Paying super for contractors and subcontractors

Work is changing and so are the teams we build. More businesses are engaging contractors to get the job done, but this flexibility comes with its own set of rules, especially around superannuation. It’s a common point of confusion for many employers.

Just because a worker has an Australian Business Number (ABN) and provides an invoice for their services, it doesn’t automatically mean you’re exempt from paying them super. 

The Australian Taxation Office (ATO) has specific rules that can classify a contractor as a ‘deemed employee’ for superannuation purposes and getting it wrong can lead to significant penalties. 

Here’s everything you need to know about paying super for contractors. 

When do you have to pay super to a contractor?

Under the Superannuation Guarantee (Administration) Act 1992, your obligation to pay super extends beyond traditional employees. The core principle comes down to one key question: is the contract wholly or principally for the person’s labour?

If the answer is yes, that contractor is considered a ‘deemed employee’ in the eyes of the ATO and is legally entitled to super contributions. This rule was designed to protect individuals who are essentially working like employees, even if they are structured as independent contractors.

Let’s break down the three main tests the ATO uses to determine if a contractor is eligible for super.

Rule 1: The contract is principally for their labour

This is the most critical factor. If you’re paying a contractor primarily for their personal skills, knowledge or physical effort, they’re likely entitled to super. Think about what you’re actually paying for. Is it their time and expertise or is it a final product or the use of their expensive equipment?

If more than 50% of the value of the contract is for their personal labour, the ATO will generally conclude that the contract is ‘principally for labour’.

Rule 2: No genuine right to delegate

Another clear signal is whether the contractor is required to do the work themselves. The contractor must not have a genuine contractual right to delegate or subcontract the work to others. 

If the contract requires the specific individual to perform the work personally and provides no “unfettered” right to send a substitute, they are likely a deemed employee. 

Note: The ATO now focuses on the legal rights in the written contract, not just whether the contractor happened to do the work themselves.

Rule 3: They’re paid for time worked, not a specific result

How a contractor is paid is a strong indicator of their status. Are they paid an hourly or daily rate or a price per unit of activity? This payment structure is common in employment arrangements and often attracts super.

In contrast, paying a fixed price to achieve a specific outcome, where the contractor quotes for the total job and is responsible for rectifying defects at their own cost, usually does not require super contributions.

Other eligibility criteria for paying super to contractors

In addition to the above rules, you must also consider the general superannuation eligibility criteria:

• Age and hours: Super is payable for all eligible contractors aged 18 or older, regardless of hours worked. For those under 18, super is only mandatory if they work more than 30 hours in a week.
• No upper age limit: Super obligations don’t stop when a worker reaches a certain age. Contributions are required for all eligible workers regardless of seniority.
• Domestic work exception: If you engage a contractor for private or domestic purposes (e.g. at your home), super is only required if they work more than 30 hours per week.
• The first dollar rule: There is no longer a minimum income threshold (formerly $450/month). Super is calculated at the current 12% rate from the very first dollar of the labour component.
• Payday Super transition: Be aware that from 1 July 2026, you will no longer pay super quarterly. You must pay contributions on the same day as their salary or invoice, ensuring funds arrive in their account within 7 business days.

When are you exempt from paying contractor super?

While the rules can seem daunting, there are clear situations where you’re not required to pay super. Understanding these exemptions can help you engage contractors confidently. 

You’re generally exempt from paying superannuation if:

You’re contracting with a non-individual entity 

Generally, if you enter into a contract with a company, trust or partnership (rather than an individual), you’re not required to pay super to the individual providing the labour. 

However, you need to make sure the arrangement is a genuine business-to-business relationship. If the contract is found to be a “sham” designed solely to avoid employment obligations, the ATO may look through the structure.

The contract is purely for a result

When you engage a contractor to deliver a specific outcome for a fixed price and they’re responsible for their own hours, tools and rectification of defects, it’s considered a contract for a result. For example, hiring a web developer to build a complete website for a single quoted fee.

The labour component is not the principal part of the contract

If the contractor is supplying expensive equipment or materials and the cost of their labour is less than 50% of the total invoice, you’re not obligated to pay super.

How to calculate super for contractors

Once you’ve determined a contractor is a deemed employee, you need to calculate their super correctly. As of 1 July 2025, the Superannuation Guarantee (SG) rate is 12%.

It’s crucial to remember that super is only payable on the labour component of their invoices. You don’t pay super on:

• Any Goods and Services Tax (GST) charged.
• The cost of materials, tools or equipment listed on the invoice.
• Any time the contractor was on unpaid leave.

Example calculation:

A contractor invoices you for $2,200. The invoice is broken down as:

• Labour: $1,500
• Materials: $500
• GST: $200 (10% of $2,000)

You only need to calculate super on the $1,500 labour portion.

Super calculation: $1,500 x 12% = $180

You would pay the contractor their $2,200 invoice and separately pay $180 into their nominated or stapled super fund.

Payday Super 2026: How the new legislation impacts contractors

From 1 July 2026, Payday Super comes into effect and is set to transform how superannuation is paid. This change means employers will no longer be able to pay super in quarterly batches.

Instead, you must align super payments with your pay cycle. For deemed employees, this means the super contribution must be initiated on the same day you pay their labour invoice. The funds must reach the contractor’s super account within 7 business days of that payment date to avoid penalties.

This shift is designed to make sure workers receive their super more frequently and prevent unpaid super from accumulating.

For businesses that engage contractors, this means your payroll process must be ready to handle super payments with every single invoice cycle. Manual calculations and quarterly payments will no longer be an option. Get ahead of the curve and know your obligations by downloading our Payday Super Factsheet.

Ordinary Time Earning (OTE) moves to Qualifying Earnings (QE) under Payday Super

From 1 July 2026, the earnings base for calculating super will officially shift from OTE to a new term: Qualifying Earnings (QE). 

While QE includes everything currently in OTE, it also standardises the calculation for Payday Super, ensuring all commissions and relevant labour payments are captured in every pay cycle.

If you’re already paying 12% on the labour component of a contractor’s invoice, your calculation will likely remain the same, but your reporting terminology in Single Touch Payroll (STP) will update to QE.

How Employment Hero automates contractor management

Staying on top of contractor payments, super calculations and the upcoming Payday Super changes can feel overwhelming. That’s where automation becomes your greatest tool.

Employment Hero is designed to remove the guesswork and risk from contractor management. Our AI-powered Employment Operating System helps you automate your processes so you can focus on building your business.

Here’s how we can help you manage contractors:

• Simplified contractor onboarding wizard: Use a step-by-step wizard to collect essential data, including ABNs, bank details and emergency contacts, making sure no critical compliance information is missed during setup.
• Automated super calculations: Our platform automatically calculates the correct SG amount on the labour portion of contractor payments, ready for each pay run.
• Payday Super ready: To make the transition to Payday Super as easy as possible for you, we’ve developed HeroClear; an automated clearing solution embedded directly into Employment Hero Payroll that validates and pays super. Keen to learn more? Visit our Payday Super Hub for more info.
• Integrated document management: Issue, sign and store contractor agreements and project briefing documents digitally. You can track the status of these documents in real-time and send automated reminders to contractors who haven’t signed their contracts yet.

Don’t let contractor compliance become a source of stress. Get in touch with one of our business specialists today and we’ll help you manage your entire workforce with ease.

Disclaimer: The information in this article is current as at 9 March 2026, and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. The Information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and to seek professional advice before making any decisions or relying on the information in this article.