Is It Time to Hire Your First Employee?

Expanding your business by hiring your first employee is a significant milestone, but it comes with important financial and compliance obligations. Deciding whether to hire an employee or engage an independent contractor also requires careful consideration. In this article, we’ll explore the financial and legal implications of bringing someone on board, as well as the key differences between employees and contractors.

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Financial Implications of Hiring an Employee

Wages and Superannuation

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When you hire an employee — whether they are a full-time, part-time or casual employee — you are legally required to pay them at least the minimum wage as per the National Employment Standards (NES) and relevant awards or enterprise agreements. In addition to wages, you must contribute to the employee's superannuation fund at the minimum rate of 11.5% (as of July 2024).

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Other financial responsibilities include:

• Leave entitlements (e.g., annual, sick, parental leave)
• Payroll tax (depending on your business’s wage threshold in your state)
• Workers’ compensation insurance (mandatory for covering employees in case of injury)

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Different types of employee payments can cause inconsistencies in cash flow, so it's essential to accurately manage employee leave entitlements. For example, as employees work, they're entitled to their wages and superannuation, however, superannuation is required to be paid (at a minimum) quarterly, whereas wages are generally paid much more frequently (weekly or fortnightly). It's important to remember that some of the funds accumulating in your bank account will need to be passed over to the employee's superannuation fund.

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Payroll Administration

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Once you hire an employee, you will have wages, tax and super obligations to meet. You'll need to set up payroll to ensure that you know exactly how much tax to withhold and pass on to the Australian Taxation Office (ATO) through Pay-As-You-Go (PAYG) withholding. You will also need to issue pay slips and maintain accurate records of payments, super contributions, and leave balances.

Many businesses opt for payroll software to streamline this process, ensuring compliance with Single Touch Payroll (STP) reporting requirements, which mandate real-time reporting of payroll data to the ATO.

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Compliance Considerations

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Legal Obligations as an Employer

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Employers in Australia must comply with various legal obligations, including workplace health and safety regulations, equal opportunity laws, and providing a safe working environment. This means you need to familiarise yourself with:

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• Fair Work laws: These outline minimum employment standards and conditions.
• Awards and agreements: Industry-specific rules that govern wage rates, hours of work, and overtime. To find the relevant award, take a look at these award resources from the Fair Work Ombudsman.
• Employment contracts: It’s essential to have clear written agreements that outline roles, responsibilities, and conditions of employment.

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Failing to meet these obligations can lead to penalties and disputes, so it's vital to be well-informed before making your first hire. If you're unsure of your legal requirements, it's always a good idea to seek advice from a commercial lawyer or accountant.

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Payroll Requirements

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When expanding your business and hiring employees, understanding payroll compliance is crucial to avoid costly mistakes. Here are the key payroll obligations to keep in mind:

STP Finalisation
Employers are required to submit their Single Touch Payroll (STP) data to the ATO at the end of each financial year.

Superannuation Contributions
Employers must pay superannuation at least quarterly, and it must be paid on time. To ensure your payments are processed in time, make payments early, as late contributions are not tax-deductible.

WorkCover Declarations
If you have employees, you’ll likely be required to submit a WorkCover declaration. This includes reporting total wages paid to employees.

Updates to Minimum Wages
From time to time, the minimum rates of pay are updated. It's important to ensure you are paying your employees at least the minimum pay rates relevant to their position and employee agreement.

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Employee vs Contractor: Key Differences and Considerations

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When expanding your team, you might consider whether to hire a new employee or independent contractor. Each option has different legal and financial implications:

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Employees

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An employee works directly under your supervision and follows your business’s instructions on how to complete their tasks. Employees typically work set hours, and you are responsible for their wages, superannuation, and entitlements, such as leave.

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Advantages:

• Greater control: You have more control over how, when, and where the work is performed.
• Loyalty and long-term commitment: Employees are likely to feel more invested in your business and remain with you long-term.

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Disadvantages:

• Ongoing costs: Salaries, super, and leave entitlements can add up. If you have permanent employees, you'll need to ensure you still pay them their agreed wage during slow periods.
• Compliance responsibilities: As outlined earlier, hiring employees brings compliance and administrative obligations.

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Independent Contractors

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Contractors, on the other hand, run their own business and are hired to complete specific tasks or projects. Contractors may work for multiple businesses simultaneously, having more than one client, using their own tools and determining their working hours.

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Advantages:

• Cost flexibility: Contractors are generally paid for specific tasks or projects and do not receive paid leave or other employee benefits. It's important to note that under some circumstances, businesses are required to pay superannuation to contractors.
• Reduced compliance: Contractors are generally classed as small business owners who handle their own tax obligations, meaning less paperwork for your business.

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Disadvantages:

• Less control: You may have less control over how and when contractors complete the work.
• Short-term focus: Contractors might be less committed to your business and more focused on completing individual projects.

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Legal Distinctions and Risks

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It’s crucial to distinguish between employees and contractors correctly. Misclassifying an employee as a contractor can lead to significant penalties from the ATO, including back payment of superannuation, entitlements, and tax.

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Here are some key factors that differentiate employees from contractors:

• Control: Employees work under your direct supervision, while contractors have more control over how they complete their work.
• Independence: Contractors typically supply their own tools and equipment, whereas employees use your business’s resources.
• Payment: Employees receive wages based on hours worked or a salary, while contractors are paid for a specific task or project.

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To help you classify workers correctly, learn more about the differences between contractors and employees.

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When Is the Right Time to Hire?

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As a business owner, you may feel the pressure to hire when demand increases or when you are stretched too thin. However, timing is everything. Before starting the hiring process, ask yourself:

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• Is there consistent work available for the new hire?
  A fluctuating workload may mean that engaging a contractor is more suitable.
• Can you afford the additional costs of hiring an employee?
  Make sure your business’s cash flow can support wages, superannuation, and other entitlements, especially if your business has lean periods.
• Is this a long-term need?
  If the need is temporary or project-specific, a contractor might be a better option.

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Hiring your first employee is a major step toward growing your business, but it’s essential to understand the financial and compliance obligations involved. Weighing the pros and cons of employees vs contractors will help you determine the best option for your business when hiring staff. Always seek professional advice to ensure you are meeting your legal obligations and making the right decision for your business’s growth.

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If you need assistance with payroll setup, compliance, bookkeeping, or any other accounting needs, feel free to get in touch with us today.

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