What's Taxation on Employees? (With Definitions of Taxes)

Updated 23 May 2023

Depending on an individual's source of income and business engagement, they can expect to pay varying taxes. If an organisation has employees, it typically withholds tax that employees owe to the Australian Taxation Office (ATO) and pays it on their behalf. By exploring what employee taxation includes, you can find it easier to calculate your take-home pay and can have confidence in your and your employer's compliance with federal and local tax legislation. In this article, we define taxation on employees, list the taxes involved, detail the tax rates and thresholds for payroll tax and answer some frequently asked questions.

What's taxation on employees?

Taxation on employees refers to the separate taxes that an organisation pays for the employment of its workforce. The types of taxes an organisation pays can depend on its operation, employee policies and workforce. The taxes on employees typically include income tax, superannuation, fringe benefits tax and payroll tax. Each tax is unique and covers varying aspects of an employee's engagement in an organisation.

What does taxation on employees involve?

Below, you can explore the typical taxes on employees:

Income tax

Income tax refers to a proportion of an employee's income that they pay to the ATO. The value of this tax increases as an employee's income increases. This tax is technically an expense to the employee, as it represents a portion of their income, but organisations typically withhold this tax and pay it to the ATO on their behalf. For example, if an employee has a tax rate on their income of 30%, the organisation withholds 30% of their earnings. While the employer makes the payment, it's actually the employee who pays the tax.

An organisation typically withholds this value at each wage payment interval. For example, if an employee receives a fortnightly wage at an income tax rate of 30%, each fortnightly payment has a 30% deduction, which contributes to their income tax. Withholding income tax rarely considers rebates and exemptions. This means an organisation typically withholds more tax than the employee is actually required to pay for the year. At the end of a financial year, employees submit a tax refund form to the ATO, which can result in a refund of a portion of the income tax withheld.

Superannuation

Superannuation is essentially a pension fund that individuals may access upon retirement. Employers typically make this contribution to employees' superannuation funds. It's not a traditional tax because the employer is making the superannuation contribution to the employee. However, it's treated as a tax to simplify payment – the employer pays this contribution to the ATO, who processes it into the employee's superannuation fund.

The contributions an organisation pays are a direct proportion of an employee's income before tax. The contribution represents a percentage of an employee's income. This percentage typically fluctuates by minimal amounts, but as of July 2022, the superannuation rate that an employer pays is 10.5%. An organisation pays this rate in addition to its employees' income. For example, if an employee earns $1000 a week, the organisation pays $105 in super contributions. The employee technically receives $1105 a week, though $105 of this wage forms part of their superannuation fund contribution.

Fringe benefits tax

If an organisation offers fringe benefits to its employees, it pays a fringe benefits tax. A fringe benefit is essentially an alternate source of tax-free income for employees. The ATO doesn't consider a fringe benefit part of an employee's income, so the employee doesn't pay tax on it. It's an alternate source of payment that employers and employees agree upon. Employees typically negotiate fringe benefits to lower their taxable income. An employee pays no tax on their benefits, but the employer does.

The fringe benefits tax represents the value of a benefit that the ATO receives if the employee pays the benefit. The employee doesn't pay for their benefit, so the organisation pays instead. For example, an employee agrees to receive a company car at the sacrifice of an agreed value of their income. The employee may receive a lower income, but they receive a car worth a monetary value with no tax obligations. The organisation providing the car pays a fringe benefits tax to compensate for the tax value that the ATO doesn't receive from the employee.

Payroll tax

Some organisations might refer to the collection of the above taxes as payroll taxes, but a payroll tax typically refers to an individual tax. A payroll tax is a levied amount on an organisation's paid or payable wages when the total wage value exceeds a specific threshold. This total value is an accumulation of an employer's or group of employers' payables and paid wages. For example, if an employer pays 10 employees $50,000 in wages each year, the total wages accumulate to $500,000.

The threshold where employers pay a payroll tax varies between states and territories. The payroll tax rate also varies. An organisation in one state might pay the same total wages as an organisation in another state, but one organisation might not be subject to payroll taxes. If both organisations are subject to payroll taxes, the rates they pay might be different. Depending on the state or territory, the threshold and payroll tax rates might apply on a yearly, monthly or weekly basis.

Threshold and rates for payroll tax

If an organisation exceeds a total wages threshold, they pay a percentage of the total wages, which represents the payroll tax rate. Using the statistics below, if an organisation in Western Australia pays $1,500,000 in wages, it pays $97,500 in tax. The following are the threshold amounts and payroll tax rates as of July 2022, as outlined by Payroll Tax Australia:

Australian Capital Territory: Annual threshold of $2,000,000 at a payroll tax rate of 6.85%
New South Wales: Annual threshold of $1,200,000 at a payroll tax rate of 4.85%
Northern Territory: Annual threshold of $1,500,000 at a payroll tax rate of 5.5%
Queensland: Annual threshold of $1,300,000 at a payroll tax rate of 4.75%
South Australia: Annual threshold of $1,500,000 at a payroll tax rate of 4.95%
Tasmania: Annual threshold of $1,250,000 at a payroll tax rate of 4%
Victoria: Annual threshold of $700,000 at a payroll tax rate of 4.85%
Western Australia: Annual threshold of $1,000,000 at a payroll tax rate of 6.5%

Frequently asked questions

Below, you can explore several answers to some frequently asked questions about tax on employees:

What's a TFN?

A tax file number (TFN) is a reference number that represents an individual or organisation's tax account information. The ATO utilises a TFN system as a data matching technique to ensure individuals and organisations pay the correct amount of tax. Employees typically require a TFN, as an organisation requires this number to withhold their part of their income tax and pay it to the ATO. International equivalents of the TFN may include a social security number or national insurance number.

What's PAYG?

Pay As You Go (PAYG) is the name of the system that allows organisations to withhold income tax from their employees. It allows organisations to pay their employees' income tax in instalments, rather than a lump sum at the end of each financial year. Organisations typically require registration with the PAYG system through the Australian Business Register.

Do you withhold employee tax for education debt?

If an employee has an education debt, such as a higher education loan program (HELP), they typically pay this debt when their income reaches a specific threshold. Employees pay this debt to the ATO. If an organisation uses PAYG, they typically consider this debt and withhold an employee's income tax along with their payable education debt. The employee usually outlines this debt when filling employment papers. The employee's TFN may also stipulate their education debt.

Why do the payroll tax rate and threshold vary between states?

The threshold and payroll tax rates are usually different in each state because the local revenue office of those states determines the rate and threshold. A payroll tax is technically a state tax, so it's subject to the state's taxation laws. Each state may have varying taxation requirements depending on several factors, such as the state's policies and economic goals.

What's a salary sacrifice arrangement?

A salary sacrifice arrangement, also known as a salary package or salary remuneration package, is an agreement to receive less income in return for benefits. A fringe benefit is a type of salary sacrifice agreement. Employer contributions to a superannuation fund may also be a salary sacrifice, but only if the contribution is above the super guarantee percentage. This contribution comes from the employee's income, rather than adding to their income. They're essentially sacrificing part of their income to their superannuation fund, which means it's not a taxable source of income.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

What's Taxation on Employees? (With Definitions of Taxes)