An Independent contractor is a self-employed person being paid through payroll rather than an employee in the normal sense.
Contractors can be paid through the Payrun screen in much the same way as other staff records, but their employment and taxation setup differs from that of an employee.
Importantly, not every independent contractor is GST registered. The additional GST setup described in this guide is only required where GST needs to be calculated on payments made to the contractor.
Set up the contractor
Create the contractor's Staff record in the normal way.
For more information about creating the initial record, refer to:
Then configure the contractor's employment arrangement:
Go to the Staff screen.
Select the contractor.
Select the Contract tab.
Select the nested Employment tab.
Set Contract to Independent contractor.
Complete the other applicable contract and payment settings.
Save the changes.
Selecting Independent contractor identifies that the person is self-employed rather than an employee and turns off leave entitlements.
For more information about the available fields, refer to:
Paying an independent contractor
Contractor payments are entered through the Payrun screen.
The appropriate type of pay code depends on how the contractor is paid.
For example:
an Allowance code can be used for payments for services or agreed amounts
a Work code can be used where the contractor is being paid according to hours worked
Allowance codes are generally a way of recording contractor payments where the payment does not need to represent ordinary employee working hours.
The pay can then be entered using the required units, rate, or amount according to the calculation method of the selected code.
For more information about setting up pay codes, refer to:
<Creating Allowance codes><Creating Work codes>
GST-registered contractors
Not all independent contractors are GST registered.
If the contractor is not GST registered, the normal contractor setup and pay entry can be used without enabling GST calculations.
If the contractor is GST registered and GST needs to be calculated through SmoothPay, three separate prerequisites must be completed:
GST calculations must be enabled for the payroll.
The contractor must be identified as requiring GST calculations.
The pay code being used must have a GST rate selected.
All three prerequisites must be met before SmoothPay will calculate GST on the contractor's payment.
1. Enable GST calculations
GST behaviour is configured under the Accounting tab in the Settings screen.
Go to the Settings screen.
Select the Accounting tab.
Set the GST amount treatment to either Inclusive or Exclusive, as required.
Save the changes.
The selected treatment determines how GST relates to the value entered in the pay:
Inclusive means GST is already included within the entered gross value.
Exclusive means GST is calculated in addition to the entered gross value.
Enabling GST calculations also makes the relevant contractor GST options and pay-code GST settings available elsewhere in SmoothPay.
For more information, refer to:
2. Identify the contractor as GST registered
Once GST calculations have been enabled, the GST? field is available under the contractor's Employment settings.
Go to the Staff screen.
Select the contractor.
Select the Contract tab.
Select the nested Employment tab.
Set GST? to the applicable option.
The GST options used for a GST-registered contractor include:
Payslip with GST calculations
Buyer-created tax invoice
Selecting either of these identifies that GST calculations are applicable to payments made to that contractor.
The difference between the two options is how the payment documentation is produced:
Payslip with GST calculations is used where the contractor provides the required invoicing documentation and the payroll output is being used as a payslip.
Buyer-created tax invoice is used where the employer is producing the tax invoice on behalf of the contractor.
3. Apply a GST rate to the pay code
The final prerequisite is the pay code itself.
When GST calculations have been enabled under Settings, a GST rate can be selected against applicable pay codes in the Codes screen.
The Work or Allowance code used to pay the contractor must have the appropriate GST rate selected.
For example, if a contractor is being paid using an Allowance code for services:
Ensure the Allowance code has been created.
Edit the code in the Codes screen.
Select GST under the GST rate field
Save the changes.
The same principle applies where a Work code is being used.
For detailed instructions on creating and maintaining the codes themselves, refer to:
<Creating Allowance codes><Creating Work codes>
How the three GST prerequisites work together
GST is only calculated when all three parts of the setup are present.
For example:
GST enabled in Settings + GST rate on pay code + contractor not marked for GST = no GST calculation
Likewise:
GST enabled in Settings + contractor marked for GST + no GST rate on pay code = no GST calculation
Only when the payroll, contractor, and pay code are all configured appropriately will GST be calculated.
Example without GST
A contractor who is not GST registered can simply be paid using the applicable pay code.
For example:
10 units × $50.00 = $500.00
The contractor's gross payment is $500.00
No GST calculation is applied.
Example with GST
Assume a GST-registered contractor is being paid $500.00 for services and all three GST prerequisites have been completed.
If the payroll is configured for GST Exclusive, GST is calculated on top of the payment:
Payment value + GST = total contractor payment
If the payroll is configured for GST Inclusive, the GST component is instead contained within the entered payment value.
The exact result therefore depends on the GST treatment selected under the Accounting tab in the Settings screen.
Before processing the contractor's first pay
Before including the contractor in a pay, confirm that:
Contract is set to Independent contractor
normal employee leave entitlements are not being applied
superannuation settings are appropriate for a self-employed contractor
the contractor's payment method and bank details are configured where required
appropriate Work or Allowance codes exist for their payments
if GST applies, all three GST prerequisites have been completed
the contractor's applicable tax settings have been completed for your jurisdiction