IT tax: employee, or contractor on an ABN?

Two developers can write the same code, sit at the same desk and take home a similar figure, and still file completely different tax. The thing that separates them is not the work. It is how they are engaged. Before you match a single expense against the rules in this cluster, settle whether you are a PAYG employee or a contractor invoicing on an ABN. This guide is written for the employee, so it is worth confirming that is you.

Why this is the first question

Day-rate contracting is common in this industry, and it is easy to drift between the two without noticing which side you are on. It matters, because being a PAYG employee or a contractor changes what you can claim, which return you lodge, and whether GST is part of your year at all. These are not two flavours of the same return. They are separate footings, and reading the deduction chapters as an employee when you are actually contracting, or the reverse, means a year spent answering questions that were never yours. Get the status right and every page that follows lands where it should.

How to tell which you are

You are an employee if you are paid a salary or wage with tax withheld before the money reaches you, super is paid in for you, and you work under the employer's direction on their systems, with no ABN invoicing in the picture. You are a contractor if you hold an ABN and invoice for your work, often at a day rate, register for GST once turnover passes $75,000, and lodge a business activity statement, the BAS, through the year.

One caution before you decide. The ATO looks at the whole arrangement, not the label on it, so having an ABN does not by itself make you a contractor, and a labour-hire worker placed through an agency and paid through its payroll is still an employee no matter what the placement is called. Weigh how the work is actually structured and paid, not the word on the contract.

The personal services income reality, which is reassuring

Here is the part that takes the pressure off. A solo contractor working a day rate almost always earns personal services income, meaning income that is mainly a reward for your own effort and skill rather than for a product or a result. If most of your income comes from one client and you do not pass the results test or hold a personal services business determination, the personal services income rules cap your deductions at what an employee could claim. So for a large share of IT contractors, the list in this guide is exactly the list that applies, and even then you cannot claim home occupancy costs such as rent or mortgage interest.

Only a genuine personal services business, one with several clients and paid to deliver a result rather than to turn up, opens the door to broader business deductions. If that describes you, the rules run wider than any single chapter here, and the right move is a tax agent who can walk you through personal services income, GST and the BAS before you lodge.

What the employed IT worker claims

If tax comes out before you are paid, this cluster is built for you, and your job at tax time is claiming back the work costs you funded yourself and were not reimbursed for. For an employed IT worker that is the running costs of working from home, home-office equipment under the $300 rule, certifications that keep your current role sharp, the work share of your phone and internet, your professional memberships, and travel between sites in a single day. Each of the other chapters here takes one of those and works through it, including the catches that quietly shrink the claim.

If you are both in the one year

A salaried role plus contract work on an ABN in the same year is a familiar shape in tech, a permanent job with a side engagement billed separately. When that is you, the answer is to keep the two apart. On the employee side sit your salary and the work deductions this cluster covers. On the contractor side sit the amounts you invoiced and the business deductions that belong to them, kept as their own records so neither one leaks into the other when you lodge.

The records differ too

Whichever side you are on, the habit that saves you is logging each cost as it happens rather than reconstructing the year from memory in July. What you keep is not the same on each side, though. An employee keeps receipts, a note of the work-use share on anything used for both work and home, and a record of the actual hours worked from home across the whole year. A contractor keeps full business records, income and expenses both, and the BAS lodgements once GST registration is in play. Either way, the ATO's free myDeductions app will hold the basics as you go.

The bottom line

Work out which one you are first, because everything else follows from it. Paid a salary with tax withheld and super going in means you are an employee, and this cluster claims your work costs against that salary. An ABN and invoices, past $75,000 with GST and a BAS to run, means you are contracting, though the personal services income rules may still hold your deductions to this same list. Answer that one question and every hour you put into your tax lands where it belongs.

General information only, not tax advice. Check the ATO or a registered tax agent for your situation.