Contractors -VS- Subcontractors – What’s The Difference?

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Contractors -VS- Subcontractors – What’s The Difference?

Written by: Canny Accounting


In the ever-changing and increasingly flexible world of paid work, there are many alternatives to traditional employment.  While traditional employment may have lacked flexibility and often a variety, the arrangement was straightforward – you would do the work to the best of your ability and your employer would pay you an agreed rate, look after your leave entitlements, and provide insurance for any on the job – and work-related accidents.

However, for contractors and subcontractors, there are some important differences to working that need to be clearly understood, both for those people setting up as contractors and subcontractors and for those wishing to hire them.

So, Contractor -VS- Subcontractor… What Are The Differences?

The actual differences between contractors and subcontractors are not many, nor are they complex – it is generally a difference of hierarchy in the supply chain.

A contractor – which may be an individual or a business, company or organisation, works with clients to deliver goods or services, in more of a ‘partnership’ role.  They are not employees.

For larger or complex projects, subcontractors will often require assistance with their provision of goods and/or services, and they will then hire subcontractors.  Subcontractors have a partnership role with the contractor and are also not employees.

Tax Law, Legal + Liability Issues

One thing that is important for contractors to be aware of is that legally they may be responsible to the client for any lack of quality or timeliness on the part of their subcontractors.

Subcontractors will often be specialist workers such as plumbers or electricians, and it is important that contractors ensure that they have the relevant qualifications, licenses, tickets, and accreditation to not only deliver safe and efficient services but to fully comply with any legislative and statutory requirements.

For both contractors and those seeking to engage them, agreements/contractors that are detailed and acceptable to both parties are of key importance, whether the contractor is an individual, a business, a company, or a not-for-profit organisation.

An individual contractor agreement or company contract agreement should either be written by or reviewed by a qualified person, such as a solicitor or an accountant, to ensure that all requirements and obligations for both parties are clearly set out.  An important distinction for contractors and subcontractors is that they are responsible for their own tax and superannuation requirements.

Contractors will also need to have a subcontractor agreement in place when engaging subcontractors.  Contractors also have a duty of care to their subcontractors to ensure that they are treated fairly and not put at any risk in working situations.  These requirements are covered by the Fair Work Act 2009 and the Fair Work Regulations 2009.

Pros + Cons of Contracting + Subcontracting

Contractors and subcontractors enjoy a range of benefits regarding variety and flexibility, although when starting out it may be necessary to get some ‘runs on the board’ by taking work that may be short-term or that may not pay the highest rate.  Building up a strong reputation will give both contractors and subcontractors a greater say in who they choose to work with over time.

On the negative side, work continuity may be an issue and with it financial insecurity.  Once again, this is often more of an issue when first starting, and building up a strong reputation usually brings stronger work continuity and more opportunities.  As a ‘lower rung’ on the supply chain, subcontractors may have slightly less flexibility in the types of work environments and personnel they work with but they are still protected, as are all contractors and employees from unsafe work environments and from bullying, harassment, and discrimination.

The freedom and flexibility for contractors and subcontractors to set their own parameters and working schedules does bring with it some extra responsibilities regarding administrative and financial oversight.  However, this is where your accountant or financial adviser will provide to be very valuable.

Assistance with Administration, Financial Information + Risk Management Aspects

Both contractors and subcontractors will benefit from professional assistance and support with:

  • Invoicing;
  • Individual Tax;
  • Payroll Tax – if they are a business that employs people;
  • GST;
  • Business Activity Statement preparation and lodging;
  • Insurance; and
  • Financial Planning to limit financial risk.

While contractors hire rather than employ subcontractors, they may have their own employers, and subcontractors may also have their own employees.  There is a range of legal and statutory requirements in this regard.

Individual contractors and subcontractors need to ensure that they understand the complexities of their own taxation responsibilities and the importance of making their own superannuation contributions as regularly as possible.

An accountant or financial adviser can provide assistance with regular and routine administrative and legal requirements, which can take a lot of the strain off individual or small business contractors and subcontracts.  However, more importantly, a strong working relationship with your professional adviser will allow you to address important planning and risk issues, such as planning for the loss of work continuity.

As contractors and subcontracts do not enjoy the assurance of ongoing work and payment, there is a strong benefit to putting strategies in place to deal with times such as the Christmas and New Year slow down, and contingencies such as illness or personal adversity.  Having holidays is something that most employees take for granted, but with no income being generated, this can be more difficult for the self-employed.

Accountants for Subcontractors… Talk to Canny Accounting!

Contracting and subcontracting for a living call for self-reliance, discipline, and financial maturity that can be very empowering and will often provide high satisfaction and a work/life balance.

There is also the opportunity to control operational issues in a way that employers struggle with, as has been seen in the fallout from the COVID-19 Pandemic.  With good planning, individual contractors and subcontractors can ride out a storm without having to worry about paying employees.

Going it alone can be satisfying but tough, and the most successful people recognise that the complementary skills and expertise that can be provided by financial and planning experts can often be the difference between simply chasing the next available contract or having a secure, financially robust lifetime vocation and income.

Get in touch with our team to find out how we can assist you in your contractor or subcontractor venture!

Pictured, Canny Group's Accounting team consisting of; Adam Ramage, Jamie Arrington, Danny Grigg, Krystine Canny-Smith and Amanda Wilkens - standing next to a yellow circle!

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