Subcontractors + What You Need To Know
Written by: Canny Accounting
Who’s who in the Zoo?
As work continues to evolve to meet changing circumstances and requirements, so too does the workforce. Today more than ever, flexibility is the buzzword, and not only are employees an increasing part of the workforce but contractors and subcontractors are also too.
While the difference between employees and contractors is probably well-known, subcontractors are not always so well understood. So what’s the difference between employees, contractors and subcontractors?
Employees
Employees are employed by a business, company or organisation under a specific contract of employment/service. The employee works the required hours and is entitled to statutory leave requirements such as sick leave, holidays, compassionate leave, and long service leave that is governed by employment and industrial relations legislation. Employers must deduct tax from their employee’s wages before payment and must pay the current legislated rate of superannuation regularly.
Contractors
Contractors are engaged by a business, company, or organisation under a contract for service. Hours worked and services provided must be agreed upon by both parties and a signed contract entered before any work commences. Contractors are self-employed and own their businesses, which can be as sole traders. They must have an ABN (Australian Business Number) and are responsible for paying their own tax and superannuation (voluntary). The business, company or organisation engaging the contractor is the client (or ‘principal’ in legal terms).
Subcontractors
Subcontractors are engaged by contractors to do aspects of the services for a client that contractors are unwilling or unable to do for various reasons. In other respects, subcontractors have the same operating structure as contractors do, and are responsible for their own tax obligations and voluntary superannuation contributions. However, they will deal with the contractor rather than the client, at least in the first instance.
Cash Flows When You’re Taking Care of Business
From an employer’s point of view, engaging contractors and subcontractors make good sense, for specific projects with a finite lifespan or ad hoc situations where extra help is needed in the short term.
Whilst subcontractors are a step removed from the client, they still add value to the client’s business or project and establish a strong working relationship with the contractor. Subcontractors have the benefit of a wide range of work choices without responsibility for the ‘middleman’ aspect of the contractor.
Using subcontractors can also fall under the heading of labour-hire, something that is common in the recruitment agency space. A recruitment agency may have a client which is a government department, and the agency has a contract with the client to provide suitable office staff on an as-needed basis. The agency will have several personnel – subcontractors – on its books. When a suitable client role arises, the agency will place the most suitable person in the role for a specific amount of time, to perform specified duties.
The client will pay the contractor for services on submission of an invoice, and in accordance with contract/agreement terms, and the contractor will pay the subcontractor on the same basis.
Financial Information for the Benefits + Responsibilities of Being a Subcontractor
A subcontractor can focus on specific tasks and services at which they excel, without the wider responsibilities of liaising with the client and managing projects. The flexibility of schedule and the choice of either accepting or rejecting work are also benefits.
Generally, subcontractors will provide their own tools and equipment, although still using the contractor’s or client’s equipment, machinery, and tools if required, which should be detailed in the contract or agreement between the contractor and subcontractor.
Whilst both contractors and subcontractors have rights under the law, they are quite different from those of employees. Anyone entering a contract or subcontract needs to ensure that they do their due diligence and completely understand all the terms of this legally binding document. The document should state that changes to it, once signed, can only be made after a written agreement from both parties.
Don’t Do “Cost (Cutting) Accounting” + Ignore Insurance
While clients and contractors will have their own insurance coverage, it is essential for subcontractors to hold public liability insurance. It will be impossible for subcontractors to get work from reputable sources without this. It also gives protection for potentially expensive materials, errors or accidents that may occur while providing services, particularly in the construction and building industries.
Depending on the business set-up, other insurances may also be applicable – such as building and contents insurance, but may subcontractors rely on their vehicles and tools/equipment to make a living. Obviously, vehicles are covered through mandatory third-party insurance, but having tools insurance is a good idea for machinery and equipment.
Another consideration is income protection insurance; however, this is not generally mandated and is up to the individual subcontractor. A cost/value analysis should be undertaken, considering such things as the type of industry and the likelihood of adverse events – for example, the building and construction industry will involve projects that are affected by bad weather and flooding (which has been a concern lately for Queensland and New South Wales). The need for income protection may also be affected by a subcontractor’s health and circumstances – if they require a lot of time off work for health, illness or personal issues, it may be more relevant than for someone who works consistently throughout the year and enjoys consistently good health. However, as the previous few years have shown us – a risk management approach to emergencies and unexpected events can be beneficial.
Compliance, A Financial Plan + Risk Management
This topic is a complex one and beyond the scope of this article. It involves issues of risk management, quality assurance, accreditation, and international standards.
Generally, issues such as work health and safety are robustly legislated and will be implemented and documented by clients. Contractors may also be required to have substantial systems and documentation in place and may require accreditation/certification.
The requirements of subcontractors in this regard will need to be made clear in the subcontract/agreement, but any person undertaking any work at any time has responsibilities under law to take care of their own and others’ health, safety and wellbeing while working at any location or worksite. A subcontractor will report any concerns to the contractor first, who will then inform the client and/or escalate the situation as required.
Otherwise, compliance is simple – do the best possible work you can always do, adhere to all contractors and client requirements and expectations, and you will enjoy a long and successful career as a subcontractor.
Turn to the Accountants Geelong Trust, Canny Accounting
So, where do you fit in when it comes to classifying your role and the work that you do? Are you an employee, a contractor or a subcontractor? There is a lot to take into consideration when it comes to being a contractor or a subcontractor. If you become a subcontractor, you will need to consider what structure is going to be the best for you, register for an ABN, possibly register for GST, look after your own tax, be responsible for your own record keeping and the list goes on but it’s not all bad. Our team at Canny Accounting have been helping subcontractors for over 60 years to ensure that subcontractors and contractors are meeting the requirements of the ATO.
If you are looking at your options on becoming a subcontractor and want to make sure this is the best position for you to be in, get in touch with our team to have a chance, we are happy to sit down with you and work out what is going to be the most beneficial to you!
