Topic: Navigating payroll tax across states: what small businesses need to consider

Last reviewed: 17/12/2025

Focus: Accounting Practice Analysis

Payroll Tax Across States: 2025 Guide for SMEs

Navigating payroll tax across Australian states is primarily an exercise in managing different thresholds, rates, grouping rules, and “where wages are taxable” sourcing rules—while ensuring your wage definitions (including contractors, allowances, and superannuation treatment) are correctly applied in each jurisdiction where staff perform services. For small businesses operating in more than one state or employing remote workers, the critical considerations are (1) registration triggers in each state, (2) correct apportionment of taxable wages, (3) managing group payroll tax exposure, and (4) maintaining audit-grade records to satisfy state revenue authorities.

Featured Answer: Payroll tax in Australia is administered by state and territory revenue offices, not the ATO, so multi-state small businesses must assess payroll tax liability separately in each jurisdiction where wages are taxable. The key is to correctly determine what payments are “taxable wages”, apply the correct state registration threshold and rate, and manage grouping and apportionment rules to avoid underpayment penalties and interest.

What is payroll tax in Australia, and who administers it?

Payroll tax is a state and territory tax on “taxable wages” paid by employers once wages exceed the relevant jurisdiction’s threshold.

From an Australian accounting practice perspective, the most common compliance misunderstanding is assuming payroll tax is an ATO-administered tax like PAYG withholding. It is not. Payroll tax is administered by each state/territory revenue authority, with separate registrations, returns, and audit approaches.

For context only (not payroll tax): the Australian Taxation Office (ATO) administers PAYG withholding, superannuation guarantee, and Single Touch Payroll (STP) reporting, which often becomes the primary evidence base used in payroll tax audits. According to ATO guidance on STP, employers report wages and PAYG withholding through STP-enabled payroll software, which can be cross-referenced in state payroll tax reviews.

Why is “across states” payroll tax harder for small businesses?

Multi-state payroll tax is harder because payroll tax is not harmonised across Australia in the way GST is.

Different registration thresholds and rates by jurisdiction (updated annually)
Different return frequencies and reconciliation requirements
“Where wages are taxable” rules (especially for remote/hybrid workforces)
Grouping rules that can aggregate wages across related entities
Contractor provisions that can deem some contractor payments as taxable wages
State-specific exemptions and concessions (commonly trainees/apprentices, certain wages in regional zones, and other targeted relief measures)

When must a small business register for payroll tax in each state?

A small business must register for payroll tax in a state/territory when its wages (as defined under that jurisdiction’s legislation) exceed the jurisdiction’s registration threshold, or when the business otherwise meets a registration trigger (such as expected wages exceeding the threshold).

Key compliance principle: registration is assessed separately per jurisdiction based on wages taxable in that jurisdiction, but grouping rules may require aggregated wage testing across related entities (which can remove access to thresholds).

Identify all wage types you pay (salary, wages, bonuses, allowances, commissions, director fees, shares/options if applicable, termination payments, etc.).
Identify where services are performed (and apply the jurisdictional sourcing rules).
Determine if you are a member of a payroll tax group.
Assess whether your taxable wages exceed the threshold in that jurisdiction.
Register, lodge returns, and reconcile annually.

Practical warning: many SMEs only discover they should have registered after a state audit, often prompted by STP data, WorkCover/Workers Compensation declarations, or contractor/payment data.

How do “where wages are taxable” rules work for interstate and remote employees?

As a general compliance outcome, wages are typically taxable in the jurisdiction where the employee performs the work, subject to each jurisdiction’s statutory “nexus” or “sourcing” rules and any special provisions for multi-jurisdictional duties.

Employees living in NSW but working for a Victorian business (or vice versa)
Fly-in fly-out or project-based work across borders (construction, trades, health services)
Sales teams operating across multiple states
Directors and executives travelling between jurisdictions

Employment contracts specifying primary work location
Timesheets or location records (especially for itinerant workers)
Rosters and job allocations by state
Remote work policies and “usual place of work” evidence
Expense claims and travel logs to support apportionment

A Brisbane-based consultancy hires a senior analyst who works from home in Newcastle (NSW) permanently.

What payments count as “taxable wages” for payroll tax purposes?

Taxable wages are defined by each state/territory payroll tax legislation and typically include more than ordinary salary and wages.

