Superannuation for contractors

Super for Contractors: Are You Getting It Right?

When you run a small business, especially in rural and regional areas , it’s common to bring in independent contractors from time to time. Maybe it’s a fencing crew, a graphic designer for your website, a consultant to help with strategy, or a bookkeeper to keep things running smoothly.

Here’s where a lot of business owners get caught out…  Even if your contractor has an ABN and sends you invoices, you might still need to pay them superannuation. Even when they’re “independent.”

And if you get it wrong, it can cost you in penalties.

So let’s break down what you need to know.

When Does Super Apply to Contractors?

Under superannuation law, contractors are sometimes treated like employees for super purposes. That means your business might need to:

• Pay super contributions for them each quarter
• Offer them a choice of super fund
• Follow the same rules as you would for an employee

You can’t simply pay them a higher rate and ask them to “sort out their own super.” The law requires your business to make the payment directly into their super fund if it applies.

Three Key Conditions to Check

Superannuation usually applies when:

• The contract is mainly for the contractor’s personal labour (not materials or equipment)
• They’re paid based on time worked, like an hourly rate
• They do the work themselves and can’t delegate it to someone else
  
  

Example 1: You hire a freelance admin assistant for 10 hours a week and pay them an hourly rate → super likely applies.

Example 2: You engage a website developer for a fixed-price project, and they deliver the finished result using their own tools → super likely doesn’t apply.

Another factor is who the contract is with:

• If you contract directly with the individual, and the work is mainly for their effort and time, SG obligations may apply.
• If the contract is with a company or trust, you generally don’t need to pay super.

For a full breakdown, the ATO has these resources to work out if you have to pay super and a specific section on super for independent contractors.

What Happens If You Get It Wrong?

If you should have paid super but didn’t, your business could face:

• Super Guarantee Charge (SGC) — this includes unpaid super, plus interest
• Penalties from the ATO
• In serious cases, personal liability can fall on company directors

Not the kind of news any business owner wants!

How to Pay Super for a Contractor in Xero

If you determine that super applies, here’s how to get it sorted in Xero:

You have two options when setting it up:

• Set the contractor up in payroll as if they were an employee. This lets you include their super in your regular pay run and use features like Auto Super if it’s enabled.
• Pay super manually, and record the payment using a bill or “spend money” transaction in Xero, coded to your superannuation expense account.

For step-by-step instructions, check out Xero’s article on how to pay superannuation for a contractor.

You Don’t Have to Work It Out Alone

The rules are tricky, especially when you’re juggling seasonal income, managing contractors, and keeping on top of day-to-day operations. That’s where having the right support makes a big difference.

I can help you:

• Check whether super applies to your contractors
• Set up the right processes in Xero to stay compliant
• Point you in the right direction if tax or legal advice is needed
  

Need Clarity Around Super for Contractors?

These rules trip up plenty of business owners. If you’d like help getting it sorted, get in touch and we can work through your situation together.

Content adapted from Australian Bookkeepers Network.