How Payroll Tax Works: A Guide for Victorian Employers

Payroll tax is a state tax paid by employers once their total wages exceed a set threshold. It isn’t the same as PAYG withholding, which is the federal tax employers withhold from employees’ wages and send to the ATO. In Victoria, the current annual threshold is $1,000,000, with a standard rate of 4.85% on wages above it. This guide covers how it works for a growing Victorian business.

This article contains general information only and isn’t personal tax advice. Every business is different, so speak with a registered tax agent, BAS agent or accountant, or contact the State Revenue Office directly, about your specific situation.

Key takeaways:

• Payroll tax is a state tax on the employer’s total wage bill, not a deduction from employee pay — it’s a completely different obligation to PAYG withholding.
• Victoria’s annual threshold is $1,000,000 (monthly threshold $83,333), effective from 1 July 2025, with a standard rate of 4.85% on wages above it.
• Eligible regional employers pay a reduced rate of 1.2125%.
• Taxable wages include salary, wages, employer super contributions, most allowances, and grossed-up fringe benefits — the definition is broader than “salary” alone.
• Grouping provisions mean related businesses can share a single threshold, which can create liability for a business that looks under-threshold on its own.
• Monthly returns are generally required, with an annual reconciliation due by 21 July each year.

Payroll tax vs PAYG withholding: the difference that trips people up

The single most common confusion around payroll tax is mixing it up with PAYG withholding. PAYG withholding is a federal obligation — tax withheld from an employee’s own wages and forwarded to the ATO on their behalf, reported through STP and the BAS. Payroll tax is a state obligation — a tax the employer itself pays on its total wage bill, administered by the State Revenue Office in Victoria, not the ATO.

They’re reported to different agencies, calculated on different bases, and carried by different parties — a business can have significant PAYG withholding obligations and still owe no payroll tax at all, if its total wage bill sits under the threshold.

What payroll tax is

Payroll tax is a self-assessed state tax charged on the value of wages paid by an employer above a tax-free threshold. Every state and territory in Australia has its own payroll tax legislation, threshold and rate — this guide focuses on Victoria, since thresholds and rates differ meaningfully between states.

Most small businesses never pay this tax. It only becomes relevant once a business’s total Victorian (or Australian, for grouping and threshold purposes) wage bill exceeds the threshold. For many businesses with only a handful of employees, payroll tax never comes into play.

Victoria’s threshold and rate

From 1 July 2025, Victoria’s payroll tax-free threshold is $1,000,000 annually ($83,333 monthly), up from $900,000 the previous year. The standard rate on wages above the threshold is 4.85%. Businesses that qualify as eligible regional employers pay a reduced rate of 1.2125% instead — broadly half the standard rate — recognising that regional Victorian businesses operate under different cost pressures to metropolitan ones.

The threshold phases out for larger wage bills, meaning the full deduction isn’t available once a business’s wages reach a certain level above the threshold. In practice, this means very large employers end up paying payroll tax on almost their entire wage bill, not just the amount above $1,000,000.

What counts as taxable wages

The definition of wages for payroll tax purposes is deliberately broad. It includes salary and wages, most allowances, employer-funded superannuation contributions (calculated on a before-income-tax basis), the grossed-up taxable value of fringe benefits, and some termination payments. In some circumstances, payments to contractors are also captured — covered in more detail below.

It’s easy to assume payroll tax wages are the same figures you see reported through STP or on a payslip. In reality, they’re often different, because superannuation and fringe benefits both add to the payroll tax wage bill in ways that don’t necessarily show up as an obvious dollar figure on an individual pay run.

Registering for payroll tax in Victoria

A business needs to register once its wages exceed the applicable threshold. That might happen gradually as the business grows, or suddenly after a large hire, a business acquisition, or being grouped with a related entity that pushes the combined wage bill over the line. Registration is done directly through the State Revenue Office, and it’s the employer’s responsibility to monitor its own wage bill and register once it becomes liable, instead of waiting to be contacted.

A business that’s been steadily hiring — a hospitality operator that opens a second venue, for instance — can cross the threshold mid-year without a single dramatic trigger. It’s the cumulative wage bill across the group, not any one hiring decision, that determines when registration becomes necessary.

