NSW Payroll Tax - When It Kicks In and How You Can Reduce It
As your business grows you are constantly exposed to new or increasing costs. Some costs of running a business may not kick in until you have reached a certain size or turnover. It is important to get an understanding of what these changes are, when they become relevant and how they may impact how you manage your business. One of those expenses is Payroll Tax. Payroll tax is a state tax. It's assessed on the wages paid or payable to employees, including directors and contractors, by an employer (or group of employers) whose total Australian taxable wages exceed the threshold amount. Each state and territory has its own payroll tax legislation, with different rates and thresholds.
Payroll Tax in NSW
If you are an employer who pays wages in NSW, you need to register for Payroll Tax if the total amount of wages exceeds the relevant monthly threshold. The annual threshold for 2023 is $1,200,000 (no increase from 2021).
The monthly thresholds for 2023 are:
Days in the month Amount
COVID-19 Payroll Tax Decrease Has Ended, and normal rates resume
During the Covid-19 pandemic, the NSW government provided relief to businesses who are liable for payroll tax. The relief provided was a 50% reduction in payroll tax for the 2012/22 tax year for businesses that experienced a decline in turnover of more than 30%. This relief has now ended and the Payroll Tax rate for 2023 is 5.45%. The following table has the rates for all years:
What is included in Wages?
Wages and other payments to employees engaged on a permanent, temporary, or casual basis are subject to payroll tax. Payments made to certain contractors may also be deemed wages. The following types of payments are liable for payroll tax:
Apprentice and Trainee Wages
Bonuses and Commissions
Salary Sacrifice arrangements
Employee Shares and Options
Third party payment on behalf of employees
Some payments made to employees are deemed exempt from Payroll Tax. These include:
additional wages paid to employees to meet the requirements of the Job Keeper scheme
wages paid from 1 June 2020 that are funded by any payment made under the Commonwealth program, Aged Care Workforce Retention Grant Opportunity
adoption and family leave
paid parental leave
contributions to redundancy benefit schemes
wages paid to employees absent from work to volunteer as firefighters or respond to other emergencies
wages paid to a person while on military leave as a member of the Defence Forces
bonefide redundancy or early retirement payments.
Be INCREDIBLY careful of Contractors:
There are complicated rules around contractors and payroll tax. People can be operating as a contractor and be deemed an employee for payroll tax purposes.
Check out our podcast on this subject -
The key here is if you are approaching the threshold – make sure you take an active step in documenting all contractors and assessing their status.
How and When to Pay?
The first thing you need to do is register for Payroll when your wages have exceeded the monthly threshold. Therefore, getting an understanding of how Payroll Tax works before you think you will be liable is essential. There are potential penalties applicable if you pay wages above the thresholds without registering for payroll tax. You register on the Service NSW website as soon as your monthly income exceeds the threshold. If your total estimated Payroll tax is less than $20,000 you can pay annually and if it is over $20,000 you must pay monthly. Each payment is due 7 days after the last day of the month. An annual reconciliation is required each year and is due on the 28th of July each year.
Other Aspects of Payroll Tax
Whilst the above seems simple, depending on the structure of your business, there are aspects of calculating payroll tax that can be complex for some businesses. The complexity may be due to:
Only paying wages for part of the year
Your business being part of a group
Employing interstate employees
Motor Vehicle Allowances
Fringe Benefits Tax
Overnight Accommodation Allowance
How to reduce the Payroll Tax
Business owners should look at how they are taking their remuneration. One common strategy to lower a payroll tax obligation is to take funds as a dividend or trust distribution. These are exempt from payroll tax and should be considered:
Salary packaging vehicles: Whilst FBT is subject to payroll tax, packaging items such as a vehicle MAY lead to a better overall income tax & Payroll tax result.
Otherwise, deductible Salary Packaging: There may be other ways to extract funds from the business that are FBT Free and exempt Payroll tax as well. Typically, any item that would be instantly deductible to an employee in their own name could be paid by the company an example of this might be deductible interest the business owner has on a personally owned rental property. The company could pay this Interest on the business owner's behalf (and reduce wages accordingly). The net result for tax to the individual is the same but the company would have a payroll tax saving.
Take Steps to ensure Contractors are NOT included: If approaching the threshold, a comprehensive review of contractors and the term of their engagement is recommended. Changing how they are engaged to reduce exposure to payroll tax might be critical.
The above are not the only methods. We do recommend a thorough review to analyse potential savings based on specific circumstances.
For a more detailed explanation of how these circumstances, if relevant, impact your business you should visit Service NSW’s website or contact your Accountant. Understanding when and how Payroll Tax impacts your business can’t be overlooked. Payroll Tax can be a significant expense and not planning for it could have detrimental outcomes to cashflow and business growth. At The Fox Group, our Expert Business Accountants can help you get an understanding of how to prepare for this expense and how to manage it.