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What is payroll tax?
Payroll tax is a state or territory tax that is imposed on employers based on the wages they pay to their employees. It is not a federal tax. The tax is collected by the state or territory where the employees are located.
Payroll tax is calculated based on the total wages paid by an employer in a specific period, usually on a monthly basis. The tax rate and thresholds vary across different states and territories. Generally, the higher the total wages paid by an employer, the higher the payroll tax liability.
Key elements in calculating payroll taxes
Calculating payroll taxes involves several key elements, including individual income tax rates, Superannuation Guarantee, Medicare Levy, and the Temporary Budget Repair Levy (if applicable). Here’s an explanation of each element and its calculation methods:
Individual Income Tax Rates
Individual income tax rates in Australia are progressive, meaning they increase as income levels rise. The tax rates are divided into income brackets or tax brackets, and each bracket has a corresponding tax rate. The tax brackets and rates may change from year to year due to government policy. To calculate the individual income tax, you apply the relevant tax rate to each income bracket and sum up the amounts.
The Superannuation Guarantee (SG) is a compulsory contribution made by employers on behalf of their employees to their superannuation (retirement savings) accounts. The current SG rate is 10.5% of an employee’s ordinary time earnings, which includes salary, wages, commissions, and certain allowances. Employers need to calculate the SG amount based on the employee’s earnings and make the contribution to their nominated superannuation fund.
The Medicare Levy is a tax that helps fund Australia’s public healthcare system, known as Medicare. It is calculated as a percentage of an individual’s taxable income. As of my knowledge cutoff in September 2021, the Medicare Levy rate is 2% of taxable income. However, additional calculations may be required for individuals who earn above certain income thresholds or qualify for exemptions.
Temporary Budget Repair Levy (if applicable)
The Temporary Budget Repair Levy was a temporary tax introduced in 2014 to help address the budget deficit. It applied to individuals with taxable incomes above a certain threshold. As of my knowledge cutoff, this levy is no longer in effect. However, it’s important to stay updated on any changes in tax legislation and consult the latest information from the Australian Taxation Office (ATO).
*For more information: Tax rates
How to calculate payroll tax?
To calculate payroll taxes, follow these steps:
Determine the Gross Salary
|Calculate the total cash wages, salary, bonuses, commissions, and other benefits for the employee.|
Subtract Applicable Deductions
|Deduct any applicable deductions and tax allowances from the gross salary.|
|Calculate the Income Tax||
Use the ATO tax tables or tax calculator to determine the income tax amount.
|Add the Superannuation Guarantee||
Add the mandatory Superannuation Guarantee contribution to the employee’s superannuation fund.
|Add the Medicare Levy||
Include the Medicare Levy, which helps fund the Australian healthcare system.
|Arrive at the Final Payroll Tax Amount||
Add the income tax, Superannuation Guarantee, and Medicare Levy to determine the final tax amount.
*Source: Payroll tax
Other relevant payroll taxes
In addition to the previously mentioned payroll taxes such as Payroll Tax, Superannuation Guarantee, and Medicare Levy, there are other relevant payroll taxes in Australia to consider.
- Fringe Benefits Tax (FBT)
FBT is a tax imposed on employers who provide non-cash benefits to their employees or their associates, such as family members. Non-cash benefits can include company cars, health insurance, housing allowances, and more.
The FBT is calculated based on the taxable value of the fringe benefits provided and is separate from individual income tax.
- Employee Share Schemes (ESS)
If a company offers employees the opportunity to acquire shares or options in the company, it may trigger tax obligations under the ESS rules.
The tax treatment of employee share schemes can be complex and involves calculating the taxable value of the shares or options provided to employees.
- State-based levies
Some states or territories in Australia may impose additional levies or taxes that are relevant to payroll.
For example, the New South Wales (NSW) government introduced the Jobs Plus Program, which includes a payroll tax rebate for eligible businesses that create new jobs in NSW. Other states or territories may have similar programs or levies that businesses need to consider.
- WorkCover premiums
WorkCover is a compulsory insurance scheme that provides coverage for workplace injuries and illnesses. Employers are required to pay premiums to their respective state or territory WorkCover authority.
The premiums are typically calculated based on the wages paid to employees and the industry in which the business operates.
How Workstem assist you on payroll taxes?
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Read More: Payroll Tax