Payroll tax: how it works and when it applies

What payroll tax is, and what it is not

Each state and territory levies payroll tax on the total taxable wages an employer pays. It's not the tax you withhold from employee pays; that's PAYG withholding, a federal obligation you collect on the ATO's behalf. Payroll tax is an extra cost you carry as the employer, calculated on the wage bill itself once it clears the relevant threshold.

Every state and territory sets its own threshold and rate and runs the tax through its own revenue office. The rules look broadly similar across the country, but the differences matter, so check with the revenue office in each state or territory where you employ people.

What counts as wages

The definition of wages here is wider than most owners expect. Depending on the jurisdiction, taxable wages can include:

• Salaries, wages, commissions, bonuses and allowances
• Super contributions, including the compulsory super guarantee
• Fringe benefits provided to employees
• Termination payments, in whole or in part
• Payments to some contractors, where contractor provisions deem certain arrangements to be wages
• Wages paid by related businesses, which can be grouped together

The contractor provisions and grouping rules are where most businesses get caught. A regular payment to a contractor can count as wages for payroll tax even where that person is a genuine contractor for every other purpose. Run related entities, and their wage bills might be grouped, meaning the combined total gets measured against a single threshold, not one each.

When you need to register

You generally need to register with the revenue office in each state or territory where you pay wages once your Australia wide wages pass that jurisdiction's threshold. Operate across multiple states and the threshold's typically apportioned, lowering the wage level at which tax kicks in for each place. Registration deadlines and lodgement cycles vary, though most registered employers lodge monthly with an annual reconciliation.

Because thresholds and rates change and differ by jurisdiction, we're deliberately not quoting any here. Check the current figures directly with the relevant state or territory revenue office, or get your accountant or bookkeeper to keep an eye on your position.

Keeping payroll tax manageable

Track total wages, not just headcount

The threshold's measured in dollars, including super and other items, not in employee numbers. A small team of well paid specialists can cross the threshold before a much larger team of part timers does. Your bookkeeping should give you a running total of taxable wages across every entity and state you operate in.

Understand grouping early

Running more than one entity with common ownership or shared employees? Get advice on whether they're grouped for payroll tax before you assume each one gets its own threshold. Grouping is one of the most common findings in a payroll tax audit.

Review contractor payments

Where you're making regular payments to contractors, check whether your state's contractor provisions deem those payments to be wages. Several exemptions exist and they're specific, so work through it properly with the revenue office guidance or a professional rather than assuming you're covered.

Where NextEra fits

Because NextEra manages payroll and keeps your books current every month, we can see when total wages are approaching the point where payroll tax deserves a proper look, and flag it before the revenue office does. A Strategic Finance Review also examines how wages, super and contractor payments are recorded across your entities, so the numbers behind that judgement are right.