The most expensive sentence in an Australian trade file is still “they’re a contractor, they have an ABN”. The invoice looks clean. The bank rule codes it to subcontractors. GST at 10 per cent comes off if the tax invoice is valid. Nobody runs Single Touch Payroll. Nobody pays Super Guarantee. At year-end the Taxable Payments Annual Report is either forgotten or filed from the same subcontractors account that also holds a couple of people who look, to anyone else, like staff.

This essay is about the books, not a court. It is not legal advice, not a Fair Work representation, and not a tax opinion on your particular person. The ATO publishes an employee/contractor decision tool. Use it. Save the result. If the relationship is close or the dollars are large, speak to a registered tax agent or an employment lawyer before you decide what the ledger is allowed to pretend.

The original Bookkeeping Centre worked with tradies, cleaners, clinics and associations. The pattern does not change much between a Sydney renovation and a Perth commercial clean: the file either names the relationship or it inherits someone else’s optimism.

Two questions, not one

Bookkeepers collapse this into a single label. The law does not. You are asking at least two questions:

  1. Is this person an employee or an independent contractor for PAYG withholding, STP and the ordinary employment file?
  2. Even if they are a contractor, do you still have a Super Guarantee obligation because they were engaged wholly or principally for their labour?

A third question sits beside them for some industries: do the payments belong on a Taxable Payments Annual Report?

You can answer “contractor” to the first question and still owe 12 per cent super from 1 July 2025, paid on payday from 1 July 2026. You can answer “employee” and still have a TPAR obligation for other people on the same job. The ledger needs language for all three answers, not a single “subbies” drawer.

Start with the ATO employee/contractor decision tool. It walks through control, ability to delegate, whether they advertise to others, whether they provide their own tools and insurance, whether they can make a profit or loss, and how they are paid. Your gut feeling that “everyone on a site is a subbie” is not a factor the tool lists.

What the employee file requires

If the person is an employee, the books are not optional:

  • PAYG withholding on each pay, reported through Single Touch Payroll
  • STP Phase 2 income types, employment basis and tax treatment — see STP Phase 2 mistakes
  • Super Guarantee at 12 per cent of ordinary time earnings, subject to the current ATO maximum contribution base, and from 1 July 2026 paid under payday super
  • leave or casual loading as the National Employment Standards and the award require — see casual loading
  • workers compensation as your state or territory scheme requires
  • an employee record you can produce: tax file declaration, super choice or stapled-fund result, and the agreement or award coverage

Coding an employee through accounts payable as “contractor — no GST” is not a workaround. It is a missing STP event, a missing SG payment, and a PAYG withholding you did not withhold. The fact that they asked to be paid on invoice does not move the obligation. People ask for all sorts of things on a Friday afternoon.

If they do not quote a tax file number, withhold at the rate the ATO currently publishes for that situation. We will not print that rate here. Look it up on the day you set the payee up.

What a genuine contractor file requires

A genuine contractor invoices you. The tax invoice should show their ABN, their identity, what was supplied, the price, and GST if they are registered. GST is 10 per cent when it is a taxable supply. If they are not registered for GST, do not invent a 10 per cent credit. If they do not quote an ABN, withhold from the invoice at the rate the ATO publishes for missing ABNs, and report that withholding. Do not “just pay the invoice” because the job is pouring on Monday.

Pay them through accounts payable, not through payroll, unless you have already decided they are an employee. Keep the contract, the invoice, the evidence of their insurance if you require it, and a note that you ran the ATO tool.

Then ask the labour question for super. If you engaged them as a person to do the work themselves — a cleaner on a weekly roster, a labourer who only works for you, a bookkeeper who sits in your office four days a week and does not send a substitute — SG may apply even though PAYG does not. That is the trap that still catches careful files. Document the conclusion. If SG applies, calculate it on the labour component, at 12 per cent, and from 1 July 2026 pay it on the day you pay them. Do not wait for a quarter you no longer have.

