Your tax and super obligations are different depending on whether your worker is an employee or a contractor.

Employees work in your business and are part of your business.

Contractors run their own business and provide services to your business.

Just because a worker has an ABN does not mean they will be a contractor for every job or working arrangement. The specific terms and conditions under which the work is performed need to be considered to determine whether the worker is an employee or contractor.

As an employer, the most common types of payments you need to withhold tax from include:
• employee wages, salary, commissions, allowances and bonuses
• payments to company directors and company office holders
• payments to individuals under labour-hire arrangements
• employment termination payments or compensation payments
• sickness or accident payments
• payments to contractors who have a voluntary agreement with you
• payments to contractors who do not provide an Australian business number (ABN).

You must pay a minimum of 9.25% of each eligible worker’s ordinary time earnings each quarter.

For super guarantee purposes, your workers include your employees and any contractors you engage wholly or principally for their labour.

Ordinary time earnings (OTE) is usually the amount your employee earns for their ordinary hours of work. It includes things like commissions, shift loadings and allowances, but doesn’t include overtime payments.

For contractors, use the labour component of their contract as the basis for their OTE.

Super is calculated quarterly – that is, every three months. For each of your eligible workers:
multiply their ordinary time earnings for the quarter by 9.25%
pay this amount to a complying super fund or retirement savings account by the quarterly cut-off date.

If you back-pay salary or wages to a former employee you have to pay super contributions on that back pay.

You can claim a full tax deduction for super payments you make for employees by the cut-off date.

You must make super contributions for an employee if you’re considered an employer for super guarantee purposes and your employee is entitled to the super guarantee.

You’re an employer for super guarantee purposes if you employ a person under a verbal or written employment contract on a full-time, part-time or casual basis.

Generally, you have to pay super for an employee if they’re 18 years old or over and you pay them $450 or more (before tax) in salary or wages in a month. It doesn’t matter whether the employee is full time, part time or casual.
Employees who are under 18 years old must meet the above conditions and work at least 30 hours to be entitled to super guarantee.

Super for the self-employed
If you’re a sole trader or a partner in a partnership you don’t have to make super contributions to a super fund for yourself, but you might want to make super contributions anyway to save for your retirement. You may be able to claim a full deduction for your super contributions and may be eligible for matching co-contributions from the government.

Contractors
If you pay an individual under a contract that is wholly or principally for their labour, and you pay them for hours worked rather than to achieve a result, you have to pay super contributions for them.

As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you:
you pay income tax on the reduced salary or wages
your employer may be liable to pay FBT on the non-cash benefits provided
salary sacrificed superannuation contributions are classified as employer superannuation contributions (rather than employee contributions) and are taxed in the superannuation fund under tax laws dealing specifically with this subject
your employer may be required to report certain benefits on your payment summary.

Assessable income
You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. You can make employee contributions out of your after-tax income towards the cost of the benefits and reduce any reportable fringe benefits amount.

Under an effective arrangement, your income tax liability should be less than it would have been without such an arrangement. However, before entering into a salary sacrifice arrangement you should consider all of the associated costs, including the amount to be sacrificed and any surcharges or obligations that may arise from having the benefits reported on your payment summary.

Fringe benefits tax
If there is any FBT payable on the benefits received, your employer is liable to pay that tax. However, as part of your salary sacrifice agreement, your salary may be reduced by the amount of FBT paid by your employer.

Certain employers, such as public benevolent institutions, health promotion charities and public hospitals, will not be liable to pay FBT unless the amount of benefits provided to an individual employee exceeds the relevant threshold.

Superannuation
Where contributions are paid to a complying superannuation fund, your earnings base may be reduced unless the salary sacrifice arrangement states otherwise. Your earnings base is the amount on which superannuation contributions made by your employer are calculated.

Reportable fringe benefits
If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your payment summary for the corresponding income year (1 July to 30 June). Some fringe benefits, called excluded benefits, don’t have to be reported on your payment summary, although your employer still has to pay FBT on these benefits.
Grossing up reflects the gross salary that you would have to earn to purchase the benefit from after-tax dollars. This is calculated at the highest marginal tax rate, including the Medicare levy – that is, your employer multiplies the taxable value of the benefit by 1.8692.

The value of fringe benefits reported on your payment summary is known as your reportable fringe benefits amount. You will need to show this amount (or the total of the reportable fringe benefits amounts if you receive more than one payment summary during the year) on your tax return.

Although this amount is shown on your tax return, it will not be included in your assessable (or taxable) income or affect the amount of basic Medicare levy payable. However, the total will be used to calculate:
the Medicare levy surcharge
deductions for personal super contributions
the super co-contribution
certain tax offsets
the private health insurance rebate
Higher Education Loan Program (HELP) and Student Financial Supplement Scheme (SFSS) repayments
your child support obligations
your entitlement to certain income-tested government benefits

What is a salary sacrifice arrangement?

A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value.

Agreement between you and your employer

It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. The contract is usually in writing, but may be a verbal one. If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement. Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time. Where you have a renewable contract, you can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.

No access to sacrificed salary

The sacrificed salary must be permanently forgone for the period of the arrangement. If a fringe benefit that has not been provided is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

Salary and wages, leave entitlements, bonuses or commissions that accrued before the arrangement was entered into cannot be part of an effective salary sacrifice arrangement.
Similarly, if you direct your employer to make payments to a third party from salary that has been earned, for things such as health insurance premiums, loan repayments, union fees or credit card repayments, these payments do not constitute an effective salary sacrifice arrangement. They are made from after-tax or net amounts of salary.

What types of benefits can be included?

There is no restriction on the types of benefits that can be sacrificed. The important thing is that these benefits form part of your remuneration, replacing what otherwise could have been paid as salary. The types of benefits generally provided in salary sacrifice arrangements by employers include fringe benefits, exempt benefits and superannuation.

Fringe benefits

Common fringe benefits include:
• cars
• property (including goods, real property such as land and buildings, and shares or bonds)
• expense payments (such as the payment of your loan repayments, school fees, child care and home phone costs).

Exempt benefits:

A number of benefits are exempt from FBT. The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:
• a portable electronic device
• an item of computer software
• an item of protective clothing
• a briefcase
• a tool of trade.

Superannuation

Salary sacrificed superannuation contributions under an effective salary sacrifice arrangement are considered to be employer contributions which, when paid for an employee to a complying superannuation fund, are not fringe benefits.
However, superannuation contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying superannuation fund will be a fringe benefit.