“Contractors are cheaper” and “contractors are more expensive” are both commonly believed and both frequently wrong, because almost nobody compares them properly.
The comparison, done properly
A role you value at $75,000 a year as an employee:
| Employee | Contractor at $85/hr | |
|---|---|---|
| Base | $75,000 | $155,550 (1,830 hrs) |
| Superannuation 12% | $9,000 | Often still payable — see below |
| Payroll tax (~5%, if above threshold) | $4,088 | Frequently payable — see below |
| Workers compensation ~2% | $1,500 | Usually not |
| Leave loading | $1,010 | Not applicable |
| Equipment, software | $2,500 | Usually theirs |
| Desk / space | $3,500 | Usually theirs |
| Recruitment, amortised | $2,000 | Lower |
| Total | ≈ $98,598 | ≈ $155,550+ |
At $85/hr the contractor is dramatically more expensive for a full-time-equivalent role. Break-even against this employee is roughly $54/hr.
But the contractor bills only what they work. If you need 600 hours a year rather than 1,830, the contractor costs $51,000 and the employee still costs $98,598. Utilisation is the whole variable.
The rule of thumb
Full-time, continuous, ongoing work → employee is almost always cheaper.
Under roughly 60% utilisation, or genuinely project-based → contractor is usually cheaper, and you avoid carrying fixed cost through quiet periods.
The mistake is engaging a contractor full-time, indefinitely, for what is functionally a job — which is both the most expensive option and the highest-risk one.
The risk most owners underestimate
Calling someone a contractor does not make them one. The ATO, Fair Work and state revenue offices apply their own tests, and they look at substance rather than labels.
Worse, the three regimes do not fully align — someone can be a contractor for one purpose and an employee for another.
What the tests look at: control over how the work is done; whether they can delegate or subcontract; who bears commercial risk; who provides tools and equipment; whether they can work for others; whether they are integrated into your business or running their own; and how they are paid (result versus time).
An ABN does not settle it. Neither does a written contract calling them a contractor. Neither does their preference.
Three specific exposures
Superannuation. Under the Superannuation Guarantee Act, a contractor engaged wholly or principally for their labour is deemed an employee for super purposes even if they are genuinely a contractor for every other purpose. This catches a very large number of arrangements.
Payroll tax. State relevant-contract provisions deem many contractor payments to be wages unless a specific exemption applies. Businesses that restructured to contractors specifically to get under a payroll tax threshold frequently discover this at audit, retrospectively, with interest.
→ Payroll tax thresholds by state
Sham contracting. Misrepresenting employment as a contracting arrangement carries civil penalties under the Fair Work Act, plus back-payment of entitlements — leave, notice, redundancy, super — potentially for years.
Doing it properly
Be honest about which you actually want. If you want to control how, when and where the work is done, you want an employee. Structuring it as contracting to avoid on-costs is exactly the arrangement the tests are designed to catch.
Get the contract right, then make the reality match it. A well-drafted agreement is worth little if day-to-day practice contradicts it. The tests look at what actually happens.
Genuine contractors should look like businesses: own ABN and insurance, multiple clients, own equipment, ability to delegate, quoting on outcomes, bearing rework risk.
Review long-running arrangements. A contractor engaged three years ago for a project who now works exclusively for you, five days a week, using your systems, is an employee in substance regardless of the paperwork.
Get advice on the specific arrangement. The cost of advice is trivially small against a retrospective assessment.
The wider context
This decision matters more than it used to. The 1–4 employee segment of Australian business fell by nearly 39,000 since 2021-22 while non-employing sole traders grew 4.3% — some of which is genuine independent contracting, and some of which is employment relationships relabelled.
The cost pressure driving it is real: wages up 20.3% since March 2020, super at its 12% ceiling, award rates up 4.75% from 1 July 2026.
But relabelling an employee as a contractor does not remove those costs. It defers them and adds penalty risk on top.
Where to go next
- The True Cost of an Employee\n- Can You Afford to Hire?\n- Payroll Tax Thresholds by State\n- Offshore vs Local Hire
Sources: Australian Taxation Office; Fair Work Ombudsman; state revenue offices; ABS Counts of Australian Businesses; Fair Work Commission Annual Wage Review 2026. Worked figures illustrative. Contractor classification is legally complex and consequences are significant — this is general information, not legal or tax advice. Obtain advice on your specific arrangements.