Your per-employee costs change significantly as your business grows, and payroll tax creates a sudden jump most owners don't anticipate. Understanding how employment costs scale with business size helps you budget accurately, plan hiring strategically, and avoid the payroll tax surprise that catches thousands of Australian businesses each year.
The relationship between business size and employment costs isn't linear. Small businesses pay proportionally more per employee due to fixed costs and lack of scale efficiencies. Then payroll tax thresholds create sudden increases that catch many owners unprepared when their total Australian wages cross state-specific thresholds.
Every employee costs significantly more than base salary through mandatory and operational expenses that scale with headcount.
Superannuation adds 12 percent to total compensation for the 2025-26 financial year. For a $70,000 employee, that's $8,400 annually in super contributions calculated on ordinary time earnings and paid quarterly to the employee's nominated fund.
Leave entitlements include annual leave representing 7.7 percent of salary (four weeks annually), sick and personal leave representing 3.8 percent (10 days annually), and long service leave accruing at approximately 1.7 percent annually after qualifying periods. Combined leave entitlements represent approximately 13.2 percent of salary in ongoing liability.
Workers compensation insurance varies by industry and state but typically ranges from 1 to 3 percent of wages for office-based roles according to SafeWork Australia 2026 benchmarking data. Manual labour and high-risk industries pay substantially higher rates of 3 to 8 percent or more.
Payroll tax applies once total Australian wages exceed state thresholds, creating the most significant cost jump as businesses scale. This is covered in detail below as it varies dramatically by state and creates cliff effects at threshold crossings.
Recruitment costs include advertising, screening, interviews, reference checking, and potentially agency fees. These average $15,000 to $25,000 per hire for mid-level positions based on SEEK's 2026 recruitment research.
Equipment and setup covers computer, phone, workspace, and software needed for employee productivity. Initial setup costs $3,000 to $6,000 per office-based employee.
Training and onboarding represents time invested by managers and team members to bring new employees productive. Even experienced hires require 40 to 80 hours of team time during their first month.
Management overhead is ongoing time supervisors and business owners spend managing each employee through direction, feedback, and problem-solving. This averages 3 to 6 hours monthly per employee.
Your first five employees carry the highest overhead percentage because fixed costs aren't yet spread across sufficient headcount to achieve efficiencies.
For a business with three employees averaging $65,000 base salary each, total employment costs break down as follows.
Base salaries: $195,000 annually for three employees.
Mandatory costs include superannuation at 12 percent adding $23,400 annually, leave entitlements at 13.2 percent adding $25,700, and workers compensation at 1 to 3 percent adding $1,950 to $5,850 depending on industry classification.
Operational costs include recruitment amortised at $15,000 to $25,000 annually assuming you hire one person yearly, equipment and software at $2,500 to $4,000 annually for replacements and upgrades, training and development at $2,000 to $4,000 for professional development, and management overhead at $18,000 to $36,000 representing 3 to 6 hours monthly per employee at $100 to $150 per hour management time.
Total employment cost: $283,550 to $318,950 for three employees with $195,000 in base salaries.
Overhead percentage: 45 to 64 percent above base salaries.
Cost per employee: $94,500 to $106,300 each for employees nominally earning $65,000.
This high overhead reflects reality that small businesses bear proportionally more cost per employee than larger organisations through inefficiencies in equipment purchasing, recruitment processes, and management ratios.
Equipment and systems have minimum costs regardless of headcount. Whether you have two employees or five, you need accounting software, file storage, communication tools, and basic IT infrastructure. These costs decrease as percentages when spread across more people.
Recruitment inefficiency means rebuilding hiring processes each time. Larger businesses with regular hiring develop efficient systems and established candidate sources. Your first five hires involve learning that makes each relatively expensive.
Management ratio of one supervisor to three employees is inefficient. As you scale to 10 to 15 employees, that same supervisor manages more people, reducing management cost per employee.
No payroll tax yet is the one advantage at this scale. All states have thresholds between $1 million and $2 million in annual wages before payroll tax applies, so your first 5 to 10 employees avoid this additional cost entirely.
As headcount grows to 6 to 15 employees, per-employee costs decrease as percentage of salary through improved efficiency and spreading fixed costs.
For a business with 12 employees averaging $68,000 base salary, employment costs break down as follows.
Base salaries: $816,000 annually for 12 employees.
Mandatory costs include superannuation at 12 percent adding $97,920, leave entitlements at 13.2 percent adding $107,700, and workers compensation at 1 to 3 percent adding $8,160 to $24,480.
