What is an independent contractor? Definition & steps

Published Friday 20 March 2026

Table of contents

• What is an independent contractor?
• Independent contractor vs employee: What's the difference?
• Common types of independent contractor work
• The benefits of becoming a contractor
• Balance the benefits with the downsides
• Plan what you will earn
• How to get started
• Five ways to find contract work
• Use cloud technology to help you
• Get started with confidence
• FAQs on independent contracting

Key takeaways

• Understand the key differences between contractor and employee status by evaluating factors like control over work, ownership of tools and equipment, financial risk, and invoicing responsibilities to ensure you're classified correctly for tax and legal purposes.
• Calculate your true earning potential by factoring in lost employee benefits (paid leave, superannuation contributions, workers compensation), setting aside 25-30% for tax, and accounting for business expenses before setting your rates.
• Register your business structure and obtain an ABN, open a separate business bank account, get appropriate professional indemnity and public liability insurance, and set up cloud-based accounting software to manage your finances from day one.
• Build multiple income streams by using freelance platforms, registering as a government supplier, leveraging your professional network, and partnering with other contractors to reduce the risk of income variability.

What is an independent contractor?

An independent contractor is a self-employed person who provides services to businesses or individuals under a contract, rather than as an employee. Unlike employees, contractors run their own business and control how, when, and where they complete their work. The Australian High Court has clarified that the relationship is defined by the legal rights and obligations in the contract.

As a general guide, you're likely to be considered a contractor if you:

• own at least part of your own business
• work for multiple clients during each tax year
• have specialised skills or expertise
• work on temporary, short-term assignments or projects
• supply most of your own materials and equipment
• make decisions about how to complete the work

Check the Australian Taxation Office (ATO) guidelines for the specific rules that apply to your situation.

Independent contractor vs employee: What's the difference?

Understanding whether you're an independent contractor or an employee is important. It affects your tax, superannuation, and workplace rights. While employees work in someone else's business, contractors are running their own.

Here are the key differences:

• Control over work: Contractors decide how, where, and when the work is done. Employees usually have their hours and tasks directed by a manager.
• Tools and equipment: Contractors typically use their own tools and equipment to do the job. Employers provide these for their employees.
• Financial risk: Contractors are responsible for their own profit or loss and usually don't receive paid leave. Employees are paid a wage and get benefits like sick leave and annual leave.
• Invoicing and tax: Contractors invoice for their work and manage their own tax and super. The ATO notes that clients must pay super for contractors deemed to be employees for superannuation purposes. Employers withhold tax from an employee's pay and pay super contributions on their behalf.

Common types of independent contractor work

Independent contractors work across almost every industry in Australia. Your skills might be in high demand for project-based work or to fill a temporary need in a business.

Some common examples include:

• Professional services: Bookkeepers, graphic designers, IT consultants, and marketing specialists.
• Construction: Electricians, plumbers, carpenters, and other tradespeople working on a project basis.
• Creative fields:Freelance writers, photographers, and web developers.
• Health and wellness: Personal trainers, massage therapists, and locum doctors.

The benefits of becoming a contractor

Independent contracting offers several key advantages over traditional employment, particularly for professionals who value flexibility and control over their work.

• Greater independence: Run your own business and make decisions about how, when, and where you work.
• Better work-life balance: Reduce commuting, skip unnecessary meetings, and set hours that suit your lifestyle.
• Higher earning potential: Get paid market rates for every hour you work, with income that scales with your skills and demand.
• Lower-risk career exploration: Test a new industry or skill set without committing to a permanent role.
• Flexible entry points: Start part-time while transitioning from employment or exploring a second career.
• Company compatibility testing: Work with a business as a contractor before deciding whether to pursue full-time employment.

If these benefits appeal to you, contracting may be a good fit for your career goals.

Balance the benefits with the downsides

Independent contracting comes with trade-offs you should understand before making the switch. The biggest difference is employment rights: contractors don't have the same legal protections as employees.

Here are the key challenges to consider:

• Income variability: You're only paid for work you complete, with no income during quiet periods.
• No employee benefits: Clients aren't required to provide leave entitlements, superannuation contributions, or minimum wage protections.
• Limited workplace protections: Workers compensation and equal opportunity laws may not cover you.
• Tax responsibility: You're responsible for setting aside money for tax and lodging your own returns.
• Outsider status: You won't be part of the team culture or included in company meetings and planning.

Understanding these trade-offs helps you plan accordingly and decide whether contracting suits your circumstances.

Plan what you will earn

Financial planning is essential before becoming a contractor. Without a regular salary, you need to understand your earning potential and account for expenses that employers typically cover.