Bonuses and commissions (including incentive payments)
Allowances (car, travel, uniforms, on-call, first aid)
Director fees (where treated as wages under the jurisdiction’s rules)
Termination payments (components may be taxable depending on character)
Shares and options (employee share schemes can be relevant)
Certain superannuation contributions (particularly if above mandated levels or captured by the jurisdiction’s definition)
Fringe benefits (often grossed-up and included, subject to specific rules)
Certain contractor payments (see contractor provisions below)

ATO linkage (evidence and data): while the ATO does not administer payroll tax, ATO STP and PAYG withholding reporting provides strong payroll “source data” that state authorities frequently rely on during reviews. In addition, ATO guidance on fringe benefits tax (FBT) and reportable fringe benefits provides a consistent payroll data foundation that often maps into payroll tax inclusions when states capture fringe benefits.

How do contractor rules affect payroll tax for small businesses?

Many small businesses underestimate payroll tax because they assume contractors are always outside payroll tax. That assumption is often incorrect.

Most jurisdictions have “relevant contract” provisions that can deem certain contractor payments as taxable wages unless an exemption applies.

Single-person contractors paid mainly for labour, not goods
Long-running contractors providing services similar to employees
Contractors who work primarily for your business
Contractors engaged through ABNs but effectively operating like staff

Whether the contract is principally for labour
Whether the contractor provides services to the public generally
Whether the contractor engages others to perform the work
Whether the contractor uses significant plant/equipment (varies by facts)
Whether work is ordinarily required for less than a specified period (jurisdictional tests differ)

A café group engages a “marketing contractor” on a monthly retainer for 18 months, working 4 days per week and using the café’s systems.

What are payroll tax grouping rules, and why do they surprise SMEs?

Grouping rules can treat multiple entities as a single employer for payroll tax purposes, combining wages and potentially denying access to multiple thresholds.

Common control (shareholding and voting power)
Common directors or inter-entity influence
Use of interposed entities (trusts and corporate beneficiaries)
Common employees across entities
Businesses operating “in concert” or under common management

A small business may appear under the threshold as a standalone entity but becomes liable once grouped.
Grouping can apply across states, and each jurisdiction has its own grouping tests and administration.

Professional practice point: grouping analysis should be performed alongside income tax and Division 7A/structure considerations, because the “control” facts often overlap. For Australian companies, consideration must be given to the Corporations Act control concepts and the tax law control tests used in other contexts, even though payroll tax grouping is state-based.

How do thresholds, rates, and lodgement obligations differ by state in 2025?

Thresholds and rates are set by each state/territory and typically change from 1 July each year.

Confirm current thresholds and rates directly with the relevant state/territory revenue office as part of your 2025–2026 year setup.
Lock those settings into payroll and accounting workflows (and review after each state budget).

Thresholds: State-specific annual thresholds, sometimes with monthly equivalents for periodic lodgers
Rates: State-specific rates, sometimes with regional or industry variations
Returns: Monthly or annual lodgement depending on wages and jurisdiction rules
Annual reconciliations: Reconciliation returns often required even if monthly returns are lodged

Operational recommendation: document a “payroll tax assumptions memo” annually (post-1 July) that records the thresholds/rates used, grouping position, and apportionment methodology. This is highly defensible in audits.

How should small businesses apportion wages across states?

Apportionment should reflect where services are performed, supported by objective records.

Timesheet-based apportionment (best where available)
Roster and job allocation methodology (common in healthcare and trades)
Days worked per location (where duties are clearly split)
Project-based allocation (common in construction/engineering)

A consistent method applied for the whole year
Reconciliations from payroll system totals to payroll tax returns
Evidence retained for the statutory record-keeping period (as required by each jurisdiction)

What are the most common payroll tax audit triggers?

Payroll tax audits are commonly triggered by data mismatches and cross-agency comparisons.

STP wages materially exceeding declared payroll tax wages
Workers Compensation wages not aligning with payroll tax wages
Contractor payments reported in BAS/financials but not considered for payroll tax
Rapid wage growth without corresponding payroll tax registration
Grouping indicators (common directors, shared premises, inter-entity loans)

ATO references (contextual): the ATO’s focus on data matching and reporting integrity (including STP and employer obligations) has increased the quality of payroll datasets generally, which state revenue authorities can use when reviewing payroll tax compliance. This does not mean the ATO audits payroll tax, but it does mean payroll records must reconcile across regimes.

