Subcontractor vs Employee: Tax Differences Every Tradie Should Know

Get called a subbie by the boss on site but never sign a contract? Get paid into your bank account with tax already taken out, even though you invoice with an ABN? These are the moments that reveal a business hasn’t actually worked out whether you’re a subcontractor or an employee.

The subcontractor vs employee tax question sits at the centre of a huge number of tradie disputes every year, and it is not just a paperwork issue. It determines your PAYG withholding, your super entitlements, and whether the business engaging you is meeting its legal obligations. Get it wrong, and either you or the business you work for can end up owing money you did not expect.

Why This Distinction Matters So Much

The core difference comes down to how you operate. An employee performs work as a representative of the business, taking direction on how, when, and where the job gets done. An independent contractor runs their own business and performs work to further that business, even while working for someone else.

Getting this wrong is not a minor administrative slip. Misclassification exposes a business to superannuation guarantee charges, PAYG withholding penalties, and sham contracting claims under the Fair Work Act, with civil penalties that can run into the hundreds of thousands of dollars per contravention. For the tradie caught in the middle, it can mean missing out on super you were entitled to, or facing an unexpected tax bill because withholding was never set up correctly.

The Contract Is Where It Starts

Since the 2022 High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek, the starting point for classification is the totality of the legal rights and obligations set out in the written contract, not the labels used or the ABN quoted. Where a contract is comprehensive, genuinely reflects the relationship, and has not been varied by later conduct, its terms generally govern the outcome.

No single factor decides the result on its own, but several indicators consistently matter:

• Whether you have the right to delegate or subcontract the work to someone else
• Who controls how, when, and where the work is carried out
• Whether you supply your own tools, equipment, and materials
• Whether you bear the commercial risk of fixing your own mistakes
• Whether you are paid for a specific result or for your time and labour
• Whether you invoice as a business or receive regular pay for hours worked

If you answer these questions and the arrangement still looks like employment dressed up as contracting, that is a warning sign worth acting on before it becomes a dispute.

Sham Contracting: Why It Is Taken So Seriously

Sham contracting happens when a business disguises what is genuinely an employment relationship as independent contracting, usually to avoid paying entitlements like super, leave, and minimum pay rates.

From 27 February 2024, the legal test for a business defending a sham contracting claim changed. It is no longer enough for a business to say it did not know and was not reckless. The business now needs to show it reasonably believed the arrangement was genuine contracting. This shift makes it harder for businesses to claim ignorance, and it means tradies who suspect they have been misclassified have a stronger position than they did previously.

ABN vs TFN: What Each One Actually Does

A lot of confusion in the subcontractor vs employee question comes down to mixing up an ABN and a TFN.

Your TFN, or Tax File Number, identifies you personally as a taxpayer. As a sole trader, you use your existing individual TFN for your business, no separate number is needed. Your ABN, or Australian Business Number, identifies your business to clients, suppliers, and the ATO. Holding an ABN does not automatically make you a genuine contractor. It is a registration, not a classification.

Having an ABN matters practically, though, because of what happens without one. If you supply your ABN and invoice a business for work, they generally pay the full invoice and you handle your own tax. If you do not quote an ABN and the payment exceeds $75 excluding GST, the business generally must withhold the top rate of tax from the payment, currently 47 percent, and remit it to the ATO on your behalf. That is a serious cash flow hit for a tradie who was expecting the full invoice amount.

Super Guarantee: Where Contractors Get Caught Out

This is one of the most misunderstood areas for tradies working as subcontractors.

Even a genuine independent contractor can still be entitled to super under the extended employee definition in the Superannuation Guarantee (Administration) Act. The key question is whether the contract is wholly or principally for your labour. If most of what you are being paid for is your own physical work, rather than a result delivered using your own equipment and materials, you may be a deemed employee for super purposes, even while operating with an ABN.

Some practical indicators that point toward a genuine contract for a result, rather than a contract for labour, include the contractor supplying expensive equipment or materials, and the cost of their labour making up less than half the total invoice value. Where those conditions are not met, super may be owed.

The current superannuation guarantee rate is 12 percent, effective from 1 July 2025. If a business fails to pay super they were required to pay, they become liable for the superannuation guarantee charge, which includes the unpaid amount, interest, and an administrative penalty on top.

PAYG Withholding: The Difference in Practice

For a genuine employee, the business withholds PAYG tax from every pay cycle and remits it to the ATO under the employee’s TFN. This is compulsory and happens automatically through payroll.

For a genuine contractor invoicing with an ABN, no tax is withheld from the payment. You receive the full invoiced amount and are responsible for setting aside enough to cover your own income tax when you lodge your return. Many tradies set aside 25 to 30 percent of each invoice for this purpose, adjusting upward as income grows.

This is exactly where cash flow problems creep in for tradies who have just moved from employee to subcontractor status. The tax that used to disappear automatically from your pay now has to be managed yourself, and it is easy to underestimate what needs to be set aside if nobody has walked you through it.

What This Means for Your Tax Invoices

If you are operating as a genuine subcontractor, your invoices need to reflect that properly. Each invoice should include your ABN, a description of the work, and GST if you are registered. If your business turnover has reached the GST registration threshold, you also need to charge and report GST through a BAS.

Keeping this consistent matters because inconsistent invoicing, work patterns that look more like employment than contracting, or a lack of any written agreement are exactly the kind of evidence that gets scrutinised if a classification dispute ever arises.

Getting Your Classification Right From the Start

Whether you are a business engaging subcontractors or a tradie working under one, getting this classification right protects everyone involved. It affects your business tax return and, for a business, its BAS and payroll obligations at the same time.

At ABBS Tax, we work through this with tradies and small business owners across Brisbane and Logan as part of preparing their sole trader tax return, because getting the classification wrong upfront creates problems that surface later, often at the worst possible time.

Need help working out subcontractor vs employee tax obligations for your trade business? ABBS Tax handles business and sole trader tax returns for clients across Brisbane and Logan. Get in touch and we will go through your situation properly.

This article is general information only, not tax advice. Employee versus contractor classification depends on the specific facts of your arrangement. Speak to a tax professional about your specific situation.