Payroll tax is an important tax that is self-assessed and paid by employers in Australia. Employers are liable for payroll tax when their total Australian wages exceed the payroll tax threshold set by the relevant jurisdiction(s). Payroll tax is administered by each state or territory and has state-specific rulings such as thresholds, rates and other requirements. Payroll tax calculations may become complex with these differences, as well as when businesses employ in different states or employ only for part of the year. This article provides a guide to the calculation of payroll tax in different scenarios.
Recommended Reads
- Understand Payroll Tax Basics
- Step-by-Step Compliance Guide
- State-by-State Breakdown
- Know What You’re Taxing
- Classify with Confidence
- Maximise Savings Legally
- Never Miss a Deadline
- Avoid Costly Mistakes
- Handle Multi-State Teams
When Do You Need to Register for Payroll Tax?
You are required to register for payroll tax in a state or territory if your company operates in or the services are performed in that jurisdiction, and your total Australian wages (or group wages, if applicable) exceed the threshold for that state or territory.
Example:
Company ABC operates in Victoria (VIC) and Queensland (QLD).
- Pays $700,000 in VIC and $500,000 in QLD
- Total Australian wages: $1.2 million
- VIC threshold: $900,000 - Must register in VIC as the total Australian wages exceed the state threshold.
- QLD threshold: $1.3 million - No tax is payable in QLD as the threshold is not exceeded. However, you should still register, as per Queensland rulings.
Thresholds and rates vary between jurisdictions. Some jurisdictions require registration even if your wages don’t exceed the threshold or if you don't have a liability. Always check the latest and state-specific values, requirements, and information on your state’s revenue office.
How to Determine in Which State Wages Are Taxable
Wages are taxable in the state or territory where the employee performs the work, if the business operates in only one state or territory. However, if an employee works across multiple jurisdictions, the nexus provision is used to decide where payroll tax should be paid. The four tiers of the nexus provision are:
- Where the employee's principal place of residence is located
- Where the employer’s Australian business number (ABN) is registered or the business is located
- Where the wages are paid (where the employee’s bank account is held)
- Where the services were mainly performed
General Formula to Calculate Payroll Tax
Once registered, payroll tax is calculated as:
Payroll Tax Payable = (Taxable Wages − Deduction) × Tax Rate
- If your total wages are below the threshold, your company is not liable to pay any payroll tax.
- The deduction entitlement varies depending on the state and may be reduced or apportioned depending on interstate employment, part-year operations, or grouping. It is designed to ease the payroll tax burden on businesses.
The maximum annual deduction (threshold) entitlement is equal to the payroll tax threshold in all states except South Australia.
Detailed Calculation Scenarios and Formulas
-
Full-Year Employment in a Single State
Formula:
Payroll Tax = (Total Wages − Annual Threshold) × Tax Rate
Example:
Company XYZ in NSW pays $1.5 million in taxable wages.
- Threshold = $1.2 million
- Rate = 5.45%
Payroll Tax = ($1,500,000 − $1,200,000) × 5.45% = $16,350
-
Employment in Multiple States
Each state applies tax based on its rate and threshold, even if wages are split. An employer that has employees in multiple states is only entitled to a part of the deduction.
Formula (Per State):
If Total Australian Wages > State Threshold:
Payroll Tax = (Taxable Wages in State - Threshold) × State Rate
Else:
Payroll Tax = $0
Deduction Formula (Per state):
Deduction Entitlement = (Wages in State ÷ Total Australian Wages) × State Threshold
Example:
Company DEF pays:
- $600,000 in VIC (threshold $1 million, rate 4.85%)
- $700,000 in QLD (threshold $1.3 million, rate 4.75%)
- Total wages: $1.3 million
- Maximum VIC threshold: $1,000,000
VIC Deduction = ($600,000 ÷ $1,300,000) × $1,000,000 = $461,538
VIC Payroll Tax = ($600,000 - $461,538) × 4.85% = $6,715
QLD Payroll Tax = $0 (state threshold not exceeded) -
Grouped Entities
Related companies are grouped, and the combined taxable wages of all members are tested against thresholds. In a group of employees, only one payroll tax deduction applies to the entire group.
