Does an independent contractor need a business license?

Traditionally, the standard career path involved working full-time for a single employer. However, the employment landscape is shifting, with an increasing number of Australians—over one million, to be precise—choosing the path of independent contracting as a sole trader.

The appeal of being an independent contractor is clear. It offers the flexibility to choose your own working hours and the opportunity to work from virtually anywhere, often resulting in higher earnings before taxes compared to traditional employment. Plus, it grants the autonomy of being your own boss.

Yet navigating the world of independent contracting comes with its challenges. Key among these is understanding the legal definition of an 'independent contractor' and the requirements associated with this role, such as the necessity of obtaining an Australian Business Number (ABN) for legally conducting business in Australia.

In this article, we'll explore common enquiries surrounding the registration of independent contractors and offer guidance on the essential steps to legally establish yourself as a self-employed individual in Australia.

FAQs about independent contractor business registrations

Understanding the definitions of the terms 'independent contractor,' 'sole trader,' 'Australian Business Number,' and 'business registration' is incredibly helpful for self-employed individuals looking to navigate the complex world of correctly classifying themselves for legal and tax purposes. 

Before you set up your business and start your new career, here are some frequently asked questions about these terms, as well as other aspects you should know about working in Australia as a self-employed individual:

Q: What’s the difference between an independent contractor and an employee?

The distinction between a contractor and an employee in Australia hinges on several key factors. Permanent employees are typically on a payroll, receiving a fixed salary or wage. Their employer automatically deducts income tax from their earnings. Additionally, employees benefit from automatic superannuation contributions and are entitled to paid holiday leave and sick days, providing a level of financial and job security.

On the other hand, independent contractors are usually compensated based on an hourly or daily rate, often engaged in short-term contracts. Classified as 'self-employed' or operating under an ABN as sole traders, contractors are responsible for managing their own financial affairs, including paying their income tax and supplementing their own superannuation contributions. They must also adhere to quarterly Goods and Services Tax (GST) report submissions, if applicable.

Unlike their permanently employed counterparts, contractors don't receive paid annual leave or sick days, reflecting the more flexible yet less secure nature of their working arrangements.

When starting a new business, Rippling can help ensure you’re classified correctly to mitigate risks of penalisation.

Q. Does an independent contractor need an ABN?

In Australia, while not every independent contractor is legally required to have an ABN, for most, it effectively becomes a necessity to operate legitimately and efficiently in a business context.

An ABN is an 11-digit identifier that makes it easier to interact with the Australian Taxation Office (ATO) and other government agencies. Without an ABN, businesses that hire contractors are obliged by the ATO to withhold tax at the top rate (47%) from any payments they make to the contractor. This situation makes having an ABN crucial for contractors to avoid excessive withholding and to conduct their business activities, such as billing and claiming GST credits.

Applying for an ABN is straightforward and can be done online via the Australian Government's Business Registration Service. However, not everyone who applies for an ABN will be eligible; you need to be carrying on or starting an enterprise in Australia. Independent contractors, as business operators, generally meet this criterion.

Q. What's the difference between an independent contractor and a sole trader?

Sole traders and independent contractors are like two sides of the self-employment coin in Australia, and they both need an ABN to efficiently do their thing. Sole traders run their own small business across a variety of jobs, handling everything from finances to admin. Independent contractors are more like freelancers hired for specific projects.

While their work might overlap, being a sole trader rather than just an independent contractor can simplify the nitty-gritty of business and tax management, offering more control over your professional life and some financial benefits along the way.

Choosing the sole trader path is popular among freelancers for its tax and paperwork simplicity. With an ABN, sole traders can easily manage their business dealings, including claiming back on business expenses—a nice perk at tax time. It's a user-friendly way to work for yourself, track your income, and sort out taxes without too much drama.

Independent contractor 101: 5 steps to get you started

Now that you’re aware of the requirements surrounding independent contractor business registration, here are the five steps you can follow to get started in your new career as a self-employed individual:

Step 1: Create a website and update your LinkedIn profile page

Once you decide what kinds of services you’re offering, spend time creating a personal website and updating your LinkedIn page to reflect your expertise and service offerings. Especially for those in creative fields, like graphic design, marketing, copywriting, and similar professions, showcasing your work is crucial. Prospective clients will often request a portfolio to understand your style and capabilities. Your website serves as the ideal platform for this purpose. Fortunately, there's an abundance of free or affordable website builders designed for users at any skill level, making it easy to develop a site that highlights your skills and the projects you're most proud of.

Make sure both your web page and your LinkedIn are SEO-friendly—that is, they contain the right keywords so you’ll show up when potential clients search to see who’s available for jobs your expertise will fit.

One further recommendation: Don’t try to make your LinkedIn your portfolio. It’s not meant for that, even according to professionals who write for LinkedIn. The website can’t properly host videos, graphic design samples, or even writing samples in the same organised way a dedicated portfolio site does, and it’s best for static documents such as a resume—things you won’t change often. Instead, include a link to your portfolio on your LinkedIn page in a place where it’s easy to find.

Step 2: Set your rates

Whether you’ve just started as an independent contractor or have prior experience, one question you should always be prepared for in an interview with a prospective client is what your rates are.

