Contractor vs employee costs in Australia isn't just about the hourly rate. Superannuation, payroll tax, workers compensation and leave entitlements can add 25-30% to the cost of an employee — but contractors charge more per hour and carry legal risk if misclassified. Here's the full comparison.
The advertised salary is only part of what an employee actually costs a business. On top of gross wages, employers in Australia generally also pay:
Adding these together, a reasonable rule of thumb is that a full-time employee costs an employer 25-30% more than their gross salary once super, payroll tax, workers comp and leave are included.
Contractors invoice for their work and, in a genuine contracting arrangement, the business generally does not pay superannuation, payroll tax, workers compensation, or leave entitlements on top of the invoiced amount. This is the main reason contractor arrangements look cheaper at first glance.
However, contractors build these same costs into their rate, because they have to fund their own superannuation, insurance, equipment, and time off. A contractor charging $120/hour with no on-costs to the business may still cost more in total than an equivalent employee on a $90,000 salary, once you annualise the comparison properly.
Enter a salary and a contractor rate to see the true total cost of each option side by side.
Open Contractor vs Employee Calculator →Consider a mid-level marketing role, comparing a $95,000 salaried employee against a contractor charging $650/day.
| Cost Component | Employee ($95,000 salary) | Contractor ($650/day, ~230 working days) |
|---|---|---|
| Base pay | $95,000 | $149,500 |
| Superannuation (12%) | $11,400 | Not paid by business (usually)* |
| Payroll tax (~5%) | ~$4,750 | Often not applicable |
| Workers comp (~2%) | ~$1,900 | Contractor's own responsibility |
| Paid leave value (~10%) | ~$9,500 | Not applicable — contractor self-funds time off |
| Approximate total annual cost | ~$122,550 | ~$149,500 |
*Unless the "principally for labour" test applies, in which case the business may still owe superannuation to the contractor. Figures are illustrative and will vary by role, state, and industry risk classification.
Since the High Court's 2022 decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek, classification primarily turns on the written terms of the contract, rather than how the relationship unfolds in practice (unless the contract is a sham or has been varied). Key factors considered include:
Sham contracting occurs when a business labels a worker a contractor to avoid the costs and obligations of employment, when the real relationship is one of employment. It's prohibited under the Fair Work Act, and getting it wrong can be expensive.
A common misconception is that contractors never receive superannuation. Under the "principally for labour" test in superannuation law, if a contract is wholly or principally for the labour of the person (rather than to achieve a defined result using their own equipment, materials, or subcontracted labour), that person may be treated as an employee for superannuation purposes — even though they invoice through an ABN and are a contractor for tax purposes.
This means a business can be liable for unpaid super on contractor payments even without formally reclassifying the worker as an employee for other purposes. It's a frequent focus of ATO compliance activity.
The decision should be driven by the genuine nature of the working relationship, not simply which option looks cheaper on the surface — misclassification risk can turn an apparently cheaper contractor arrangement into a much more expensive one.
Is it cheaper to hire a contractor or an employee in Australia?
Contractors are usually cheaper on paper because businesses don't pay superannuation, payroll tax, workers compensation or leave entitlements on top of the rate. However, contractors typically charge a higher hourly or daily rate to cover their own costs, so the real difference is often smaller than it first appears once you compare total cost per hour of work delivered.
What is the true cost of hiring an employee in Australia?
On top of gross salary, employers typically pay an additional 25-30% in on-costs: 12% superannuation guarantee, payroll tax (if applicable, generally 4.75-5.5% of wages above the state threshold), workers compensation insurance (roughly 1-3% depending on industry risk), and the cost of annual leave, personal leave and public holidays.
Do businesses pay superannuation for contractors?
Sometimes. Under the "principally for labour" test, if a contractor is paid mainly for their personal labour and skills rather than to achieve a result using their own tools, equipment, or subcontractors, they may be legally entitled to superannuation guarantee contributions even while operating under an ABN.
What is sham contracting?
Sham contracting occurs when a business engages a worker as an independent contractor when the working relationship is genuinely one of employment, often to avoid paying superannuation, leave entitlements, payroll tax and other employee protections. It is illegal under the Fair Work Act and can result in significant penalties, including back-payment of entitlements.
How does the ATO decide if someone is a contractor or an employee?
Following the 2022 High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek, the ATO and Fair Work Ombudsman primarily look at the written contract terms, focusing on control over how work is performed, whether the worker can subcontract or delegate, who supplies tools and equipment, and whether the worker operates their own independent business.
What tax obligations do contractors have in Australia?
Contractors generally need an ABN, must register for GST if turnover exceeds $75,000 per year, are responsible for their own income tax via quarterly PAYG instalments, must keep their own tax and business records, and do not have tax automatically withheld by the business that engages them, unless they don't provide an ABN, which triggers 47% withholding.
Do contractors get paid leave in Australia?
Genuine independent contractors are not entitled to annual leave, personal/sick leave, or paid public holidays, because they are running their own business rather than being employed. This is one of the main reasons contractor day rates are typically higher than an equivalent employee's daily rate — the contractor must self-fund time off.
What is payroll tax and does it apply to contractors?
Payroll tax is a state-based tax on total wages once a business exceeds a state-specific threshold (generally $650,000-$1.3 million annually, varying by state). Payments to contractors can be captured by payroll tax rules in some circumstances, particularly under "relevant contract" provisions, so businesses shouldn't assume contractor payments are automatically exempt.
What are the risks for a business that misclassifies an employee as a contractor?
Risks include back-payment of unpaid superannuation plus the Superannuation Guarantee Charge and interest, back-payment of leave entitlements, payroll tax reassessments with penalties, Fair Work Ombudsman penalties for sham contracting, and potential claims for unfair dismissal if the relationship ends and is later found to have been employment.