Construct You Blog

What To Consider When Becoming a Subcontractor

Luigi Catanese

30/10/2017

For many people in the trades and services industry, a time will come when you will decide to switch from being an employee to being a subcontractor.

 

Being a subcontractor has many benefits, the main benefit being that you are effectively self-employed, giving you more work-life-balance and flexibility. As the decision maker, you can have more of a say in when you work, by taking time off when suits you, and have more choice over the jobs you work on and what fee you’ll charge. You may choose to work more at certain times of year when your financial obligations are higher and take more time off at other times of the year for leisure, to spend with family and loved ones when work allows.

Transitioning from being an employee to being a subcontractor requires some organisation and a little red tape.

Regardless of the industry, as a subcontractor there are some common registrations and considerations to keep the transition smooth and legal:

Your Business Structure

Will it just be you, acting as a sole trader, or will you have a team of people that work for you? Most subcontractors start as sole traders. This is certainly simpler to set up and operate, as you have full control of business decisions and are required to do less paperwork. It is relatively easy to change the business structure if your business expands and you wish to take on employees.

 

If you wish to operate as a company or trust, you will create a separate entity for all of your business matters. Operating as a company or trust rather than a sole trader is more complex and expensive to set up, but will give your accountant more flexibility at tax time as your business and personal finances will be kept separate.

 

The main benefit of having your personal and business finances kept separate are that your financial liability is also separated. If you experience financial difficulties as a sole trader, this can overflow and impact your personal finances, whereas if you run a separate entity your personal finances could be protected if set up correctly.

Tax File Number (TFN) and Income Tax

There are some things to be mindful of when operating as a sole trader, such as you will be using your personal Tax File Number (TFN). As previously mentioned, this means there is no differentiation between your personal and business finances when it comes to tax time.

 

If you wish to have your business as a separate entity, you will require a different TFN to keep your finances separate.

Australian Business Number (ABN)

If you are operating as a sole trader, you are required to have your ABN printed on all your invoices and documents relating to any work you undertake.

Goods and Service Tax (GST)

If you earn, or think you may earn over $75,000 per annum (currently) you will have to consider GST registration.

Your Rates, Entitlements & Superannuation

If you’re a business owner you don’t get leave entitlements such as annual leave or sick leave. This needs to be taken into consideration when considering your rates.

 

Many subcontractors are surprised to learn that their hourly rate will be approximately 50% higher as a subcontractor than an employee. This is because when you are an employee, your employer is required to pay for insurances, licences, taxes, entitlements that are all tied into the rate they pay you. As a subcontractor you don’t get any of this so you need to ensure you’re taking this into account when setting your rates.

 

It is also important to keep on top of your Superannuation, and seek advice on how to manage this if you are unsure to avoid hefty penalties from the Australian Taxation Office (ATO).

Insurance

As a subcontractor, you are responsible for your own insurances. Don’t assume that because your client has insurance, that you will be covered. There are two types of insurances you will legally require, or want to consider:

 

Public Liability Insurance: This covers you for any damage caused to property, or personal injury that you cause to someone else as a result of your work. Public Liability Insurance is required before tradesmen will be able to enter a worksite.

 

Income Protection Insurance: Although this is not always legally required, it is something that sole traders should consider. Income Protection Insurance should be considered for everyone in the workforce, but as subcontractors aren’t entitled to any sick leave or workers compensation, it is especially important to ensure your financial situation will still be manageable in the case of injury or illness that requires time off work.

A hard working and thorough subcontractor is a significant asset for any general contractor.

Subcontractors are worth their weight in gold to general contractors as they can pay a fee to get the job done, without the legalities that come with hiring an employee.

 

There are many considerations when becoming a subcontractor; it may seem overwhelming and you may not know where to start. Once becoming a subcontractor online platforms such as Construct You provide trades based businesses with resources and tools to help grow their businesses through unique business profiles pages, online project marketplace, an industry focused recruiting tool and specific networking features.

 

Disclaimer
The information provided on this blog post is general information only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider seeking professional advice relating to your own objectives, financial situation and needs.


References:

https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/business-structures-and-types/sole-trader

https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-and-company-registration/Register-for-an-Australian-Business-Number-ABN

https://www.ato.gov.au/Business/Registration/Work-out-which-registrations-you-need/Taxation-registrations/Tax-file-number/