Monthly returns and annual reconciliation

Once registered, payroll tax is generally paid through monthly returns, due by the 7th of the following month, unless the business has been approved to pay annually instead. Annual payment is generally only available where the expected payroll tax liability is relatively small.

Regardless of the payment frequency during the year, an annual reconciliation is due by 21 July each year. It compares actual annual wages against the annual threshold and settles any difference between what’s been paid monthly and what’s actually owed for the full year — worth diarising alongside the rest of your EOFY checklist.

Grouping provisions: why related businesses can be treated as one employer

Victoria’s grouping provisions treat related businesses — those sharing common ownership, control, or the use of employees between entities — as a single group for payroll tax purposes. A group shares one threshold between its members instead of each business getting its own, and only one nominated member (the designated group employer) can claim the deduction on the group’s behalf.

A business that appears small can end up with an unexpected liability here. A business owner running a café under one company and a small property investment through a related trust, with staff technically employed by different entities but under common control, may find both wage bills combined for grouping purposes, even though neither entity looks close to the threshold in isolation.

Contractor payments and payroll tax

Payments to contractors aren’t automatically exempt from payroll tax. Under Victoria’s contractor provisions, some contractor payments are treated as taxable wages unless an exemption applies. Even if the contractor operates through their own company, trust or partnership, or works as a sole trader, payroll tax can still apply. Where the contractor also supplies materials or equipment, part of the payment may be excluded, based on approved rates for different classes of contract.

This is a complex area. Engaging contractors instead of employees doesn’t automatically remove payroll tax exposure, even though some businesses assume it does — the contractor provisions exist specifically to address that assumption.

The Mental Health and Wellbeing Surcharge

Since 1 January 2022, larger Victorian employers also pay a Mental Health and Wellbeing Surcharge on top of standard payroll tax: an additional 0.5% on Victorian taxable wages above an annual threshold of $10 million, and a further 0.5% on wages above $100 million. This surcharge only affects large employers — it isn’t something most small or medium-sized businesses need to worry about, but it’s worth knowing about if a business is scaling toward that level of wage bill.

Common payroll tax mistakes growing businesses make

• Not monitoring the wage bill as the business grows, and only discovering a liability after the threshold has already been crossed for several months.
• Excluding superannuation or fringe benefits when estimating whether the business is near the threshold.
• Missing a grouping relationship with a related company, trust or partnership under common control.
• Assuming all contractor payments sit outside payroll tax, without checking the relevant contract provisions.
• Leaving the annual reconciliation until 21 July, without having tracked the position through the year via monthly returns.

What happens if you get it wrong

Underpaying or failing to register for payroll tax when required can lead to interest and penalty tax being applied to the shortfall, assessed once the State Revenue Office identifies the underpayment — which can happen well after the event, particularly through data-matching with other government wage information. Correcting a payroll tax underpayment generally means going back to work out the correct position from when the liability first arose, not just from when the mistake was noticed.

How other states differ

Every state and territory sets its own payroll tax threshold, rate and specific exemptions, so a business with employees interstate needs to check the rules in each relevant state instead of assuming Victoria’s figures apply elsewhere. If your business has a real presence in more than one state, confirm your interstate wage apportionment and registration position with each relevant state revenue office directly — getting this wrong across multiple jurisdictions compounds the correction work involved.

Getting help

If you’re not sure whether your business is approaching the payroll tax threshold, or a recent restructure or acquisition might have created a grouping relationship you haven’t accounted for, our bookkeeping services and BAS services pages cover the ongoing compliance support we provide Melbourne small businesses. If payroll processing itself needs attention first, our guide on reducing payroll errors is a useful starting point.

Official resources

• Understanding payroll tax — State Revenue Office Victoria
• Threshold and phase-out rate — State Revenue Office Victoria
• Understanding wages — State Revenue Office Victoria
• Grouping — State Revenue Office Victoria
• Contractors — State Revenue Office Victoria
• Mental health and wellbeing surcharge — State Revenue Office Victoria
• Payroll tax — State Revenue Office Victoria