Knowing if you need to pay payroll tax for your contractors can be tricky.
The distinction between “employee” and “contractor” is important for many areas of tax, superannuation and other government obligations. And on the surface you’d think it would be easy to differentiate between the two. But in reality, the lines can be blurred especially when it comes to payroll tax. Who you believe to be a contractor may in fact be classified as an employee for the purposes of payroll tax.
Employers are required to pay payroll tax on all of their taxable wages. Payments made to contractors or consultants, regardless of the structure of their business, may be considered wages for payroll tax purposes.
How to decide if you need to pay contractor payroll tax
Payments to contractors are liable for payroll tax unless an exemption applies.
An employee works in your business and is part of your business, whereas a contractor runs their own business.
But even if a worker has an ABN and calls themselves a contractor, an employer/employee relationship may exist.
You need to undertake an assessment of the relationship you have with each of your contractors. By assessing them against the Payroll Tax Exemptions you’ll be able to determine if a worker is an employee or contractor for payroll tax purposes.
Exemptions to payroll tax for contractors
You need to assess your relationship with each contractor and decide if they are exempt from payroll tax.
Understanding the exemptions and their true intent takes some research. Or better still you may consider getting advice from a payroll tax professional.
Below is an overview of the exemptions. If you and your contractor meet one of the following exemptions, then the payments you make to the contractor is exempt from payroll tax.
1. Services ancillary to the supply of goods
Is the main purpose of the contract to supply goods or equipment? If so, and the services provided by the contractor mostly support the supply of those goods or equipment, then they are exempt from payroll tax.
2. Services not ordinarily required by your business
Is this a one off service that your business doesn’t usually need? If yes, chances are they are exempt from payroll tax.
But be mindful. The contractor must offer the same type of services to the public. And they must get less than 40 percent of their gross trading income from your business in that financial year.
3. Services required for 180 days or less
Does your business need a specific type of service but you only need that service for less than 180 days in a financial year?
If so you’ll not be liable for payroll tax. What’s important in this exemption is the service required is only needed for the limited number of days. And that’s regardless of:
- how many individual contractors you get to do the work
- if you use employees or contractors
- the days you use the contractor is consecutive or not
4. Services provided for 90 days or less in a financial year
Has the contractor provided the same or similar service to you for less than 90 days?
If so you’ll be exempt from payroll tax for the contractor.
5. Services performed by two or more people
This exemption applies if a contractor engages two or more workers to provide the contracted services.
6. Services provided by an owner driver
Does your contractor provide you with transportation or delivery services?
An exemption applies if the services provided by the contractor are incidental to the transportation and delivery of goods and are done in a vehicle provided by the contractor, and not a vehicle supplied by your business.
There’s also an additional exemption for services “approved by the Commissioner as exempt”. If your contractor does not meet any of the other exemptions, it may be worthwhile to chat with a payroll tax professional who can help you determine if this exemption may apply.
You need to keep a record of the conclusion you made and how you got to it when it comes to being able to substantiate your payroll tax exemptions. If you get audited you’ll be asked to show records to support your decision of whether your worker is an employee or contractor and the factors you relied on to come to your conclusion. While the onus of this ultimately falls with you as a business owner, your accountant or financial advisor will generally be able to assist you with this and ensure all bases are covered.
Electronic records can help to make keeping track of this easier. And most accounting software tools will allow you or your accountant to accurately keep records should you be audited.
Common Mistakes to Avoid
Each year millions of dollars in underpaid payroll tax is detected. In around 8 out of 10 audits, there is a payroll tax shortfall. There are some common mistakes employers make when applying the exemptions in relation to the contractors they engage. Here are just a few examples:
Contractors vs Employees
The most common mistake employers make is simply not realising that a contractor is really an employee for payroll purposes. They don’t realise they need to undergo the process of determining if they are exempt from payroll tax.
Determining the 180 days vs 90 days exemption rules
Determining the difference between these two exemptions can be confusing.
The 180 day exemption is about the type of services the business uses. The 90 day exemption is about the contractor and the number of days they provide their services.
And it’s important you don’t claim the 180 days exemption as an extension of the 90-days rule.
Not understanding the meaning of "services not usually required by your business"
There are two components to this exemption. And it’s the second component that can be missed. And that’s to ensure the contractor provides the same type of services to the general public and gets less than 40 per cent of gross trading income from your business in that financial year.
What to do if your contractor is not exempt from payroll tax?
If you identify a contractor does not meet any of the exemptions, the next step is to work out if payments made to that contractor are liable for payroll tax.
If you haven’t already, this is also the time to get in touch with a professional to help. Not only can they confirm your assessment of the exemptions, they can help you to correctly apply payroll tax to your contractors who aren’t exempt.
Get professional, reliable advice
Professional, friendly and easy to understand advice is often the best path to understanding the complexities of payroll tax for contractors.
Kelly+Partners has the expertise to give you peace of mind, knowing you’re meeting your tax obligations are being met.