New company: pay owners as employees or contractors? Reporting obligations?

A friend set up a company a year ago with another guy. The company’s revenue comes from app sales and contract income (they both do contract work as app developers for third parties, invoiced through the company). Both of them have their own ABN (not registered for GST), and the company has an ABN.

They need to complete their first tax return, and there are so many questions!

• Is it easiest to treat them as contractors or employees? They only started the company in 2010/11 and withdrew less than $30k each, so payroll tax wouldn’t apply. But I think if they’re treated as employees the company would have to pay 9% super, as well as withhold PAYG and remit to ATO?

• Let’s say we decide to treat him as a contractor. He would have earned about $30k through the company on his ABN. What are his reporting obligations? Would he just include this in his personal tax return (as personal services income), or does he also have to lodge a BAS or make regular PAYG payments to the ATO?

• If he started invoicing third parties directly for his work instead of through the company, I think he would then satisfy the 80% rule + unrelated client test (i.e. he could be classified as a ‘personal services business’ even though he’d be operating as a sole trader). In this circumstance, would he pay the 30% company tax rate on his income or still his marginal tax rate?

Thanks for your help!

Karen