considered employees for super purposes by the ATO. Non-compliance here is a common trap for small businesses. |
| Benefits & Leave | Must provide paid entitlements like annual leave, sick leave, and possibly long service leave. Requires tracking and accounting. | Not entitled to these benefits, reducing financial and administrative obligations. |
| Payroll Tax | Employees clearly attract payroll tax. | Payments may still attract payroll tax if contractors are engaged under a relevant contract or agreement. Rules vary by state, so it’s important to know your local obligations. |
| Administrative Burden | High – includes managing PAYG, super, leave, payroll systems, and possibly workers’ comp insurance. | Lower – mainly involves tracking payments and invoices. However, TPAR reporting and possible super obligations mean it’s not completely hands-off. |
The ATO Looks at the Whole Relationship, Not Just the Contract.
When determining whether someone is a subcontractor or an employee, it’s more than what’s written in the contract. The ATO expects businesses to consider the full picture, what they refer to as the “totality of the relationship.” That means how the work is actually carried out in practice.
This approach has come into sharper focus with recent changes to the Fair Work Act 2009 under the new “Closing Loopholes” laws. The goal here is to ensure that people doing the same kind of work receive the same entitlements.
So even if a worker has an ABN and sends you invoices, if they’re working full-time hours for years, reporting to a manager, and relying on your business for income, they may be seen as an employee under the law. And that has serious consequences for super, leave, and other entitlements.
It’s all about fairness and getting it right from the start. Misclassifying workers, even unintentionally, can result in back payments, penalties, and compliance issues in the future.
Choosing the Right Option
There’s no one-size-fits-all answer, as it depends on the nature of the work and how you want to manage your team.
If you need someone:
- Long-term
- Working regular hours
- Becoming part of your business
Hiring an employee makes more sense. They’re more likely to stick around, get to know your systems, and grow with your business over time.
If the work is:
- Short-term or project-based
- Highly specialised
- Needed to manage busy periods or fluctuating workloads
Engaging a subcontractor could be a better option. You’ll get flexibility, targeted expertise, and fewer ongoing obligations.
Just make sure the structure you choose reflects how the work is actually done, not just what the contract says on paper.
Why Growth iQ are the Adelaide Accountants Tradies Need
At the end of the day, when you hire subcontractors, you have a responsibility to ensure they are doing the right thing. That means checking they’re paying their workers correctly, meeting employment obligations like superannuation, workers’ comp, and payroll tax, and holding the right licences.
Overlooking these areas can expose your business to serious risk.
At Growth iQ, we help building and construction businesses stay compliant and confident that there are no risks associated with their decision to hire an employee or subcontractor. We don’t just process numbers for you, we understand the real-world risks you face as a business owner in a trade.
So our expert accountants for tradies support you with due diligence, payroll setup, and contractor reviews to reduce exposure to underpayment claims and accessorial liability.
We partner with you to establish the right structure from the start and maintain it as you grow.
Contact one of our accountants today to determine which approach is best for you and how you can maintain compliance to avoid potential risks down the line.