Operational costs include recruitment at $30,000 to $50,000 annually for two to three hires, equipment and software at $6,000 to $10,000 with established systems and volume licencing, training and development at $6,000 to $12,000, and management overhead at $43,200 to $86,400 as supervisors manage multiple people efficiently.
Total employment cost: $1,115,000 to $1,193,000 for 12 employees with $816,000 in base salaries.
Overhead percentage: 37 to 46 percent above base salaries.
Cost per employee: $92,900 to $99,400 each for employees nominally earning $68,000.
Overhead percentage decreased from 45 to 64 percent at smaller scale to 37 to 46 percent, reflecting improved efficiency. Most businesses with 12 employees remain below payroll tax thresholds, though businesses in Victoria or Western Australia with $1 million thresholds might cross into payroll tax territory at this headcount.
Established systems mean not rebuilding processes for each hire. You have proven job descriptions, interview frameworks, onboarding checklists, and equipment standards reducing cost and time of bringing new people aboard.
Volume efficiencies in software licencing, equipment purchasing, and service providers reduce per-employee costs. You negotiate better rates and spread fixed costs across more users.
Management leverage improves as supervisors manage 4 to 6 direct reports rather than 2 to 3. Same management time supports more employees, reducing cost per person.
Reduced owner involvement in daily management as supervisory layer develops means owner time isn't directly consumed by every employee issue.
Once you cross payroll tax thresholds, per-employee costs jump significantly as the tax applies to all wages, not just excess over the threshold.
Each state and territory has different payroll tax settings creating varying impacts.
New South Wales: $1.2 million annual threshold, 5.45 percent tax rate on all wages once threshold exceeded. Monthly threshold is $100,000.
Victoria: $1 million annual threshold (lowest in Australia), 4.85 percent rate. Monthly threshold is $83,333.
Queensland: $1.3 million annual threshold, 4.75 percent rate. Monthly threshold is $108,333.
South Australia: $1.5 million annual threshold, 4.95 percent rate. Monthly threshold is $125,000.
Western Australia: $1 million annual threshold, 5.5 percent rate (highest rate with Victoria's threshold). Monthly threshold is $83,333.
Tasmania: $1.46 million annual threshold, 4.0 percent rate for first $2 million then 6.1 percent. Monthly threshold is $121,667.
Northern Territory: $1.5 million annual threshold, 5.5 percent rate. Monthly threshold is $125,000.
Australian Capital Territory: $2 million annual threshold (highest), 6.85 percent rate (highest rate). Monthly threshold is $166,667.
These thresholds aggregate across all your Australian operations. If you have offices in multiple states with combined wages exceeding a state's threshold, you pay that state's payroll tax on wages earned in that state.
Payroll tax creates a cliff because the tax applies to all wages once you exceed the threshold, not just the excess amount.
Consider an NSW business with 15 employees averaging $75,000, totalling $1.125 million in annual wages. They're $75,000 below the $1.2 million threshold and pay zero payroll tax.
They hire employee 16 at $75,000, bringing total wages to $1.2 million. Suddenly they're above threshold and owe payroll tax on all $1.2 million at 5.45 percent, which equals $65,400 annually.
The decision to hire employee 16 added $65,400 in payroll tax beyond that employee's individual loaded cost. This explains why many businesses experience severe sticker shock when crossing payroll tax thresholds.
For an NSW business with 20 employees averaging $72,000 base salary, employment costs break down as follows.
Base salaries: $1.44 million annually for 20 employees.
Mandatory costs include superannuation at 12 percent adding $172,800, leave entitlements at 13.2 percent adding $190,100, workers compensation at 1 to 3 percent adding $14,400 to $43,200, and payroll tax at 5.45 percent adding $78,500 on all wages including super.
Operational costs include recruitment at $45,000 to $75,000 for three to five hires annually, equipment and software at $8,000 to $14,000, training and development at $10,000 to $18,000, and management overhead at $60,000 to $108,000 as management structure matures.
Total employment cost: $2.023 million to $2.134 million for 20 employees with $1.44 million in base salaries.
Overhead percentage: 40 to 48 percent above base salaries.
Cost per employee: $101,200 to $106,700 each for employees nominally earning $72,000.
Overhead didn't decrease much from the 6 to 15 employee tier despite scale because payroll tax added significant cost. Without payroll tax, overhead would be approximately 34 to 42 percent, but the tax adds 5 to 6 percentage points to total employment cost.
