Agency Engagement Models: Your Complete Guide to Working Through Agencies

Working through agencies is one of the most common paths for contractors, but choosing the right engagement model can significantly impact your take-home pay, tax obligations, and administrative responsibilities. This comprehensive guide explains the three primary agency engagement models and helps you determine which one aligns best with your contracting goals.

Understanding Agency Business Structures

When you work through an agency, the money flows from the client to you through multiple layers, each with different tax and legal implications. Understanding this flow is crucial for making informed decisions about your engagement model.

The Money Flow

1. Client Company pays the agency an agreed rate (including GST)
2. Agency takes their margin and passes the remainder to you through one of three models
3. You receive payment according to your chosen engagement structure

The Three Engagement Models

1. PAYG Employee Model

How it works: You become a temporary employee of the agency, receiving wages through their payroll system.

Advantages:

• Simplest setup: No business registration required
• Agency handles everything: Payroll, superannuation, tax withholding
• Employment protections: Access to worker compensation, some employment rights
• Predictable taxes: Tax withheld at source, minimal end-of-year surprises

Disadvantages:

• Highest tax burden: No business deductions, personal tax rates apply
• Limited flexibility: Must follow agency employment policies
• No business growth: Can’t build a business entity or brand

Tax Implications:

• Income Tax: Marginal tax rates (19-45% + Medicare)
• Medicare Levy: 2% of taxable income
• HECS Debt: Additional percentage if applicable
• Superannuation: 12% paid by agency (not included in your rate)

Best for:

• New contractors testing the waters
• Those who prefer simplicity over optimization
• Contractors in lower tax brackets

2. PTY LTD Sub Contractor Model

How it works: You establish a company (PTY LTD) that contracts directly with the agency as a business-to-business arrangement.

Advantages:

• Tax optimization: Access to business deductions and tax planning
• Lower tax rates: Company tax rate (25-30%) vs individual rates
• Business legitimacy: Professional image, can grow into consulting
• Flexibility: Control over business operations and structure
• Retained earnings: Option to leave profits in company for future years

Disadvantages:

• Complex setup: Requires company registration, ongoing compliance
• Administrative burden: Accounting, BAS, annual returns
• Higher costs: Accounting fees, ASIC fees, audit requirements
• IR35/PSI risk: Potential personal services income implications

Tax Implications:

• Company Tax: 25% (turnover <$50M) or 30% on company profits
• Business Deductions: Home office, equipment, professional development
• GST: Must register if turnover exceeds $75k annually
• Dividend Tax: When distributing profits to yourself
• Tax Provisioning: Must set aside funds for quarterly obligations

Best for:

• Experienced contractors with steady income
• Those seeking tax optimization opportunities
• Contractors planning long-term business growth

3. Payroll Company Model

How it works: A third-party payroll company acts as an intermediary, employing you while you work for the agency’s client.

Advantages:

• Balanced approach: More tax benefits than PAYG, less admin than PTY LTD
• Professional handling: Payroll company manages compliance
• Business deductions: Access to some business-style deductions
• Reduced admin: Less paperwork than running your own company

Disadvantages:

• Service fees: Payroll company charges fees (typically 1-3%)
• Limited control: Bound by payroll company’s processes
• Vendor dependency: Reliant on third-party service quality
• Potential IR35 issues: Still employed, but with business characteristics

Tax Implications:

• PAYG Tax: Withheld at source like employment
• Reduced rates: Often lower than pure employment due to structure
• Fee deductibility: Payroll fees typically tax deductible
• Superannuation: Handled by payroll company

Best for:

• Contractors wanting middle ground between simplicity and optimization
• Those with irregular contract patterns
• Contractors who prefer outsourced administration

Financial Comparison Framework

Key Metrics to Compare:

Take-Home Pay Calculation:

• Gross daily rate from agency
• Less: All taxes and levies
• Less: All fees and costs
• Less: Required provisions (company tax, etc.)
• Result: Net take-home per day

Administrative Burden:

• PAYG: Minimal - agency handles everything
• PTY LTD: High - full business compliance required
• Payroll Company: Low - third party handles most tasks

Tax Optimization Opportunity:

• PAYG: None - personal tax rates apply
• PTY LTD: Maximum - business deductions, tax planning, timing flexibility
• Payroll Company: Moderate - some deductions, limited flexibility

Factors Influencing Your Choice

Income Level

• Lower rates (<$600/day): PAYG often most practical
• Medium rates ($600-1000/day): Payroll company provides good balance
• Higher rates (>$1000/day): PTY LTD typically offers best optimization

Contract Duration

• Short contracts (<6 months): PAYG or payroll company
• Medium contracts (6-18 months): Any model works
• Long contracts (>18 months): PTY LTD benefits compound over time

Career Goals

• Testing contracting: Start with PAYG
• Building consulting business: PTY LTD essential
• Lifestyle contracting: Payroll company offers good balance

Risk Tolerance

• Risk averse: PAYG provides most certainty
• Moderate risk: Payroll company balances risk and reward
• Comfortable with complexity: PTY LTD offers maximum control

Making the Switch

From PAYG to PTY LTD

1. Register company with ASIC
2. Obtain ABN and GST registration
3. Set up business bank account
4. Establish accounting systems
5. Notify agency of new arrangement

From PAYG to Payroll Company

1. Research and select reputable payroll company
2. Complete their onboarding process
3. Coordinate transition with agency
4. Set up direct debits for fees

Transition Timing

• End of financial year: Cleanest for tax purposes
• Between contracts: Avoids mid-contract complications
• Allow 2-4 weeks: For setup and agency coordination

Common Pitfalls to Avoid

PAYG Employee Mistakes:

• Assuming it’s always the worst option financially
• Not negotiating for higher base rates to compensate for tax disadvantage
• Forgetting to claim available personal deductions

PTY LTD Mistakes:

• Underestimating ongoing compliance costs
• Poor record keeping leading to tax penalties
• Not setting aside sufficient tax provisions
• Mixing personal and business expenses

Payroll Company Mistakes:

• Not researching the company’s reputation thoroughly
• Ignoring fee structures and hidden costs
• Assuming all payroll companies offer the same service level

Using the Agency Business Calculator

Our calculator helps you compare these models by:

1. Input your agency rate: The rate the agency pays you
2. Configure each model: Adjust taxes, fees, and costs for your situation
3. Compare take-home pay: See actual dollars in your pocket for each model
4. Consider total costs: Factor in administrative burden and compliance costs

Key Variables to Adjust:

PAYG Model:

• Income tax rate (varies by total income)
• Medicare levy and HECS obligations
• Extra fees (some agencies charge processing fees)

PTY LTD Model:

• Business costs (accounting, insurance, equipment)
• Tax provision (typically 25-30% of profits)
• GST obligations if applicable

Payroll Company Model:

• Service fees (usually 1-3% of gross)
• Payment advance fees (if using early payment services)
• Any additional charges

Professional Advice Recommendations

When to Consult Professionals:

Accountant Consultation Required:

• Annual income >$100k in any model
• Complex tax situations (multiple income sources, investments)
• When switching from PTY LTD back to employment

Legal Advice Needed:

• IR35 or Personal Services Income concerns
• Contract interpretation issues
• Liability and insurance considerations

Financial Planning:

• Long-term tax strategies with PTY LTD structures
• Superannuation optimization across models
• Investment strategies for business profits

Conclusion

The choice between PAYG Employee, PTY LTD Sub Contractor, and Payroll Company models depends on your individual circumstances, income level, risk tolerance, and career goals. While PTY LTD structures often provide the best financial outcomes for higher-income contractors, the administrative complexity may not be worth it for everyone.

Use our Agency Business Calculator to model your specific situation, but remember that financial outcomes are just one factor. Consider the administrative burden, your comfort with business compliance, and your long-term contracting goals when making this important decision.

The contracting landscape continues to evolve, and what works best today may change as your career progresses. Regularly review your choice and be prepared to adapt as your circumstances and the market change.

Ready to Compare?

Use the Agency Business Calculator to input your specific rates and circumstances. Model all three engagement approaches to see which delivers the best outcome for your situation, both financially and practically.

Remember: The best engagement model is the one that aligns with your goals, risk tolerance, and administrative preferences while maximizing your take-home pay over the long term.