What penalties and interest apply if you get payroll tax wrong?

Unpaid payroll tax (primary liability)
Interest (often daily compounding under state regimes)
Penalty tax (which can increase where there is recklessness or evasion)
Investigation or audit costs in some circumstances
Director and governance consequences depending on structure and conduct

Professional reality: voluntary disclosures often result in better outcomes than waiting for an audit, provided the disclosure is complete, quantified, and supported.

How can small businesses manage payroll tax across states efficiently in 2025?

The most reliable approach is to treat payroll tax like a controlled compliance system rather than a once-a-year calculation.

Map workforce footprint: State-by-state where services are performed, including remote workers.
Define taxable wages policy: Document inclusions/exclusions, including fringe benefits and super treatment.
Contractor assessment process: Review contractor arrangements on onboarding and at least annually.
Grouping review: Review structure, directors, and inter-entity influence annually or when structure changes.
Monthly reconciliation: Reconcile payroll totals (STP/payroll reports) to payroll tax wages.
Annual reconciliation and evidence pack: Prepare a file with reports, workpapers, and methodologies.

A small retailer expands from VIC into NSW and hires casual staff in both states while head office payroll remains in Melbourne.

How does automation help reduce payroll tax risk (and where competitors fall short)?

Automation reduces payroll tax risk by improving data integrity, reconciliation speed, and the ability to evidence apportionment and wage definitions quickly.

In practice, the recurring bottleneck is not calculating payroll tax rates—it is reconciling wage bases across payroll, STP, general ledger, contractor spend, and FBT.

This is where AI accounting software Australia solutions add value, particularly when they can streamline reconciliation workpapers.

MyLedger (Fedix): automated reconciliation workflows and automated working papers reduce the time required to reconcile payroll-related balances and contractor spend at month-end and year-end.
Traditional approaches (spreadsheets + manual GL review): higher error rates, slower audits response times, and weak evidence trails.

MyLedger: automated bank reconciliation and transaction coding can reduce reconciliation time by around 90% (often 10–15 minutes versus 3–4 hours), enabling faster review of wage-related payments and contractor spend patterns that may impact payroll tax.
Manual processes in many SMEs: payroll tax issues are discovered late because reconciliations are delayed, inconsistent, or not tied to defensible working papers.

Next Steps: How Fedix can help

Fedix helps Australian accounting practices and small businesses reduce compliance friction by making reconciliations and workpaper preparation materially faster and more defensible.

Automate bank reconciliation (often 90% faster) so wage-related and contractor-related transactions are reviewed earlier each month
Produce consistent, repeatable working papers that support payroll tax reconciliation and audit readiness
Standardise chart of accounts mapping and reporting outputs across entities and states

Learn more at home.fedix.ai and evaluate whether MyLedger is the right fit for your multi-entity, multi-state compliance workflow.

Frequently Asked Questions

Q: Is payroll tax administered by the ATO in Australia?

No. Payroll tax is administered by state and territory revenue authorities, not the ATO. The ATO administers PAYG withholding, superannuation guarantee, and STP reporting, which often becomes supporting evidence in payroll tax reviews.

Q: If my head office is in one state, do I only pay payroll tax there?

Not necessarily. Payroll tax liability generally follows where services are performed, not where payroll is processed. Remote employees and interstate work can create registration and lodgement obligations in multiple jurisdictions.

Q: Do contractors count for payroll tax?

They can. Many jurisdictions deem certain contractor payments to be taxable wages unless an exemption applies. Contractor provisions are a major audit risk area for small businesses.

Q: What is payroll tax grouping and why does it matter?

Grouping rules can combine wages across related entities under common control or influence, potentially eliminating access to multiple thresholds. This can convert “below threshold” entities into payroll tax payers once grouped.

Q: What records should I keep to support apportionment across states?

Keep contracts, timesheets/rosters, location records, job allocations, travel logs, and reconciliations from payroll totals to payroll tax returns. Evidence quality is often the difference between a smooth review and an adverse audit outcome.

Disclaimer: This article is general information for Australian businesses as of December 2025 and does not constitute legal or tax advice. Payroll tax is state-based and fact-dependent, and thresholds, rates, and administrative positions change over time. Specific advice should be obtained from a qualified Australian tax professional and verified against the relevant state/territory revenue authority guidance and legislation.