Moving from full-time employment into IT contracting or freelancing changes almost everything about how your tax works, from what’s withheld to what you’re allowed to claim. However, understanding the key differences upfront prevents costly surprises down the track.
Many IT contractors start as sole traders for simplicity, while others operate through a company structure, particularly as income grows or contracts require it. Consequently, this decision affects your tax rate, compliance obligations, and personal liability. It’s worth revisiting as your contracting career develops, rather than treating it as a one-time decision.
If most of your income comes from your personal skills and effort common for many IT contractors, you may fall under the ATO’s Personal Services Income rules. These rules limit some of the deductions and structuring benefits otherwise available to businesses. Therefore, working out whether PSI rules apply to your situation ranks among the most important early steps for any IT contractor, since it directly affects what you can and can’t claim.
If your contracting income is expected to exceed the GST threshold, you must register, charge GST on your invoices, and lodge a BAS regularly. Consequently, this is a common early hurdle for new contractors moving from an employee role, where GST was never something they had to think about.
Home office costs. Given how much IT work happens remotely, a properly calculated home office claim is often one of the largest deductions available.
Equipment and software. You can generally deduct laptops, monitors, and software subscriptions used for client work, either immediately or via depreciation depending on the cost.
Professional development and certifications. You can typically claim courses and certifications directly related to your contracting work.
Accounting and compliance costs. Fees you pay for tax and BAS preparation count as deductible business expenses.
Insurance. You can generally deduct professional indemnity and public liability insurance, which your contract often requires.
Unlike employees, contractors generally need to arrange and pay their own superannuation contributions. An employer would normally deduct and pay this for you, but a client won’t do it automatically. Therefore, build this into your regular financial planning, since it’s easy to overlook when income arrives as lump invoice payments rather than regular pay.
Contractor income doesn’t have any tax withheld automatically. So, setting aside a portion of each payment rather than treating the full invoice amount as available income avoids a difficult surprise at tax time.
Treating gross invoice income as take-home pay. Without setting aside tax and GST, contractors can quickly overspend against income that isn’t fully theirs to keep.
Not understanding PSI rules early. This affects deduction eligibility significantly. Clarify it at the start of a contracting career, not after the ATO queries a return.
Missing superannuation altogether. Without an employer contributing automatically, it’s easy to reach retirement with a meaningfully smaller balance than intended.
EBATS helps IT contractors and freelancers understand PSI rules, choose the right structure, and stay compliant with GST, BAS, and superannuation obligations.
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