How is payroll tax calculated? Read our ultimate guide

While federal taxes like income tax and Goods & Services Tax (GST) are well-known, payroll tax is a state-based obligation that many businesses may overlook. This tax is levied by individual states and territories, with each having its own rules, thresholds and tax rates. For all businesses, it's essential to ensure compliance and avoid penalties.

This guide will walk you through the basics of payroll tax, with a particular focus on NSW. You'll learn how payroll tax is calculated, the significance of this tax, the differences in regulations across states and the importance of understanding your obligations.

The definition and purpose of payroll taxes

Payroll tax is a state-based tax levied on businesses when their total wages exceed a state-set threshold. This tax applies to the total taxable wages paid to employees, which include not just salaries, but also allowances, fringe benefits and other forms of compensation. The calculation of payroll tax varies by state, as each state and territory in Australia has its own specific payroll tax legislation and thresholds.

Before 2007, each state and territory independently determined how payroll tax was calculated, leading to significant variations across Australia. However, in 2007, the six mainland states implemented a standardised template for payroll tax legislation. This template addresses key areas such as:

• Motor vehicle allowances.
• Accommodation allowances.
• Work performed outside the jurisdiction.
• The timing of returns.
• Fringe benefits.
• Grouping of businesses.
• Superannuation contributions for non-working directors.
• Employee share acquisition.

These elements are crucial for determining how payroll tax is assessed and calculated. The primary purpose of payroll tax is to generate revenue for state and territory governments. This revenue funds specific programs and contributes to the general state revenue, supporting essential services like healthcare, education and infrastructure.

Payroll tax is paid to the specific state revenue office of each state, such as Revenue NSW for New South Wales. The details of payroll tax obligations, including withholdings, thresholds, eligibility requirements and payroll tax rates, are specific to each state. Understanding these details is vital for ensuring compliance with state payroll tax laws and accurately calculating your payroll tax liability.

How payroll tax works

Payroll tax operates on a relatively straightforward principle: businesses are required to pay a tax based on the total wages they pay to their employees. However — as we mentioned above — the specifics of how payroll tax is assessed and collected vary significantly between states and territories.

In NSW, payroll tax applies to businesses whose total wages exceed the annual threshold of $1.2 million or the monthly threshold of $100,000. Once these thresholds are exceeded, the business must pay payroll tax at a rate of 4.85% on the amount above the threshold. This means that if your business's total wages are below the threshold, no payroll tax is payable. However, if your wages exceed the threshold, only the amount above the threshold is subject to payroll tax.

The process of assessing payroll tax involves determining your total taxable wages, subtracting the applicable threshold and applying the state's tax rate to the remaining amount. It's important to note that businesses with employees working across multiple states must consider the payroll tax obligations in each state. In such cases, wages must be apportioned based on where the work is performed, and the payroll tax is paid to the relevant state or territory government.

Thresholds and tax rates by state in 2024

Here is a detailed breakdown of the thresholds and tax rates for 2024:

• New South Wales:
  • Threshold: $1.2 million annually, $100,000 monthly.
  • Tax rate: 4.85%.
  • NSW has one of the most straightforward payroll tax systems, with a flat rate applied above the threshold.
• Western Australia:
  • Threshold: $1 million annually, $83,333 monthly.
  • Tax rate: 5.5% for wages over $1 million, not exceeding $100 million; 6% for wages between $100 million and $1.5 billion; 6.5% for wages above $1.5 billion.
  • A diminishing threshold applies for businesses earning between $1 million and $7.5 million.
• Northern Territory:
  • Threshold: $1.5 million annually, $125,000 monthly.
  • Tax rate: 5.5%.
  • The Northern Territory has a straightforward payroll tax system, with a flat rate applied above the threshold.
• South Australia:
  • Threshold: $1.5 million annually, $125,000 monthly.
  • Tax rate: Ranges from 0% to 4.95% depending on wages paid.
  • South Australia provides a deduction entitlement of $600,000 annually, with a variable rate applied depending on the wage amount.
• Queensland:
  • Threshold: $1.3 million annually, $108,333 monthly.
  • Tax rate: 4.75% for wages up to $6.5 million; 4.95% for wages over $6.5 million.
  • Queensland has a tiered payroll tax system, with a higher rate for larger businesses.
• Victoria:
  • Threshold: $700,000 annually, $58,333 monthly.
  • Tax rate: 4.85% for local employers; and 1.2125% for regional employers.
  • Victoria offers a lower rate for regional employers to encourage economic activity outside of Melbourne.
• Tasmania:
  • Initial Threshold: $1.25 million annually.
  • Subsequent Threshold: $2 million annually.
  • Tax rate: 4% for the initial threshold, and 6.1% for the subsequent threshold.
  • Tasmania's payroll tax system is tiered, with higher rates applied to larger businesses.
• Australian Capital Territory:
  • Threshold: $2 million annually, $166,666.66 monthly.
  • Tax rate: 6.85%.
  • The ACT has one of the highest payroll tax rates in Australia, reflecting its unique economic environment.

How to calculate payroll tax in NSW

Here's a simplified process of how to calculate your payroll tax in NSW:

1. Determine gross wages: Start by calculating your total gross wages for the financial year. This includes all payments made to employees, such as salaries, wages, bonuses, allowances and superannuation contributions. Ensure that you include all taxable wages as defined under NSW payroll tax laws.
2. Subtract the state threshold: Once you have your gross wages, subtract the NSW payroll tax threshold, which is $1.2 million annually or $100,000 monthly. If your wages are below this threshold, you are not required to pay payroll tax.
3. Calculate net taxable wages: If your gross wages exceed the threshold, the remaining amount is your net taxable wages. This is the portion of your wages subject to payroll tax.
4. Apply the payroll tax rate: Multiply your net taxable wages by the NSW payroll tax rate of 4.85% to calculate the amount of payroll tax payable.

For example, if your business has total gross wages of $1.5 million for the year, you would subtract the $1.2 million threshold, leaving you with $300,000 in net taxable wages. Applying the 4.85% tax rate results in a payroll tax liability of $14,550.

It's important to note that if your business has employees working across different states, you may need to apportion the wages based on where the work was performed. Additionally, businesses that are part of a group may have to aggregate their wages for payroll tax purposes, which can affect their tax liability.

How to calculate your payroll taxes by state

Payroll tax is calculated using:

• Gross wages (as defined by each state) – State threshold = NET taxable wages x State tax rate = Payroll tax payable

This basic formula will vary based on the group membership and interstate gross earnings.

Seeking professional help

Navigating payroll tax regulations can be challenging, especially if your business operates across multiple states or has complex payroll arrangements. Seeking professional assistance from a qualified accountant can ensure that you accurately calculate your payroll tax liability, comply with state regulations and avoid penalties.

At Wilson Porter, we offer comprehensive payroll services designed to simplify your tax obligations. Our team of experts can help you with payroll tax calculations, filing and compliance, ensuring that your business meets all its legal requirements. We also offer advice on optimising your payroll processes and managing interstate wage allocations.

If you need assistance with payroll tax or any other aspect of your business's financial management, contact us today to schedule a consultation. We're here to help you navigate payroll tax and keep your business on track.

Learn more about Wilson Porter Payroll and Tax services.