Part 1: Do I need an ABN? Am I an employee or a contractor?

You are currently viewing Part 1: Do I need an ABN? Am I an employee or a contractor?

What is the difference between an employee and a contractor?

An employee works and is part of someone else’s business, whereas a contractor runs their own business independently.

Contractors are often responsible for their own tax and super obligations, but employers will withhold tax and pay super for you as an employee.

“My employer says I need an ABN, but do I really need one?”

Not everyone needs an Australian Business Number (ABN) and an employer can’t ask you to get an ABN as a condition of employment.

In many cases, employees in irregular or casual jobs (such as performers, musicians, some consultants and labourers) are asked to get an ABN by employers when they are not eligible for one.

You’re not entitled to an ABN for work that you carry out as an employee, even if you or your employer calls it “contracting”.

The following things mean you’re entitled to an ABN:

  • Carrying on or starting an enterprise in Australia. Or making supplies connected with Australia’s indirect tax zone
  • A Corporations Act company

Noticeably missing from the above list is “because my employer said I have to have one”.

The ABR are now cracking down on holders of ABN’s who are being deemed ineligible. This is because many people have been told (incorrectly) by their employers that they “need an ABN” in order to do the job, in an attempt to treat them as independent contractors.

The reason for this? As a contractor, you can be paid less and miss out on superannuation, and paid leave entitlements that you may be eligible for as an employee.

How do I become eligible for an ABN?

If you do want to legitimately carry out work as a sole trader with an ABN, you’ll be required to do many (if not all) of these things:

  • Be genuinely running your own business.
  • Pay your own income tax and GST directly to the ATO.
  • Source your own clients (e.g. through advertising).
  • Delegate work to others if you choose without approval from any employers or managers.
  • Be responsible for quoting your work, including setting or negotiating your own prices.
  • Invoicing for work.
  • Have a separate business bank account.
  • Pay for your own business insurance (e.g. public liability).

If these do not apply to you, then you’re an employee, not a sole trader, and you are not eligible for an ABN!

How do I know if I’m a legitimate contractor?

A genuine contractor is running their own business, which means they would:

  • Pay their own income tax and GST directly to the ATO
  • Source their own clients (e.g. through advertising)
  • Delegate work to others if they choose without approval from any employers or managers
  • Be responsible for quoting their work, including setting or negotiating their own prices
  • Invoice their work
  • Have a separate business bank account
  • Pay for their own business insurance (e.g. public liability)

If you’re legitimately carrying out contracting work as a sole trader with an ABN, you’ll be required to do many (if not all) of the things above. If these do not apply to you, then you’re an employee, not a sole trader, and you are not eligible for an ABN!

If you believe you have been incorrectly deemed a “contractor” and need advice on how to raise or resolve this issue with your employer, we recommend you look at the information and resources provided on the Fair Work website, and contact the Fair Work Ombudsman for assistance.

If you’re an employer who needs help with making an employee Vs contractor classification, or if you need professional advice on employer obligations, payroll or employment contracts, get in touch with us.