Do you need to pay superannuation and payroll tax for your contractors? The short answer is: probably. The longer answer depends on how those contracts are structured – and getting it wrong can be expensive.

The ATO has tightened its approach to contractor classification significantly over the past few years, largely to prevent businesses from using contractor arrangements to sidestep employee obligations. That doesn’t mean every contractor relationship is suspicious – it just means the rules apply regardless of what your contract says.

Here’s what you need to know.

Employee vs Contractor – It’s Not Just About the Agreement

You might have a clear internal distinction between your employees and your contractors. But the ATO doesn’t necessarily see it that way.

For superannuation purposes, the ATO can deem someone an employee even if they have a contractor agreement, their own ABN and GST registration. The legal label on the contract is not the deciding factor – the nature of the working relationship is.

A 2022 High Court decision reinforced this, confirming that courts will look at the actual conduct between the parties, not just the written terms. If your contractor works exclusively for you, follows your direction and provides primarily their labour, the substance of that arrangement may look a lot more like employment than contracting.

When Do You Need to Pay Super for Contractors?

The Superannuation Guarantee applies to contractors who are individual or sole traders when all of the following are true:

• The contract is mainly for their labour (more than half the dollar value of the contract relates to their personal labour rather than a specific outcome)
• They perform the work personally and cannot delegate it to someone else
• Payment is not contingent on achieving a specific result, such as hitting a sales target

If you’re paying a contractor to deliver an outcome – a fixed project with a defined deliverable – and they can subcontract or delegate the work, super is generally not required.

If the contractor operates through a company, trust or partnership, you do not need to pay super for the individual performing the work on their behalf.

The current Superannuation Guarantee rate is 12%, having reached its legislated ceiling on 1 July 2025. If you’re required to pay it and don’t, the ATO can issue a Superannuation Guarantee Charge, which includes the unpaid super, interest and an administration fee – and is not tax deductible.

Not sure whether a specific contractor relationship triggers the SG? The ATO has an online tool to help you work it out at ato.gov.au.

When Do You Need to Pay Payroll Tax for Contractors?

Payroll tax rules for contractors are broader than the super rules – and often catch businesses off guard.

Each state and territory sets its own payroll tax legislation and thresholds. As a general rule, contractor payments are included in your payroll tax calculation unless a specific exemption applies. Importantly, the labour vs outcome distinction that matters for super does not apply here. Whether you’re paying for labour or a defined result, contractor costs will typically count toward your payroll tax liability.

Common exemptions that may apply include:

• The contractor supplies services of a kind not ordinarily required by your business
• The contractor provides services to the general public in the ordinary course of running their own business
• The contractor was engaged for no more than 90 days in a financial year (in some states)

Payroll tax is only triggered once your total Australian wages – including contractor payments – exceed the threshold in the relevant state or territory. Thresholds vary, but as a rough guide they currently sit between $700,000 and $1.25 million annually depending on where your business operates.

If you’re approaching those thresholds or operating across multiple states, it’s worth reviewing your contractor arrangements carefully before lodgement.

What Happens If You Get It Wrong?

For super: if the ATO determines you should have been paying superannuation guarantee contributions and didn’t, you’ll be liable for the Superannuation Guarantee Charge. This covers the unpaid amounts plus interest and penalties, and unlike standard super contributions it cannot be claimed as a tax deduction.

For payroll tax: state revenue offices can audit and back-assess up to five years of payroll tax obligations. Penalties for late lodgement or underpayment vary by state but can be substantial, particularly if the revenue office determines the non-compliance was not a genuine mistake.

The best position to be in is a proactive one – reviewing your contractor arrangements before obligations arise rather than after a review.

As your team grows and your contractor arrangements become more complex, having someone across your payroll and compliance obligations from the start is worth it. Our bookkeeping and payroll team can help you stay on top of both.