What is payroll tax to my contractor?
Payroll tax is a state government tax based on wages paid to employees that exceed the threshold amount, which, for the 2020 financial year, sits at $900,000. While many people will automatically assume that this refers exclusively to the money you pay to your staff in the form of wages, there’s another element to it that is often overlooked: Payroll tax for contractors payments. What many people don’t know is that your company’s 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 purposes unless an exemption applies.
What are the exemptions to employer payroll tax for contractors
There are seven exemptions that can apply to contractors 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
Fun fact: payroll tax is the NSW state Government’s largest single source of tax revenue. We all know what that means… it means it’s far more likely taxpayers will be scrutinised on payments, as the NSW government will not want to lose out on any of their revenue!
What are the common traps to payroll tax for contractors
Contractors payments are something that we often see missed in payroll tax returns. There are a number of reasons why. Let’s take a look at some of the more common reasons why:
- 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.
Let’s take a look at a couple of examples that demonstrate which contractor payments are liable for payroll tax, and which ones aren’t. It’s worth noting that the contractor provisions apply regardless of whether the contractor provides services as a company, trust, partnership or as a sole trader.
Example 1 – Liable contractor payments
In this example, an ex-employee has returned to the company 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, for a total of 144 days in the financial year, and invoices the company for their hours including GST.
In circumstances such as the one shown in this example, 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
In our second example, 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 circumstances such as the one shown in this example, 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).
Do I have to pay payroll tax for staff members who are contracted through an employment agency?
An employment agency arrangement exists if an employment agent obtains a worker to provide services to a client for a fee. Under this arrangement, the worker doesn’t become an employee of the client.
Because an employment agency arrangement isn’t considered a “relevant contract”, contractor exemptions do not apply in this instance.
Materials and Equipment
When materials and equipment are provided alongside labour under a contract, the only payments that are liable for payroll tax are those relating to labour.
In instances where the contract does not separate the materials or equipment from the labour, deductions of between 5% and 37% apply (as per NSW state legislation). This will vary between the services provided, which industry they fall under and what the labour they perform is.
It’s highly advised that you investigate the deductions you’re entitled to through your relevant state government website, such as Revenue NSW, as each state has different legislation and requirements.
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 – as we discussed earlier in the article), we expect taxpayers to continue to be scrutinised on contractor payments as part of their annual payroll tax returns.
That means it’s incredibly important to ensure you are adhering to all of your payroll tax obligations, as the last thing you want is to be flagged by the state’s tax revenue auditors. It’s for this very reason, that we strongly recommend you engage a professional accountant who is an expert when it comes to everything tax. At Bishop Collins, our highly experienced team can provide you and your business with the assistance you need to ensure you are ticking all the right boxes when it comes to payroll tax, whether it’s for wages or for contractors.
If you would like more information on reviewing your payroll tax obligations please contact our office or complete the form below.