Contractor vs Employee: The Tax Differences

A $600 day rate looks like $150,000 next to a $95,000 salary — but the two aren't comparable. The salary arrives with tax withheld, super paid on top and leave built in. The contract arrives raw, with every obligation now yours.

Here's how contractor and employee tax actually differ, the PSI rule that surprises new contractors, and who genuinely comes out ahead.

First, the myth: there's no magic low contractor tax rate. Sole trader income lands in your personal tax return and climbs the same staircase as a salary — 0% up to $18,200, then 16%, 30%, 37% and 45% steps, plus the 2% Medicare levy.

The difference is the plumbing. Employees have tax withheld from every pay; contractors invoice untaxed, and the bill arrives later, whole. Roughly a third of every invoice was never really yours. After your first return, the ATO usually moves you onto PAYG instalments — quarterly pre-payments of next year's tax — so the drip-feed returns, just self-managed.

Employees get super guarantee: the employer must pay 12% of salary into your super fund (your locked-until-retirement investment account), on top of your pay. On $95,000, that's $11,400 a year. Contractors generally get nothing unless it's negotiated into the rate — though contractors paid mainly for their labour can be an exception the hiring company must cover. Assume it's on you, and check.

So an honest comparison of that $600 day rate starts by subtracting 12% for super, then paid leave, sick days, public holidays and the empty weeks between contracts. The gap between $150,000 and $95,000 shrinks fast.

In one plain sentence: if your income is mainly a reward for your personal skills and effort — you, doing the work, largely for one client — the ATO's personal services income rules tax it like a salary and block most business-style deductions.

PSI exists to stop employees quitting on Friday and returning Monday as a "consultancy" with better write-offs. Genuine businesses — multiple clients, staff, tools of trade, results-based contracts — can pass the tests. If you're one person with one main client, assume PSI applies until proven otherwise. It doesn't change your tax rate — it changes what you can claim.

Contracting has real, legal tax advantages when you're running an actual business:

A contract rate needs to be meaningfully higher than the equivalent salary — think 25 to 40% — before you're genuinely ahead, because you're self-funding super, leave, gaps between gigs, insurance and admin. A day rate that only looks 15% better is usually a pay cut in disguise.

Contracting wins when the rate is truly higher, you run it like a real business, and you set tax aside. Employment wins on stability and super paid without thinking. Comparing a real offer? Convert both to annual take-home — salary through our tax calculator, contract rate minus super, leave and dead weeks through the same — and let Compare Offers referee.