What is payroll tax to my contractor?
Payroll tax is a state tax based on wages paid to employees that exceed the threshold amount ($900,000 for 2020FY).
Wages include not only the salary component paid to employees, but also superannuation, fringe benefits and certain payments to contractors.
Most businesses are good at identifying what wages need to be included, but don’t always consider the payments they make to contractors.
Generally, payments made to contractors that are primarily for labour are automatically included for payroll tax unless an exemption applies.
What are the exemptions to payroll tax for contractors
There are seven exemptions that can apply to contractor payments in NSW which are:
- Services ancillary to the supply of goods
- Any services not ordinarily required by your business
- A service required for 180 days or less in a financial year
- If you have provided services for 90 days or less in a financial year
- If the commissioner has approved the service as exempt
- Any services provided by two or more people
- If the services have been provided by an owner driver
What are the common traps to payroll tax for contractors
We commonly see contractor payments missed in payroll tax returns, some common reasons include:
- The taxpayer has only included payments they have identified as part of the payroll system and not considered contractor payments made outside of this system; &
- The taxpayer has not reviewed their accounting records in their entirety for contractor payments, such as payments recognised in unusual expense accounts.
Example 1 – Liable contractor payments
An ex-employee has returned as a sales consultant and continues to provide services to the business it ordinarily needs, this time under the guise of a company.
The ex-employee works three days per week, 144 days in the financial year, and invoices the company for their hours including GST.
In this circumstance, the contract will not satisfy the 180 day exemption as the services provided by the ex-employee are ordinarily required by the business, that is, sales are integral to the function of any business.
Example 2 – Exempt contractor payments
A builder contracts a carpenter to provide services throughout the year to construct and install timber frames for new houses.
The carpenter does not work for any other builders during the year and employs an apprentice and a labourer to assist him constructing and installing the frames.
In this circumstance even though the carpenter’s services are provided for over 90 days and are ordinarily required by the builders’ business, the builder will not be liable on the payments made to the carpenter, as the contractor has engaged two or more workers to provide the services (exemption 6).
Why it’s important to know if you are liable for payroll tax on contractor payments
Given the complexities of contractor exemptions, and the importance of payroll tax to the NSW state budget (being their largest single source of tax revenue – refer to the above image), we expect taxpayers to continue to be scrutinised on contractor payments as part of their annual payroll tax returns.
If you would like more information on reviewing your payroll tax obligations please contact our office or complete the form below.