Payroll Tax vs. Income Tax: What’s the Difference?

Understanding the difference between payroll tax and income tax is important for Australian business owners, employers, and individuals. While both taxes relate to payments made for work, they apply in different ways. Payroll tax is a state or territory tax that businesses pay when their total wages exceed a certain threshold, while income tax is a federal tax applied to the income individuals and businesses earn throughout the year.

If you run a business with employees, you may need to manage both payroll tax obligations with your state revenue office and income tax reporting with the Australian Taxation Office (ATO). Employees should also understand what taxes are withheld from their pay and why. Whether you’re employing staff, working as a contractor, or operating as a sole trader, knowing how these two taxes work can help you stay compliant and better plan for your financial obligations. In this article, we’ll break down the key differences and explain how each type of tax impacts you.

What Is Payroll Tax?

If your business pays employees in Australia, you are required to pay payroll tax. This is a state or territory-based tax, calculated as a percentage of the total wages you pay each month. The tax is collected by the state or territory where your employees are based.

Not all businesses are liable to pay payroll tax. Your company will only need to pay if its total wages exceed the tax-free threshold set by the specific state or territory. The threshold and tax rates vary across different regions in Australia, so it's important to be aware of the rules in your area.

Payroll tax is the responsibility of the employer, and while employees don’t pay it directly, it can influence the overall costs for the business. Employers are also required to make superannuation contributions for their employees, which is separate from payroll tax and goes towards their retirement savings.

To ensure your business stays compliant with payroll tax regulations, our expert team can guide you through the specific requirements and help manage your obligations efficiently.

When Are You Required to Register for Payroll Tax?

You are required to register for payroll tax if your total Australian taxable wages exceed the threshold set by the state or territory where your employees work.

Each state and territory has different thresholds and tax rates, updated regularly. As a guide for the 2024–25 financial year:

• In New South Wales (NSW), the threshold is $1.2 million per year, with a payroll tax rate of 5.45%.

• In Victoria (VIC), the threshold is $700,000, with a rate of 4.85% for metropolitan employers and a reduced rate for regional employers.

• In Queensland (QLD), the threshold is $1.3 million, with a rate of 4.75% for businesses with wages up to $6.5 million, and 4.95% for larger wage bills.

• In South Australia (SA), the threshold is $1.5 million, with a progressively increasing rate up to 4.95%.

• In Western Australia (WA), the threshold is $1 million, and the payroll tax rate is 5.5%.

• In Tasmania (TAS), the threshold is $1.25 million, with a rate of 4% on wages up to $2 million, and 6.1% on amounts above that.

• In the Australian Capital Territory (ACT), the threshold is $2 million, and the payroll tax rate is 6.85%.

• In the Northern Territory (NT), the threshold is $1.5 million, with a tax rate of 5.5%.

If you pay wages in multiple states or territories, your total Australian wages are aggregated to determine whether you exceed the threshold, and you may have to register and lodge payroll tax returns in more than one jurisdiction.

In NSW, employers must register for payroll tax within seven days of exceeding the threshold. Other states and territories also require timely registration once the threshold is crossed, so it’s important to monitor your total wages throughout the year.

For the most accurate and up-to-date information, always check the relevant state or territory revenue office, such as Revenue NSW, the State Revenue Office Victoria, the Queensland Revenue Office, and others.

What Is Income Tax?

Income tax is a tax on the money you earn, applying to individuals, businesses, and the self-employed. The amount you pay depends on your income, with a progressive rate: higher earners pay a higher percentage of their income in taxes. In Australia, income tax is collected at the federal, state, and sometimes local levels. The Australian Taxation Office (ATO) oversees the income tax system. You are required to pay income tax on all types of income, including wages, salaries, bonuses, commissions, dividends, and any other earnings you make in Australia.

Various deductions and credits can reduce your tax burden. Deductions may include work-related expenses, while tax credits could apply to things like dependents or low-income earners. These can lower the total amount you owe.

Income tax is essential for funding public services such as healthcare, education, and infrastructure. It's important to understand your tax obligations and make use of available deductions and credits to manage your tax liability effectively.

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Australian Resident Tax Rates 2024–25

Key Differences Between Payroll and Income Tax

• Payroll tax is paid by the employer based on the total wages they pay their employees. The more employees earn, the higher the payroll tax. Income tax, however, is paid directly by the employee and depends on how much they earn—the more they make, the higher the tax.

• The main difference is that employers pay payroll tax to the government on behalf of the employee, while employees are responsible for their own income tax. Employers ensure payroll tax is deducted and paid, while employees only worry about their income tax.

• Income tax is calculated as a percentage of what a person earns, with higher earners paying more. On the other hand, payroll tax is based on the total wages an employer pays and is usually a set percentage. This means income tax increases with earnings, while payroll tax stays the same for all employees.

  
  

What About PAYG Withholding?

In addition to payroll tax and income tax, most employers must also manage Pay As You Go (PAYG) withholding.

• ✅ PAYG withholding is where businesses withhold tax from employees’ wages and remit it to the ATO on behalf of the employee.

• ✅ It ensures employees meet their personal income tax obligations progressively throughout the year.

• ✅ The amount withheld is based on employee information provided in the Tax File Number (TFN) Declaration.

While PAYG withholding and payroll tax both relate to wages, they are completely separate obligations:

• PAYG withholding benefits the employee (by prepaying their income tax)

• Payroll tax is an employer obligation paid to state or territory governments.

Conclusion

For most individuals, income tax is the main tax to think about. However, if you operate a business and employ staff, even just a few employees, it’s important to also understand payroll tax. Payroll tax is a state-based obligation that employers must pay once their total wages exceed the relevant threshold. Businesses need to keep accurate records, monitor their total wage bill, and meet specific registration and reporting requirements with their state or territory revenue office.

As an employer, you are responsible for calculating and paying payroll tax — it’s not deducted from your employees’ wages. Employees don’t need to worry about payroll tax themselves; their focus remains on income tax, which is withheld through PAYG by their employer. Understanding your payroll tax obligations early can help you avoid unexpected costs, penalties, and compliance issues as your business grows.

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