How to figure out Payroll Tax, tax deductions related to payroll and deductions from employees pay

Juston Jirwander Bishop Collins Accountants headshot

Juston Jirwander

Associate Director

payroll

Payroll, in terms of taxation, can mean many different things.

We’re often asked questions which have various meanings, depending on the level of experience of the person asking. The following three aspects of payroll sound similar but are very different.

  1. Payroll Tax,
  2. Tax deductions related to payroll, and
  3. What needs to be deducted from an employee’s pay and how do you calculate this?

Let’s tackle this one by one.

About Payroll Tax

Payroll tax is defined by the Australian Revenue Office as:

“A self-assessed, general purpose state and territory tax assessed on wages paid or payable by an employer to its employees, when the total wage bill of an employer (or group of employers) exceeds a threshold amount”.

The payroll tax rates and thresholds vary between states and territories. For NSW the threshold is $1,200,000 for the 20/21 financial year, and the rate is 4.85% on all wages above this threshold. So, if your wage costs for the year are $1,300,000 you will be liable for NSW payroll tax of 4.85% of $100,000 ($1,300,000-$1,200,000) or $4,850 for the year.

Tax Returns are lodged, and payment of liability is made at an agreed frequency (monthly, quarterly, or annually). This is paid to the respective revenue office in the Australian state and/or territory in which the wage payment is deemed liable.

Payroll Tax is the most contentious tax in Australia, and heavily debated on its merits. Essentially, it’s a tax on employing people and goes against leavers of growing our economy and employment. On the other hand however, the revenue it generates is highly relied upon by the states and unlikely to be removed at this stage.

Tax deductions related to payroll

As a business owner, you can generally claim a tax deduction for:

  • The salaries and wages you pay to employees
  • Super contributions you make on time to a complying super fund or retirement savings account (RSA) for your employees and for certain contractors.

Other Payroll Deductions

Costs incurred on staff in gaining assessable income are also deductible and include:

  • Training costs
  • Payroll Tax
  • Staff amenities
  • Some small gifts or rewards on a one-off occasion under $200
  • Workers compensation

If you’re a sole trader, you can usually claim a deduction for your own super contributions in your personal tax return, as well as all the above costs you incur for any employees.

Let’s look with more detail into the major expenses of Wages, Salaries, and Superannuation, as there are a few aspects to watch.

Salaries and wages

As the business owner, the deductions you can claim depend on the type of business you operate. If you operate:

  • As a sole trader, you are the business owner and not an employee of your business, therefore you can’t pay yourself a salary or wage. Any payment of a salary or wage to you is considered a distribution of profit.
  • If your business operates as a partnership, the partnership can’t pay you salary or wages as you are a partner, not an employee. Any payment of a salary or wages to a partner is considered a distribution of profit as well.
  • If your business operates under a company or trust, your company or trust is a separate legal entity from yourself, and it can generally claim a deduction for any salaries and wages paid to you or other workers.
  • If you engage a contractor to complete a service for your business, you may be able to claim the amount you pay them as a deduction.

Generally, to be able to claim a deduction for the payments you make to your workers, you must first comply with the pay as you go withholding (PAYGW) and reporting obligations for each payment.

Super contributions for your workers

You can claim a deduction for super contributions you make on time to a complying super fund or retirement savings account (RSA) for your employees and for certain contractors.

The minimum you must pay is called the super guarantee (SG):

  • The SG is currently 9.5% of an employee’s ordinary time earnings
  • You must pay the SG at least four times a year, by the quarterly due dates (generally 28 days after quarter end)
  • You must pay and report super electronically in a standard format, ensuring you meet SuperStream requirements
  • Your super payments must go to a complying super fund – most employees can choose their own fund

If you don’t pay an employee’s super on time and to the right fund, you must pay the superannuation guarantee charge (SGC) and lodge an SGC statement to the ATO. The SGC is not tax-deductible. OOUCH! So, pay on time.

calculating tax deductions

What and how to calculate deductions from employees pay?

Taking money out of an employee’s pay before it’s paid to them is called a deduction.

An employer can only deduct money if:

  • The employee agrees in writing, and it’s principally for their benefit.
  • By law or a court order it is allowed, or by the Fair Work Commission. This includes PAYG Income Tax withholding, Court ordered garnishee orders etc.
  • It is allowable under the employee’s award.
  • It is in the employee’s registered agreement, and the employee agrees to it. Examples include salary sacrifice arrangements or additional payments into an employee’s super fund.

An employee’s written agreement must be genuine. They can’t be forced to agree to a deduction.

Deductions must be shown on the employee’s pay slip, time, and wages records.

Deductions under an award or agreement

Some awards have a clause that allows an employer to deduct money from an employee’s pay without their agreement.

If a registered agreement allows the deduction, the employee must still agree to the deduction.

Deductions that are NOT allowed

An employer can’t deduct money if:

  • It benefits the employer directly or indirectly, and is unreasonable in the circumstances, or
  • The employee is under 18 years of age, and their parent or guardian hasn’t agreed in writing.

This is the case even if the deduction is made in accordance with an award, registered agreement, or contract.

Payroll Tax, Payroll deductions and Pay

As you can see, it can become confusing when discussing payroll. We have also written a great article on “Am I liable for payroll tax on my contractor payments”.

More information can be found on payroll tax at the  FairWork website. Advice from an accountant should be sought if you are needing more information.