Starting out as a contractor: what you actually need

There is a lot of advice online about setting a business up properly – structures, trusts, forecasts, entities holding shares in other entities. Almost none of it applies if what you are doing is picking up contracting work on site.

You are not building a company. You are selling your labour to whoever needs it this month. The setup for that is genuinely small, and paying for anything more elaborate at this stage is money that could have gone into tools.

A sole trader ABN is almost certainly enough

Apply for an ABN as a sole trader. It is free, it takes minutes, and you quote it on every invoice. You keep using your own tax file number, and the business income goes in the business section of your ordinary tax return.

You do not need a company. A company costs money to set up and several hundred dollars a year to keep, and it buys you protection you mostly do not need yet – you have no employees, no stock, and nobody extending you credit. If that changes, so does the answer, and it is easy enough to change then.

But check you are actually a contractor

Having an ABN does not make you a contractor – and the distinction is worth getting right. If you work set hours for one builder, use their tools, take their direction and cannot send someone else in your place, you are an employee in the eyes of the law regardless of what the paperwork says and regardless of what you both agreed.

That matters to you, not just to them. Employees get super, leave, workers compensation cover and notice. Contractors get none of it and have to arrange their own.

The one nearly everyone misses: super

Even as a genuine contractor, if your contract is wholly or principally for your labour, the person paying you has to pay your superannuation. It does not matter that you invoiced them with an ABN.

This catches an enormous number of people in construction, on both sides. If you supply mainly your own labour rather than a result plus materials and plant, ask about super before you agree a rate – and if you have been contracting for a while without it, it is worth a conversation about what you may be owed.

GST, once you get busy

Register for GST once your turnover reaches $75,000, which on full-time rates does not take long. From then on you add 10% to your invoices, claim back the GST on your tools, fuel and materials, and lodge a BAS each quarter.

You can register before you reach it. Many contractors do, because the credits on tools and a vehicle are worth having and most of the people paying you are registered anyway. How GST works and how to calculate it covers the arithmetic – including why you divide by 11 rather than taking 10% off.

Tax does not come out automatically any more

Nobody is withholding it for you. Put money aside from every payment, because the bill arrives all at once after your first return, and then the ATO puts you on quarterly PAYG instalments for the year ahead – which can mean paying last year's tax and this year's instalments in the same period.

Set aside more than feels necessary in year one. That is the year the timing catches people.

Insurance you will actually be asked for

• Public liability – most sites will not let you start without it

• Income protection – if you stop, the money stops. There is no sick leave

• Workers compensation does not cover you. It covers your workers. As a sole trader you are not your own employee, so cover for yourself has to be arranged separately

• Tools and vehicle – worth checking what your home policy does and does not extend to

Construction has a few of its own

You will need a White Card for any construction site. Building work over the licensing threshold needs a licence in your state, which is separate from anything the ATO asks for.

And it is worth knowing that businesses in building and construction report to the ATO every year what they paid each contractor, through the taxable payments annual report. Your income is already visible. Declare it properly and this is a non-issue; the people it catches are the ones who assumed cash work was invisible.

When to stop being a sole trader

Come back to the structure question when any of these become true: you start putting on employees, you take on work where something going wrong could cost more than you have, you begin subcontracting to others, or the profit starts staying in the business rather than funding your living.

Until then, simple is not a compromise – it is the right answer. If you are building something larger than a one-person trade, business setup walks through the whole of it. When that changes, our business structuring page has a short tool that will tell you which way to go, and the sole trader structure covers what you have now in more detail.