Payroll Tax and Contractors: What Business Owners Need to Know

A lot of business owners think that if someone has an ABN and invoices as a contractor, payroll tax won’t apply. The reality is a bit trickier. In some cases, payments to contractors can still count as wages, which means payroll tax may be payable.

This can catch people off guard, especially in industries that rely heavily on contractors such as medical practices, IT, construction, mortgage broking and professional services.

When Can Contractors Trigger Payroll Tax?

Payroll tax usually applies to employees, but contractors can be included too if the arrangement looks like what’s called a “relevant contract.” In simple terms, this is when a contractor is working in a way that’s more like an employee than a separate business.

This may be the case if:

• The contractor is mainly providing their labour, not delivering a product or final outcome.

• The contractor works under your direction or control.

• The contractor does not delegate or subcontract the work.

• The contractor works mostly or only for your business.

Contractor or Employee?

The difference is not just about what the contract says. It comes down to how the relationship works day to day.

• Employees are directed by the employer, are paid wages, get super contributions and are entitled to leave.

• Contractors usually run their own business, decide how and when to work, invoice for services and look after their own tax and super.

  
  

Getting this wrong can lead to penalties, back pay and unexpected payroll tax bills.

How to Stay on Top of Payroll Tax

Here are some practical steps you can take to reduce the risk:

• Review contractor agreements. Look at what the contractor is actually doing and how the work is structured.

• Keep records clear and up to date. Track who is being paid, what they are being paid for and under which contract.

• Check for exemptions. Occasional or one-off services might be exempt, but ongoing core work usually is not.

• Plan ahead. Payroll tax can be applied retrospectively, so it pays to have complete and accurate records ready.

  
  

Tip: Vivid Enterprise Solutions can review your contractor arrangements and payroll tax obligations for you. We make sure your setup is compliant and reduce the risk of any unexpected surprises.

Why This Matters

Payroll tax is often thought of as something only large employers need to worry about. Contractor arrangements mean it can apply more often than many business owners realise. By reviewing contracts early and keeping good records, you can avoid costly issues and feel confident that your business is doing the right thing.

At Vivid Enterprise Solutions, we help businesses understand the rules around payroll tax and contractors, keep records in order, and work alongside specialist advisers where needed. Our goal is to give you clarity and peace of mind, so you can focus on running your business with confidence.

Disclaimer: This article is intended to provide general guidance and is not specific advice. We encourage you to seek tailored advice for your circumstances.