The difference between an employee and a contractor
An employee works in your business and is part of your business. A contractor is running their own business.
If you have employed a contractor with an Australian Business Number, they will need to provide their ABN. The contractor would need to review the ATO website and confirm which option they fall under and indicate to you the rate at which they should be taxed if required:
Australian Business Numbers are eleven characters long. They must be supplied by payees who wish to sign a voluntary agreement with your company for regular withholding of PAYG instalments. Their tax type is set to Specify Rate, and a flat percentage of tax is deducted from their pay.
A contractor generally looks after their own tax obligations, so you don't have to withhold from payments to them unless they don't quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments.
If an ABN is not supplied, you can save the details in MicrOpay by using 10000000000 until the ABN has been supplied by the contractor.
You should check if you need to pay super for individual contractors if the contract is principally for their labour, but you don't have FBT obligations.
There may be instances where you are obliged to only pay Super for a Contractor. Refer to the setup Contractor for Super Only section below for specific information on how to set them up.
Note: Once transactions are processed for an employee, you will not be able to make changes to their selected TFN or ABN option in the current financial year. If the employee's circumstances change, e.g., they switched from being a full-time employee to a contractor, or if their Tax Details were incorrectly entered, you will need to create a new employee record with the appropriate options selected.
Set up a Contractor
If you create a new Contractor using Add Employee.
Go to Payroll, Maintenance, Employees, Employees.
Click Add.
Complete the Personal Details page and select Tax Details:
Select the Australian Business Number (radio button) - Use the Australian Business Number radio button if a valid ABN has been supplied by the employee for use as the basis of taxation, and enter the Business Number in this field. The Basis of Payment field will default to Business / Personal Services when this radio button is selected and cannot be changed.
Tax Rate - field is used to enter a rate of taxation that is specified. This field is available because the Specify Rate has been selected as the Tax Type, which is automatic when the Australian Business Number is selected.
ATO Reporting Information (STP) Field - Income Type is VOL (Voluntary Agreement), and Tax Treatment Code is VOXXXX/VCXXXX - this is dependent on whether the Commissioner's Instalment Rate is ticked.
If you create a new Contractor using the New Employee Wizard:
Go to Payroll, Maintenance, Employees, Add New Employee.
Enter the Australian Business Number supplied on the Voluntary Agreement page.
Set up a Contractor for Super Only
You can set up a contractor so that you pay their superannuation directly to their Fund. Doing this will mean that the Super Liability for the employee is included in STP Reporting without any Qualifying Earnings (QE). There are two options for paying Super:
If the amount of super changes each period, then record the super value as a Super Adjustment using Manual Calculation. For more information see, Process a Superannuation Adjustment.
If the amount of super is the same each period, set up a Fixed Employer Contribution and set the employee up as Autopay (leaving Normal Hours Paid and Rate details blank). Only the Employee's Super will calculate each Period. For more information see, Pay an employee the same amount of super per period.
Create the Employee Record
Go to Payroll, Maintenance, Employees, Employees.
Click Add.
Complete the Personal Details page and select Tax Details:
Select the Australian Business Number (radio button) - Use the Australian Business Number radio button if a valid ABN has been supplied by the employee for use as the basis of taxation, and enter the Business Number in this field. The Basis of Payment field will default to Business / Personal Services when this radio button is selected and cannot be changed.
Tax Rate - field is used to enter a rate of taxation that is specified. This field is available because the Specify Rate has been selected as the Tax Type, which is automatic when the Australian Business Number is selected.
ATO Reporting Information (STP) Field - Income Type is VOL (Voluntary Agreement), and Tax Treatment Code is VOXXXX/VCXXXX - this is dependent on whether the Commissioner's Instalment Rate is ticked.
Select Pay Details. Select:
Yes for Autopay.
Advice Only as Payment Method.
Make any other required selections.
Select Superannuation Details. Add the Superannuation Fund and Employer Contribution.
Review all other pages in the Employee record.
Click OK.