Being an independent contractor – what it means and common pitfalls

What is a contractor?

What does being a contractor mean?

• You are self-employed.
• You usually have a high level of control over the work you perform, your hours, work location and how you do the work.
• You typically would use your own tools and equipment or be responsible for sourcing them. 
• You are responsible for paying your own taxes and GST and putting money away for your superannuation.
• You aren’t covered by national employment standards. This means you don’t get things like annual leave or sick leave, you can’t bring personal grievances to work and request leave.
• You are in charge of invoicing, accounting and administration of your business.
• If you don’t work on a public holiday, you won’t be paid.
• Not only that, if you don’t work, you don’t get paid!

Common pitfalls

• Not putting aside enough for tax – transfer money regularly to a separate bank account and don’t touch it. We recommend allocating 20%-30% of your income to cover these taxes.
• Not getting advice upfront – get the experts involved early.  Your accountant can help you decide the best structure to save you tax. A solicitor (e.g., Legal Vision, Sprint Law) should look over any new contracts to reduce future liability.
• Paying tax and GST late – this costs you money on penalties and interest.
• Not sending your invoices on time – if you don’t send it, you don’t get paid! It's worth noting Australian businesses are encouraged to use eInvoicing. You can find more information here.
• Having your hourly rate set too low – this is easier if you’ve previously been a paid employee in the industry. A good rule of thumb would be your old hourly rate + 20%. This may seem a lot at first, but remember that you need a markup to cover annual leave, sick leave, and public holidays. Our separate blog deals specifically with pricing your products or services.
• Not making time for record-keeping and administration. Your can leave your books to us by using our bookkeeping services, so you can focus on growing your business.
• Work is often inconsistent depending on what contracting work you undertake. Short term gigs end and you’ll need time to find another gig and this can be time consuming.

Other things to remember

• Even if you are a contractor, you should always have a contract of service with your client to set out the terms applying to your services. Make sure your contract is specific for your client – you may have different contracts under different circumstances
• You are expected to have your own equipment and tools needed for your job. Find more about what expenses you can claim as a business owner.
• Getting loans and mortgages – this can be harder than when you were an employee. You will need to demonstrate to the bank your business history and provide a forecast of your projected income and expenses for the next 12 months. For the first couple of years, this will be extremely difficult unless you have an ongoing contract for the future.
• Insurance and income protection – you need to consider the impact to you and your family if you cannot work due to either an accident or sickness.

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