Payroll tax is one of those “sneaky” taxes that seem to creep up on unsuspecting business owners, who get hit with a payroll tax assessment or worse still, a payroll tax audit before they know it. Businesses that are labour intensive, such as manufacturing or labour-for-hire services should pay close attention to their payroll tax obligations.
As you grow and employ more staff, you must pay this tax if your weekly payroll expense exceeds the set threshold. In Australia, payroll tax is a state-based tax. As a business owner, you should be fully conversant with the particular regulations that apply in your state. Check with the relevant state departments to find out your obligation.
I’m going to share you some fundamentals about payroll tax. I will use Queensland as an example in this blog post, but check with the relevant departments for your state, such as Victoria and NSW.
Example: Payroll tax in Queensland
- What is payroll tax?
If you are an employer (or group of employers) who employs in Queensland, and your Australian taxable wages are $1.1 million or more a year, then you must pay payroll tax.
- Payroll tax registration requirements
You must register for payroll tax within seven days after the end of the month in which you pay taxable wages in Queensland and:
- Pay more than $21,153 a week in Australian wages
- Become a member of a group that pays more than $21,153 a week in Australian wages.
- Calculation of payroll tax:
Payroll Tax = (Taxable Wages – Deductions) * 4.75 percent
Taxable wages include:
– Employer super contribution
– Salary sacrifice
– Annual leave, sick leave, long service leave and such
– Allowances, commissions and bonuses
– Director fees
– Bookkeeping fees
– Fringe benefits
– Low-interest or interest-free loans
Taxable wages do not include:
– Military leave
– Dividends (company share)
Once again, make sure you check the applicable state payroll tax requirements relevant to your business location.
Keeping payroll tax at a minimum
1. Utilise dividends instead of wages and bonuses
Dividend payments are excluded from the definition of taxable wages under the payroll tax provisions. Business owners trading through a company structure should remunerate themselves and their key staff via dividends rather than with lofty salary and wage packages. The same goes for paying bonuses. Utilise bonus dividend payments rather than wage bonuses to reward your top management. Such dividend payments will not be included in your payroll tax calculations.
2. Don’t wait for your financial advisor
Many business owners have become “unstuck” because they were not aware or didn’t fully understand their payroll tax obligations. Ignorance is not a defence, so do not rely on your accountant or financial advisor to inform you when your weekly payroll exceeds the threshold and you become liable for payroll tax. Understand the provisions, and monitor closely your weekly payroll, including all wage elements under the definition of taxable wages.
3. Keep labour costs under control
It makes good business sense to plan, budget and monitor your business expenses, especially your staff wages. For many business owners, staff wages is their biggest cost, so monitor it closely. Do you have excess staff capacity? Can you introduce operational efficiencies that can utilise your existing staff levels rather than increasing your staff headcount? Consider all options to keep your wages cost down.
4. Reinvent your business
Perhaps this is a great opportunity for you to rethink your business model. As your wages bill starts to approach the payroll tax threshold, maybe it’s time to reinvent how you do business. Here are some ideas:
- Use more independent contractors rather than full-time staff
- Introduce job-sharing and flexible, reduced work hours
- Utilise technology within your business instead of manual labour
All business owners with a growing workforce must be proactive in managing any potential payroll tax liability. Take action now to understand your obligations and plan for it. If ignored, then a sudden payroll tax assessment will drain your valuable cash flow.
The information provided here is of a general nature for Australia and should not be your only source of information. Please consult an experienced and registered tax agent as each small business’s circumstance will vary for end of financial year.