When it comes to your tax return, the question of whether you are a contractor or an employee can have a significant impact on what you can claim as a tax deduction. While many small business owners have made a clear decision to start a business, and therefore will hopefully have considered their tax obligations accordingly, contractors can often move gradually from a position as an employee into contract work. As a result, they may not be fully prepared when it comes to administering their affairs.
Employees will be paid by an employer and should be receiving benefits such as recreational and sick leave as well as employer guaranteed superannuation contributions. As a contractor, you are self-employed with all of the associated reporting requirements, such as submitting a quarterly Business Activity Statement (BAS) if you earn over $75,000 per annum (monthly if you report income over $2 million). If you are working for a business as a contractor, you will need to organise your own superannuation contributions and you won’t have allowances for leave. The person you are contracting for will simply be paying you an agreed amount to complete the required task.
On the positive side, you can also claim many more deductions than an employee. Given the high level of mobility that most self-employed individuals have thanks to the development of mobile communications such as Wi-Fi, tablets, laptops and mobile phones, it is now commonplace for contractors to work out of a home office. In this situation, you will be able to claim a percentage of things like rent or rates, power and telephone bills. The rate you can claim depends on usage, so rent will be calculated on the floor space that your office covers a s a percentage of your overall home floor space, while internet and phone will be calculated on an estimation of the overall ratio of business and personal use of those utilities.
Other deductions for business owners include depreciation on assets such as business vehicles, which also offer the opportunity to deduct car expenses, which can be calculated on 66 cents per kilometre travelled or via logbook records. Like electricity expenses, car expenses are calculated on the estimated ratio of business to personal use.
Small businesses can currently claim immediate deductions for assets under $20,000, meaning that they can reduce taxable income more dramatically in the short-term, this is particularly beneficial for businesses in the start-up phase as they generally purchase assets upfront while their income is relatively low. Generally assets are depreciated over a number of years, meaning smaller deductions initially.
If you are an employee, tax time is a far simpler process. You benefit from not having to bother with any of the administrative and reporting requirements of a business owner, but you are also unable to benefit from the additional deductions that business owners can claim. Each employment option provides positives and negatives, so it is important to know which you are before preparing your tax return is due.
By Jennifer Lowe