Do not apply SG to a genuine supply of a result with materials, a crew and a risk of profit or loss just because you are nervous. Over-paying super on a company-to-company contract is not “safe”. It is a miscode that will confuse their fund and your expense. Nervousness is a reason to use the tool and to get advice, not a reason to guess in the contractor’s favour or against it.

TPAR: the report the trades still treat as optional

If you are in building and construction, cleaning, courier or road freight, information technology, or security, investigation and surveillance, payments to contractors for those services generally belong on a Taxable Payments Annual Report. The ATO’s current TPAR page is the source for who is in, what “building and construction services” includes, and when the report is due.

TPAR is not payroll. It is a yearly report of contractor payments, ABNs and GST. Software can often build it from a contact flagged as a TPAR supplier. That flag only works if the contact was set up as a contractor with an ABN, not as a miscellaneous expense named “cash to Dave”.

Common TPAR failures in a trade file:

  • paying a contractor from the owner’s personal account and never entering the invoice
  • lumping materials and labour on a receipt that names nobody
  • using one contact called “subcontractors” for six people
  • reporting only the contractors you remember in June
  • ignoring cleaning or IT contractors because “we are a builder, not a cleaner”

A file that cannot produce TPAR from the ledger cannot claim it has books a tax agent can use. Build the flag at onboarding, not at lodgement.

How the ledger should show the split

Give the chart separate rooms:

  • Wages and salaries (employees)
  • Superannuation guarantee (employees, and contractors you have concluded are SG-liable)
  • Subcontractors — labour (TPAR-flagged where required)
  • Subcontractors — supply and install, or other result contracts
  • Materials (inventory or job cost, not a hiding place for people)

Do not pay a person from “materials” because you would rather not see labour rise. That is how a lying P&L and a missing TPAR happen in the same month.

On each job, the job-cost report should distinguish employee wages (with a burden for SG and workers compensation) from contractor invoices. If you cannot tell whether last month’s “labour” was STP or TPAR, you cannot price the next job. MYOB versus Xero for a trade business is the software conversation; this is the coding conversation.

Related parties deserve their own names. A spouse who invoices the company from a new ABN is not automatically a contractor. Run the tool. A director who takes drawings and occasional “contractor” payments is usually neither. Drawings and director fees have accounts. Use them.

Sham contracting is not a bookkeeping preference

Fair Work and the ATO both care when a business treats an employee as a contractor to avoid leave, SG or withholding. We will not rehearse the case law here. We will say this as bookkeepers: if you control the hours, supply the tools, forbid substitution, and pay an hourly rate for personal labour, the invoice is not a shield. Recoding the contact from “employee” to “supplier” in software is not a restructure.

If you inherit a file full of “contractors” who look like staff, do not silently flip them to payroll on Monday without talking to the owner and, if needed, their advisers. The flip has STP, SG catch-up, workers compensation and possibly leave consequences. It may also have a TPAR history that now needs an explanation. Park a written note: what you found, what the ATO tool said, what you have asked the owner to decide. Then keep paying them the way the current (wrong) file pays them only as a temporary, named exception — not as a practice you are willing to defend.

A short onboarding ritual that prevents the June panic

For every new person who will be paid more than pocket money:

  1. Decide, in writing, employee or contractor, using the ATO tool.
  2. If contractor, decide, in writing, whether SG applies to the labour.
  3. If employee, collect TFN declaration, super destination, and award or agreement coverage before the first pay.
  4. If contractor, collect ABN, GST status, tax invoice format, insurance if you require it, and a TPAR flag if your industry is in.
  5. Create the contact or the employee once, with the right accounts, and forbid the bank rule that codes them to “materials — general”.
  6. File the decision next to the contract. Five years is the working habit for records; longer if the relationship is still live. See source documents.

Do that when they start, and the month-end close does not have to re-litigate the relationship every time a payment hits the feed.

The Rosebery desk used to tell owners that a contractor is a relationship you can describe, not a rate you prefer. The books can live with either answer. They cannot live with both answers at once, which is what “they invoice, but they are basically one of us” has always been.