Contractor vs employee: how tax and pay differ
A contractor's day rate can look far higher than an employee's salary, but a contractor pays for their own super, leave, insurance and tax set-aside. Here is what changes, and what rate it takes to come out even.
What changes when you contract
| Employee | Contractor | |
|---|---|---|
| Tax | Withheld from each pay by the employer | You set money aside; the ATO may ask for quarterly PAYG instalments |
| Super | Employer pays 12% on top | Paid by the client only if the contract is mainly for your labour; otherwise your own |
| Leave and public holidays | Paid annual, personal and public holiday leave | Unpaid: no work, no income |
| GST | Not applicable | Register once turnover reaches $75,000 |
| Expenses | Work expenses, or the standard deduction from 2026–27 | Business expenses, subject to the personal services income rules |
| Insurance and equipment | Usually covered by the employer | Your own cost |
The day rate that matches a salary
To take home the same as an employee on $100,000 plus super in 2026–27, a sole trader who funds their own 12% super needs to invoice about $112,470.40 a year before GST. Over 220 billable days, after allowing for 4 weeks’ leave, 10 sick days and public holidays, that is a day rate of about $511.23, or $67.27 an hour.
That is before business costs such as insurance, equipment, software and an accountant. The contractor calculator adds those and lets you change every assumption.
Tax as a contractor
- The same tax rates. A sole trader pays the same income tax and Medicare levy as an employee on the same taxable income. The difference is that nothing is withheld, so put aside money for tax from every invoice.
- PAYG instalments. Once you have business income, the ATO may put you into PAYG instalments, so you pay tax quarterly during the year instead of one big bill.
- Personal services income. If most of your income is for your own skills and effort, such as an IT or engineering contractor billing by the day, the personal services income rules limit the deductions you can claim. They stop you from splitting income or claiming costs an employee couldn’t.
- No standard deduction. From 2026–27, the $1,000 standard deduction applies to labour income such as wages, not to business income.
Employee or contractor?
It depends on the working relationship, not the job title or the contract’s label. The ATO looks at:
- Ability to delegate or sub-contract: Who can do the work?
- Basis of payment: How is your payment calculated?
- Equipment, tools and other assets: What do you need to do your work and who provides it?
- Commercial risks: If you make a mistake, who pays to have it fixed?
- Control over the work: Who has the right to tell you how, when and where you do your work?
- Integration: Are you seen as part of the business or separate from it?
Being treated as a contractor when you are really an employee is called sham contracting, and it can mean missing out on super, leave and minimum pay.
Frequently asked questions
Does having an ABN make me a contractor?
No. Whether you are an employee or a contractor depends on the whole working relationship, not on whether you have an ABN. An employer can’t make you a contractor just by asking you to get one. The ATO has an employee or contractor guide.
Do contractors get super?
Sometimes. If you are paid under a contract that is mainly for your labour, the business usually has to pay super guarantee for you, even though you have an ABN. Otherwise you fund your own super, and can claim a deduction for personal contributions up to the concessional cap of $32,500. See Super for independent contractors.
When do I have to register for GST?
When your business turnover reaches $75,000 a year, or is expected to. Below that it is optional. Once registered, you add 10% to your invoices and pass it on to the ATO; it is not your income.
General information based on ATO rules and rates, not tax advice. Figures are worked out by our calculators; see how we calculate.