Payroll tax and contractors: are they exempt?

Blog
Monday 28th October 2024

Payroll tax and contractors: are they exempt?

Blog
Monday 28th October 2024
Written by Courtney Dolan

Revenue NSW and other state governments assume that all contractors are subject to pay payroll tax unless you can satisfy an exemption.  

Currently, they’re very active in audits and have contractor payments as a key focus of reviews. This means if you have any contractors or will be taking some on in the near future, it’s important you get the classifications and paperwork right. 

What is a contractor? 

First, let’s quickly define what an independent contractor is. According to Business.gov.au, a contractor is defined by the following:

  • Run their own independent business and sell services to clients
  • Typically use their own processes, tools, and techniques to complete tasks
  • Have the ability to negotiate their own fees and terms of work
  • Can work for multiple clients at the same time

Contractors are entitled to certain workplace rights and protections. But their responsibilities differ from those of employees, particularly concerning insurance, tax and super.

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Your obligations re payroll tax

Businesses in NSW must register for payroll tax when their monthly wages exceed the monthly threshold. If you end up under the annual threshold, any payroll tax paid will be refunded on lodgement of your annual payroll tax return.  

If you’re liable for payroll tax as an employer, you need to: 

  • Register for payroll tax if the total taxable wages exceed the threshold
  • Lodge monthly or annual payroll tax returns
  • Pay the payroll tax by the due date
  • Keep records of wages paid, employee classifications and contractor payments for compliance and audit purposes

Importantly, while your employee wages and super may be under the payroll tax threshold, adding in your contractor payments may tip you over the threshold, so beware when positioning a contractor as exempt! 

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When are contractors exempt?

Here are the most common contractor exemptions from payroll tax liability:

  • Services not ordinarily required by your business – For example, you’re hiring a painter to refresh your legal office.
  • Services provided are required by your business for less than or equal to 180 days per year – This includes days when employees perform the same work. For example, a ski resort engages contractors and/or employees to provide skiing lessons for less than 180 days per year. 
  • Services provided by a contractor are for less than or equal to 90 days per year – This is cumulative, not consecutive. For example, if a contractor provides services for 50 days in September and 45 days in April, the total cumulative days worked in the year would be 95 days. In this case, they don’t qualify. 
  • Services provided by the contractor to the public during the financial year and engaged by you for less than or equal to 10 days on average per month – For example, if a contractor provides services to the public for a total of 80 days in a financial year and is engaged by you for an average of 8 days per month, they qualify under this provision. However, if they average 12 days per month with you over the same period, they would not be eligible, as they exceed the 10-day limit on average.
  • Services performed by two or more people – For example, if a contractor team of three individuals provides a service together for a total of 60 days in a financial year, the services are considered as performed by two or more people. This means they qualify. However, if only one person from that team is engaged for all 60 days, it won’t meet the requirement, as two or more people must perform the service.

Proving your exemption 

To be considered exempt, you need to be able to prove to Revenue NSW that your contractor falls into an exemption category for payroll tax purposes. 

Key to proving the exemption is documenting the contract relationship. If nothing’s in writing, it’s hard to prove you meet an exemption. 

Because of this, make sure you review and make a record of the exemptions you meet for each contractor each year to protect yourself from a Revenue NSW review. 

If you have questions about payroll tax obligations or contractor classifications, don’t hesitate to contact your Maxim advisor or reach out to our team

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