Navigating Payroll Tax: Tips for Business Owners

Relevant For:

Business owners and bookkeepers managing payroll tax and contractors.

Key Points:

• Independent contractor payments are often wrongly believed to be exempt from payroll tax.
• Payments to contractors included in payroll tax unless specific carve-outs apply.
• Service entities and pseudo-contractors require careful handling to avoid payroll tax issues.
• Operating multiple businesses under different structures may not avoid payroll tax grouping.
• Seek advice for multi-state operations and complex business structures.

Full Article:

Payroll tax is often seen as a burdensome and expensive aspect of running a business.

Legal cases continue to bring it into sharper focus.

This article aims to debunk common payroll tax myths and offer assistance to help businesses manage their obligations effectively.

Tackling Payroll Tax Myths

Several misconceptions persist within the business community regarding payroll tax:

• Independent Contractor Payments: Payments to independent contractors are often thought to be exempt from payroll tax. However, this is not true unless specific exclusions apply.
• Separate Structures: Operating multiple businesses under different legal structures (controlled by the same individuals) is believed to allow separate payroll tax thresholds. In reality, businesses are often grouped for payroll tax purposes.
• Service Entities and Contractors: Using service entities to avoid payroll tax by paying contractors is not foolproof. These arrangements are scrutinised, and payroll tax may still apply.

Understanding Contractors and Employees

It’s crucial to distinguish between contractors and employees:

• Contractors: Perform services under a contract for services, are not integral to daily operations, and are responsible for their errors.
• Employees: Work under a contract of service, are essential to daily operations, and are generally not responsible for their errors.

Misclassifying employees as contractors, even with a “contractor” agreement, does not change their status under the law. Payroll tax exemptions for contractors will not apply if they are actually employees.

To exclude payments to contractors, businesses must meet specific carve-out criteria and maintain evidence to support their claims.

Separate Business Structures

Even if businesses operate as separate entities, they may be grouped for payroll tax purposes if they have common control, common employees, or related bodies corporate. Businesses should assess their structure and seek to de-group if appropriate. The Commissioner has discretion to de-group businesses that are not sufficiently connected.

Service Entities

Using service entities between contractors and pseudo-contractors requires careful consideration:

• They only apply to genuine contractors.
• Contractor carve-outs must still apply to exclude payments from payroll tax.
• Fees charged by the service entity should be paid from the contractor’s earnings.

Conclusion

Business owners and financial controllers should seek professional advice if:

• Contractors or service entities are used.
• Multiple businesses are operated with separate payroll tax thresholds.
• A business operates across different states and claims thresholds in each.