This can be a tricky question to answer, even for the most experienced person. If you ask for too little, you’ll find yourself working extremely hard for far less than you deserve. Ask for too much, and you might wind up losing the job because you’re far outside what’s considered a reasonable rate for the services you provide. 

Do research beforehand on the regular market rate for the work you do. Then, decide whether you charge by the hour, per project, or whether you offer a monthly rate to employers who are looking to work with you regularly. Each has its pros and cons.

If you decide to charge by the hour, you’ll be paid for the exact amount of work you do, which can be extremely helpful if you're working on a big project or with a new client and aren’t sure how much time you’ll be putting in. On the other hand, if you work very efficiently, you may not make as much working per hour as you would if you charged per project. 

Charging a flat rate is great for people who work efficiently and for ensuring clients know the cost of the work ahead of time and aren’t surprised by the final invoice. A con of charging a flat rate? You might get clients who are put off by a big number and who go elsewhere looking for someone 'cheaper'.

Before you decide, consider the scope of the project you’re working on, whether the client is new, and what’s worked for you in the past. Whichever option you select, have your rates in mind before you start interviewing.

Step 3: Perfect your pitch

Whether you apply to freelance jobs through websites or cold-email a few companies you’d like to work for, you need to hone your elevator pitch first. Spend some time writing a short paragraph that clearly explains who you are, what you do, and what kind of work you’re looking for, as well as the benefits you’ll bring to the position. Furthermore, make sure you research each company carefully so you can tailor your pitch to their needs and values. 

One further note: If you go the cold-email route, be extra diligent in your research and make sure you email the right person. It’s best to be able to address a specific person by name: the old 'to whom it may concern,' is a thing of the past—the internet has made it much easier to find out who holds which role, and people tend to ignore emails that aren’t specifically addressed to them.

Step 4: Network, network, network

You need to get your name out there, and networking is one of the most effective ways to market yourself. Join online forums with fellow independent contractors who offer similar services, and take part in their conversations. Make sure you get to know them as people and focus on sharing information, not just on asking for leads for jobs. By becoming a respected, well-known part of the community, leads will gradually start coming your way. 

Additionally, find online groups that are relevant to your industry, add companies to your LinkedIn profile that you’d particularly like to work for, and focus on letting people get to know you in addition to keeping an eye out for open positions.

Step 5: Set up a bank account and keep detailed records of all payments you receive

Remember: As an independent contractor or sole trader, you’re responsible for paying taxes to the ATO. Because you’re not classified as a full-time employee, your client won’t be doing this for you (and the ATO doesn’t look kindly on people who try to hide money).

Many independent contractors opt for opening a separate business bank account to manage their finances, though some choose to use their personal account and maintain meticulous records instead. Rather than paying your taxes annually, it's advantageous to make payments quarterly through the ATO's Pay As You Go (PAYG) system. This approach helps avoid the stress of a significant tax bill at the end of the financial year. The ATO's due dates for quarterly payments are generally the 28th day after the end of each quarter, helping you spread out your tax obligations and manage your cash flow better.

Foreign self-employed workers and independent contractor business registrations

The pandemic resulted in the explosion of the gig economy and made remote work arrangements a common way to do business. It also allowed companies to look for and hire talent anywhere in the world; similarly, freelancers could now seek out the right job in any country, not just their own. 

Hiring a foreign independent contractor legally and compliantly

Hiring a foreign independent contractor legally and compliantly offers significant advantages for Australian businesses. Engaging with contractors overseas allows access to a broader skill set and potentially finding the ideal candidate for specific projects. Moreover, favourable currency exchange rates and lower labour costs can present financial benefits for Australian companies seeking talent beyond their borders.

Nevertheless, to sidestep legal complications, penalties, or fees, it's essential for businesses (and contractors) to be well-informed about the labour laws applicable in both Australia and the contractor's home country. Understanding these regulations ensures a smooth, lawful employment relationship.

Do foreign independent contractors need registered businesses?

Just like Australian independent contractors, both foreign freelancers and the companies who hire them often wonder if the former needs a registered business to operate as an independent contractor. The short answer? The rules vary from country to country. It’s crucial to look up the laws of the nation the independent contractor hails from.

Here’s a concise overview of the importance of business registration for freelancers from various countries frequently collaborating with Australian firms:

• India: Generally, Indian independent contractors don't need any kind of business registration paperwork.
• Philippines: Filipinos who want to work as independent contractors need to register as such, as well as obtain a taxpayer identification number (TIN) and a Department of Trade and Industry (DTI) certificate.
• Brazil: As long as they're not subject to the regulations of any of the clients they work for, independent contractors in Brazil can operate without a registered business.
• Ukraine: Yes, business registration is necessary. Generally, Ukrainian freelancers set themselves up as an 'Individual Entrepreneur' (or FOP) and need to fill out the necessary paperwork and tax documents to get started.

Just as it’s crucial for independent contractors to meet any legal requirements necessary to set themselves up as freelancers, the company needs to make sure to classify new hires correctly. Misclassifying an employee as a contractor—or vice versa—can result in fines and penalties. 

Rippling’s 90-second quiz can help companies correctly classify a new worker—whether they’re a foreign independent contractor or a US citizen.

To learn more about how we can help you hire, onboard, and manage your global workforce, schedule a demo with Rippling today. 

Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.