Many contractors start as employees, giving them insight into market rates. If you're unsure what to charge, research rates on freelance platforms or industry associations.

When calculating your rates, factor in what you'll lose by leaving employment:

• Paid leave (annual, sick, and parental)
• Superannuation contributions from an employer
• Workers compensation coverage

Follow these steps to calculate your true earnings:

1. Estimate your hourly or project rate.
2. Project how many billable hours you'll work each month.
3. Subtract business costs (insurance, equipment, software, accounting).
4. Set aside money for tax (typically 25–30% of income).

Use accounting software to forecast your income and track expenses. If the numbers work, you're ready to take the next step. Consider speaking with an accountant before making your final decision.

How to get started

Setting up as a contractor involves several practical steps:

1. Register your business: Choose a business structure (sole trader or company) and register for an ABN, which the ATO describes as a unique 11-digit identifier that helps businesses and government interact. Check out the guide on starting a business for detailed steps.
2. Write a business plan: Include your rates, expected expenses, and growth projections. An accountant can help you create realistic forecasts.
3. Open a separate business bank account: Keeping personal and business finances separate simplifies bookkeeping and tax time.
4. Get appropriate insurance: Professional indemnity covers you for advice or services that cause a client loss. For accounting professionals, CPA Australia specifies a minimum sum insured that can range between $2 million and $75 million depending on the services provided. Public liability covers injuries or property damage.
5. Set up accounting software: Track income and expenses, send invoices, and stay on top of tax obligations from day one. Xero accounting software makes this straightforward.

It's also worth preparing a standard contract and NDA (non-disclosure agreement) and services agreement for clients to sign. Some clients may prefer their own documentation, but having your own templates protects your interests.

Five ways to find contract work

Finding clients is essential to your success as a contractor. Here are five proven strategies:

• Use freelance platforms: Bid on projects through sites like Upwork, where businesses post work for contractors.
• Register as a government supplier: Access public sector contracts through government procurement portals (registration is required).
• Build your LinkedIn presence: Connect with potential clients, share your expertise, and respond to requests for proposals.
• Tap your professional network: Ask former colleagues, friends, and industry contacts for referrals and introductions.
• Partner with other contractors: Collaborate with contractors whose skills complement yours and refer work to each other.

If you can deliver work remotely, look for clients in other states or countries. Accounting software with multi-currency invoicing makes international work straightforward.

Use cloud technology to help you

Cloud-based tools help contractors manage tasks that employers previously handled, from accounting to marketing. The right software reduces admin time and keeps your business organised.

Essential tools for contractors:

• Time tracking and project management: Monitor billable hours and project progress to ensure accurate invoicing.
• Accounting software: Track income and expenses, send invoices, and manage tax obligations in one place.
• Task management: Organise your workload and deadlines without relying on someone else to manage your time.
• Office productivity suite: Create documents, spreadsheets, and presentations using cloud-based tools you can access anywhere.
• Marketing tools: Build your website, manage social media, and promote your services to attract new clients.

Cloud-based software lets you access your business data from any device, anywhere. This flexibility is particularly valuable when you're working across multiple client sites.

Get started with confidence

Contract work requires initiative, self-discipline, and a tolerance for uncertainty. You'll need to manage your own time, find your own clients, and handle periods without work.

But with the right preparation, contracting can be both liberating and financially rewarding. You'll have significant control over your work.

The tools available today make running a contractor business simpler. Xero's cloud-based accounting software helps you track income, manage expenses, send professional invoices, and stay on top of tax obligations, all in one place.

Get one month free and see how Xero accounting software makes managing your contractor finances easier.

FAQs on independent contracting

Here are answers to common questions about working as an independent contractor in Australia.

What is an independent contractor in Australia?

An independent contractor is a self-employed person who provides services to clients under a contract, rather than as an employee. The Australian Taxation Office (ATO) determines contractor status based on factors like control over work, financial risk, and whether you supply your own tools.

What's the difference between a freelancer and an independent contractor?

The terms are often used interchangeably. Both describe self-employed people who work for clients on a contract basis rather than as employees.

Can an independent contractor work for only one client?

Yes, but working exclusively for one client may indicate an employment relationship rather than a contractor arrangement. The ATO considers multiple factors when determining your status, not just the number of clients.

Do independent contractors need an ABN?

Yes. You need an Australian Business Number (ABN) to invoice clients and operate as a contractor in Australia. You can register for an ABN free through the Australian Business Register.

How do independent contractors pay tax?

Contractors are responsible for their own tax. This typically means setting aside a portion of each payment (often 25–30%), lodging a tax return annually, and potentially making quarterly Pay As You Go (PAYG) instalments if your income exceeds certain thresholds.