Formula:
Group Payroll Tax = (Total Group Wages − Threshold) × Rate
Example:
GHI and JKL are grouped, paying $800,000 and $900,000 in NSW, respectively.
- Combined wages = $1.7 million
- Threshold = $1.2 million
- Rate = 5.45%
Taxable Amount = $1,700,000 − $1,200,000 = $500,000
Group Tax = $500,000 × 5.45% = $27,250 -
Monthly Payroll Tax Calculation
When lodging monthly, the threshold is prorated. However, most states have set both an annual and a monthly threshold.
Formula:
Monthly Threshold = Annual Threshold ÷ 12
Payroll Tax = (Monthly Wages − Monthly Threshold) × Rate
Example:
Company MNO (WA):
- Monthly wages = $100,000
- Annual threshold = $1,000,000
- Rate = 5.5%
Monthly Threshold = $83,333.33
Taxable Wages = $100,000 − $83,333.33 = $16,666.67
Payroll Tax = $16,666.67 × 5.5% = $916.67 -
Employing for Part of the Financial Year
If an employer pays wages for a part of the financial year, wages are annualised to determine the rate, and he/she will not be entitled to the full deduction.
Annualisation Formula:
Annualised Wages = (Actual Wages Paid ÷ No of days employed) × 365
Deduction Formula:
Deduction = Max Deduction × (No of days employed ÷ 365)
*Please use 366 instead of 365 in a leap year.
Example:
Business Pty Ltd operated from 1 Nov 2024 to 30 Jun 2025 (211 days), paying $1 million in wages.
- Annualised Wages = ($1,000,000 ÷ 211) × 365 = $1,729,857
- Max Deduction = $600,000
- Deduction = $600,000 × (211 ÷ 365) = $346,027
If the rate at $1.73M is 4.95%, tax = ($1,000,000 − $346,027) × 4.95% = $32,371
- Annualised Wages = ($1,000,000 ÷ 211) × 365 = $1,729,857
-
Employing Interstate for Part of the Year
Deduction Formula:
Deduction = (Max Deduction × (Relevant State’s Wages ÷ Total Wages)) × (Days Employing ÷ 365)
Example:
- Total wages = $2 million
- SA wages = $1.2 million
- Days employing = 180
- Max Deduction = $600,000
Deduction = ($600,000 × 1.2M ÷ 2M) × (180 ÷ 365) = $600,000 × 0.6 × 0.4932 = $177,534
Taxable wages = 1,200,000 - 177,534 = $1,022,466
Payroll Tax = 1,002,446 × 4.95% = $50,612
What Wages Are Taxable?
Taxable wages typically include:
- Salaries and wages
- Superannuation
- Bonuses and commissions
- Allowances
- Fringe benefits (grossed-up)
- Contractor payments (subject to relevant tests)
To know more about this, please refer to our article on taxable and non-taxable wages.
Common Mistakes to Avoid
- Failing to group related companies
- Not apportioning deductions correctly
- Missing contractor obligations
- Using outdated thresholds or rates
- Incorrectly allocating wages to states
Tools and Resources
- State Revenue Office calculators
- Payroll software with tax integration
- ATO and state payroll tax guides
- Professional advice for multi-state or grouped structures
Conclusion
Before the payroll tax deadlines, companies need to:
- Determine the total wages paid in Australia (or group wages, if applicable).
- Check thresholds in every state where services are provided.
- Use the Nexus provision to decide where to pay
- Distribute and prorate deduction rights, particularly in situations involving multiple states or a partial year.
- Determine taxable wages, apply state-specific rates, and account for any phased deductions or temporary levies.
- File monthly returns and reconcile once a year, taking into account changes in thresholds, group dynamics, and new personnel.
Understanding these procedures on payroll tax allows you to maintain compliance and prevent expensive mistakes. Businesses can effectively handle their payroll tax obligations with accurate computations, on-time registrations, and appropriate deduction allocation. Using trustworthy payroll software and staying updated on state laws guarantees that your company is audit-ready and penalty-free.
