Should I Be an Employee or Contractor in My Own Business?

Last Updated September 2026

If you operate through a company or trust and do the actual work yourself — consulting, IT, trades, health services, whatever it is — you've probably wondered whether you could just invoice your own business as a contractor instead of paying yourself a wage.

The short answer is yes, it can be possible to contract with your own company, but you can't simply choose contractor status because it suits you better for tax. You need to consider the actual legal relationship, whether the income counts as Personal Services Income (PSI), and superannuation. For many owner-operated businesses, paying yourself a formal salary is simpler. For others, a genuine contractor arrangement may be appropriate. Here's how to actually think it through.

Are You Actually a Contractor?

Whether someone is an employee or a contractor comes down to the substance of the working relationship — not what the contract calls it. Courts and the ATO look at things like:

• Who controls how, when, and where the work is done

• Whether the worker can subcontract or delegate the work to someone else

• Who provides the tools and equipment

• Who bears the commercial risk if something goes wrong

• Whether the worker is running their own genuine business, or working within someone else's

This matters for PAYG withholding, superannuation guarantee obligations, workers compensation, and other employment-related obligations.

Contractor status doesn't automatically mean you're outside PSI. You can be a genuine contractor under this test and still generate PSI under the next one — they're separate questions, and it's easy to assume passing one means you've cleared both.

Can I Invoice My Own Company as a Contractor?

Setting up an ABN and sending invoices to your own company doesn't automatically make you an independent contractor for tax purposes. If the arrangement is effectively you providing your personal labour to a company you control, the ATO looks past the label and at what's actually happening.

That means working through this in order: are you genuinely a contractor in the first place, does your income count as PSI, and if so, does your arrangement qualify as a genuine personal services business?

Does Your Income Count as PSI?

If you're generating income mainly through your own personal skills or effort, and running that income through a company, trust, or partnership rather than earning it directly, the ATO's Personal Services Income rules can apply — regardless of what your paperwork calls the arrangement.

Broadly, if majority of what you're paid under a contract is a reward for your personal labour or skill, that income is treated as PSI. This can apply even when the income is received through a company, trust, or partnership rather than by you directly — the rules are designed to prevent individuals from using an entity to obtain tax outcomes that generally wouldn't be available if they earned the same income directly from their own personal effort.

If the PSI rules apply, the next question is whether your arrangement qualifies as a genuine personal services business (PSB). The main path most business owners rely on is the results test, which needs to be satisfied for at least 75% of your relevant PSI. Broadly, it requires:

• You're paid to produce a specific result or outcome, not simply for your time

• You supply your own tools and equipment, or bear the cost of them

• You're liable for rectifying any defective work — genuine commercial risk sits with you

It isn't passed simply because you use your own tools or work under a fixed-price contract — all three need to be satisfied together. A contract that pays a flat daily or hourly rate for time spent, rather than for a defined deliverable, tends to fail this test — a common trap for business owners who assume a company structure alone is enough.

There are three other PSB tests covering unrelated clients, employment, and business premises. These can provide another pathway to PSB status, but generally aren't available where 80% or more of your PSI comes from one client and its associates — in that case, the results test becomes the main path.

This is a facts-and-circumstances area, and ATO guidance on how these tests are applied is refined periodically — it's worth reviewing your specific contracts and arrangements with your accountant rather than relying on a general checklist.

What Does This Mean for Salary and Super?

Here's a practical point that ties this whole question together: if the income is promptly paid to you as salary or wages — generally within 14 days of the relevant PAYG period — it is generally taxed to you as salary, and the PSI attribution rules can operate differently because that salary is taken into account in determining the amount of PSI that remains to be attributed. This is part of why paying yourself a formal, timely salary is often the simpler path, not just an administrative preference.

Superannuation is a separate issue again. Being a genuine contractor for tax purposes doesn't automatically mean super obligations don't apply — the superannuation rules use their own tests, so it's worth having your specific arrangement reviewed rather than assuming one classification settles both questions. If you're taking money out of your company outside of formal wages or dividends, there can also be separate Division 7A considerations worth reviewing.

A Practical Way to Think About It

You're more likely to have a straightforward employee arrangement if:

• You're essentially working for your own company

• You personally perform almost all the work

• You're paid for your time rather than a defined result

• The company effectively controls how and when the work gets done

A genuine contractor arrangement may be appropriate where:

• There's a real commercial contract for a defined outcome

• You carry genuine commercial risk if the work goes wrong

• You operate independently, with your own tools, systems, or premises

• You have multiple unrelated clients, or otherwise satisfy a PSB test

None of these factors should be looked at in isolation — it's the overall picture that matters, and it's worth having that picture reviewed properly rather than assuming either label automatically applies.

So, Which Option Is Right for You?

There isn't a one-size-fits-all answer. For many owner-operated businesses, salary is the simpler option, but a contractor arrangement can be appropriate where the underlying relationship and business structure genuinely support it. The key is not choosing the label that produces the best tax outcome — it's making sure the structure reflects how the business actually operates.

Not sure whether you should be paying yourself through wages or contracting through your company? L & Co can review your structure, contracts, and PSI position, and help you work out the most appropriate approach.

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This article provides general information about employee, contractor, and PSI classification and isn't a substitute for advice about your specific arrangement. These rules are fact-dependent and ATO guidance is updated periodically, so speak with your accountant before restructuring how you're paid.

Frequently Asked Questions

1. What is Personal Services Income (PSI)?

PSI is income where majority of what you're paid for a piece of work is a reward for your personal labour, skills, or effort, rather than income from selling a product or generated by a broader business with staff and assets. It's assessed on a contract-by-contract basis, not across your whole business.

2. Can my company pay me as a contractor?

It can be possible, but setting up an ABN and sending invoices to your own company doesn't automatically make you an independent contractor. The substance of the arrangement matters, and you also need to consider the PSI rules and superannuation obligations. If the arrangement is effectively you providing your personal labour to your own company, simply changing the paperwork doesn't necessarily change the tax outcome.

3. Does operating through a company avoid PSI?

Not automatically. The ATO can look through a company, trust, or partnership structure and attribute income back to the individual who performed the work, if the PSI rules apply and a personal services business test isn't met.

4. What is the 80% rule?

If less than 80% of your PSI in an income year comes from the same client and its associates, you may be able to self-assess as a personal services business using one of the other PSB tests. At 80% or more from a single client, those tests generally aren't available, and you'd need to rely on the results test or a specific ATO determination.

5. Does being a contractor mean I don't have to pay super?

Not necessarily. The tests for superannuation guarantee obligations are separate from the PSI rules — being a genuine contractor for tax purposes doesn't automatically mean super doesn't apply. It's worth having your specific arrangement reviewed against both sets of rules rather than assuming one classification settles the other.