[section id="introduction" format="overview"]
Whether you engage contractors occasionally or as part of your ongoing workforce, it’s important to understand how these payments interact with payroll tax. State revenue authorities assess contractor payments, service types, and engagement patterns to determine whether they should be treated as taxable wages.
[/section]
[section id="understanding-payroll-tax-and-contractor-payments" format="overview"]
Understanding payroll tax and contractor payments
Payroll tax is a state-based employment tax that applies when your total taxable wages exceed the relevant threshold. Under contractor provisions, payments made for labour are often deemed wages, unless a specific exemption applies.
Knowing how these rules work helps you classify contractor engagements correctly and avoid unexpected payroll tax liabilities.
[/section]
[section id="what-do-the-ato-and-state-revenue-offices-define-as-wages" format="overview"]
What do the ATO and state revenue offices define as wages?
For payroll tax purposes, state revenue authorities use a broad definition of “wages”. It includes more than just the salary you pay employees. Wages also cover allowances, commissions, bonuses, superannuation, payments in kind, and certain contractor payments where the contractor provides labour or services to your business.
Under this definition, a payment doesn’t need to look like a traditional wage to be subject to payroll tax. If the payment rewards labour or services that an individual performs for your business, it may fall within the taxable wages base. This is why contractor arrangements are reviewed closely during payroll tax audits across all states and territories.
[/section]
[section id="when-are-contractor-payments-considered-wages-for-payroll-tax" format="overview"]
When are contractor payments considered wages for payroll tax?
Contractor arrangements can feel straightforward, but for payroll tax purposes, the rules are much more nuanced. State revenue authorities look at how the contractor works with your business, not just whether they have an ABN.
Here are the most common situations where contractor payments may be treated as wages:
[section_inner_1 id="contract-mainly-for-labour" format="overview"]
1. The contract is mainly for labour
If the contractor is being paid for their time, skills, or labour, rather than delivering a product, the payment may be taxable.
[/section_inner_1]
[section_inner_1 id="contractor-works-regularly" format="overview"]
2. The contractor works with you regularly
Repeat engagements throughout the year resemble an ongoing working arrangement rather than an independent business relationship.
[/section_inner_1]
[section_inner_1 id="services-team-would-handle" format="overview"]
3. They perform services your team would usually handle
When contractors fill roles that employees would typically do, their payments may be included in taxable wages.
[/section_inner_1]
[section_inner_1 id="integration-into-business" format="overview"]
4. There’s integration into your business
Utilising your systems, equipment, or processes can suggest that the contractor is operating like that of an employee.
[/section_inner_1]
[/section]
[section id="what-exemptions-apply-to-contractor-payments" format="ol"]
What exemptions apply to contractor payments?
The good news is that payroll tax rules include several exemptions for genuine independent contractors. If the contractor is running their own business, not yours, there’s a good chance an exemption could apply.
Here are the key ones to know:
- 90-day exemption – The contractor works 10 days or less per month on average.
- 180-day exemption – The contractor works less than 180 days in the year.
- Services to the public – The contractor serves a broad client base, not just your business.
- Specialist services exemption – They’re brought in for a one-off or niche service your employees don’t ordinarily handle.
- Contractor hires others – If the contractor employs staff or subcontractors, it usually shows independence.
[tip_box]
Exemptions vary between states and territories. Always check the rules for your location and keep documentation that shows the contractor’s trading income, service pattern, or client base.
[/tip_box]
[/section]
[section id="how-to-determine-if-your-contractor-arrangement-is-taxable" format="steps"]
How to determine if your contractor arrangement is taxable
Working out whether a contractor’s payments should be included in your payroll tax calculation doesn’t have to be complicated. You can apply a simple, structured process to understand how state revenue authorities assess the arrangement.
[section_inner_1 id="step-1-nature-of-service" format="overview"]
Step 1: Start with the nature of the service
Ask yourself: Am I paying this contractor for their labour, or for a finished product? If it’s labour, the payment may be included in taxable wages.
[/section_inner_1]
[section_inner_1 id="step-2-level-of-control" format="overview"]
Step 2: Consider the level of control
If your business dictates how the work is done, or the contractor must follow your processes, this increases the likelihood of payroll tax applying.
[/section_inner_1]
[section_inner_1 id="step-3-business-independence" format="overview"]
Step 3: Check for genuine business independence
A contractor who sets their own hours, brings their own equipment, or engages others to help with the work is more likely to be treated as independent.
[/section_inner_1]
[section_inner_1 id="step-4-apply-exemptions" format="overview"]
Step 4: Apply the exemptions
Once you’ve assessed the relationship, check the 90-day and 180-day rules and whether the contractor provides services of that kind to the public generally.
[/section_inner_1]
[/section]
[section id="how-to-manage-payroll-tax-compliance-for-contractors" format="overview"]
How to manage payroll tax compliance for contractors
Once you understand how payroll tax applies to contractors, the next step is putting the right systems in place. Good compliance isn’t just about avoiding penalties; it also gives you clarity and confidence about how your business is operating.
Here are simple ways to stay on top of your payroll tax obligations:
[section_inner_1 id="keep-clear-records" format="overview"]
Keep clear records of contractor engagements
Document what the contractor provides, how often they work, and what they’re paid. This makes it easier to show why an exemption applies.
[/section_inner_1]
[section_inner_1 id="track-contractor-days" format="overview"]
Track contractor days worked
Because exemptions often depend on the number of days in a financial year, accurate tracking is essential.
[/section_inner_1]
[section_inner_1 id="review-agreements-regularly" format="overview"]
Review each contractor agreement regularly
A contractor who was independent last year may now be working more like an employee.
Regular reviews help you stay compliant.
[/section_inner_1]
[section_inner_1 id="maintain-documentation" format="overview"]
Maintain contractor documentation
Collect ABNs, service descriptions, insurance certificates, and evidence of the contractor’s work with other clients.
[/section_inner_1]
[section_inner_1 id="confirm-exemptions-annually" format="overview"]
Confirm exemptions annually
Set a quarterly reminder to reassess contractors, especially if your business is growing or roles change.
[/section_inner_1]
[section_inner_1 id="get-support-when-unclear" format="overview"]
Get support when the rules are unclear
Contractor arrangements can be complex. Our team can help you review contracts, assess payroll tax risk, and maintain compliance.
[/section_inner_1]
[/section]
[section id="get-payroll-tax-guidance-from-liston-newton" format="cta"]
Get payroll tax guidance from Liston Newton
If you’re unsure whether a contractor should be included in your taxable wages, you’re not alone; this is one of the most common questions we receive from business owners. We can help you interpret the rules, apply exemptions correctly, and establish a compliance process that scales with your business.
[free_strategy_session]
Free financial strategy session*
A 90-minute strategy session gives you practical clarity around your business tax and compliance position.
- Get a clear understanding of your payroll tax obligations
- Receive tailored insights into your contractor arrangements
- Walk away with a detailed action plan and next steps for your business
[/free_strategy_session]
[/section]