For identical business with 20 employees averaging $72,000 salary, annual employment costs vary by $15,000 to $25,000 depending on state due to different payroll tax settings.
Victoria and Western Australia with $1 million thresholds: Businesses pay payroll tax on full $1.44 million in wages. Victoria at 4.85 percent equals $69,800 annually. Western Australia at 5.5 percent equals $79,200 annually.
New South Wales with $1.2 million threshold and 5.45 percent rate: Payroll tax of $78,500 annually on all wages.
Queensland with $1.3 million threshold and 4.75 percent rate: Payroll tax of $68,400 annually.
South Australia and Northern Territory with $1.5 million thresholds: This business remains below threshold and pays zero payroll tax, saving $68,000 to $79,000 annually compared to Victoria or Western Australia.
Australian Capital Territory with $2 million threshold: Business well below threshold, no payroll tax despite higher rate.
The identical business operating in South Australia saves $68,000 to $79,000 annually compared to operating in Victoria or Western Australia purely due to payroll tax differences. Over a decade, this compounds to $680,000 to $790,000 in savings, providing substantial competitive advantage for labour-intensive businesses.
Smart businesses anticipate crossing payroll tax thresholds and plan accordingly rather than being caught by surprise.
Track total Australian wages monthly and project when you'll approach your state's threshold. Most businesses cross thresholds through combination of headcount growth and wage increases, not single hires.
If you're at $950,000 in annual wages and growing 15 percent annually, you'll cross Victoria's $1 million threshold within months. Build payroll tax cost into financial forecasting now, not when it suddenly appears.
When within $200,000 of your state's threshold, include estimated payroll tax in hiring business cases and financial projections. A hire appearing to cost $95,000 in direct employment expenses actually costs $95,000 plus your payroll tax rate applied to all existing wages once that hire pushes you over threshold.
For a business at $1.15 million in NSW wages, hiring a $90,000 employee pushes total wages to $1.24 million. The hire costs approximately $120,000 in direct loaded cost plus 5.45 percent of $1.24 million in payroll tax ($67,600), for total incremental cost of $187,600. That's more than double the employee's base salary.
If you're close to threshold near year-end, consider whether hiring in January rather than December allows deferring payroll tax by full year. The threshold is annual, so pushing one employee's start date from December to January might save $60,000-plus in current financial year.
This isn't tax avoidance, it's prudent cash flow management when the decision doesn't materially affect business operations.
Some businesses explore using related entities to split wages across structures and stay below thresholds in each. The ATO and state revenue offices have grouping provisions that aggregate wages across related entities for payroll tax purposes.
Genuine separate businesses with different owners and operations can maintain separate payroll tax positions. Artificial structures created purely to avoid payroll tax will be grouped and assessed on combined wages. Consult your accountant before attempting structural approaches.
The 8 to 10 employee threshold typically signals when dedicated finance support becomes valuable for managing employment cost complexity beyond just payroll tax.
At this scale, monthly payroll obligations might include salaries totalling $60,000 to $80,000, superannuation of $7,000 to $10,000, workers compensation premiums of $600 to $2,400, and potentially payroll tax approaching $3,000 to $5,000 monthly once thresholds are crossed.
Managing these obligations accurately while maintaining cash flow requires sophistication that many business owners prefer not to handle personally. This is when embedded finance support or internal bookkeeping staff becomes justified purely from employment cost management complexity.
Employment costs represent one of largest and most complex expense categories for growing businesses. Understanding how these costs scale with business size helps you budget accurately and avoid surprises.
Your first five employees cost 45 to 65 percent more than base salaries through super, leave, workers comp, recruitment, equipment, and management time. Employees 6 through 15 improve to 37 to 46 percent overhead through efficiencies. Once payroll tax applies, overhead returns to 40 to 50 percent depending on your state's rate.
These aren't optional costs you can avoid through clever management. They're reality of employment in Australia set by legislation and operational requirements. Businesses that navigate this successfully budget based on loaded costs from beginning, anticipate threshold impacts before they arrive, and build systems to manage complexity as they scale.
If you're approaching these thresholds or experiencing complexity they create, professional finance support helps ensure compliance, manage cash flow, and optimise employment cost structures within the rules.
At what employee count does payroll tax become an issue?
This depends on average salaries and your state. With $70,000 average salaries, you'll approach thresholds at 14 to 16 employees in Victoria or WA, 17 to 19 employees in NSW or Queensland, and 21 to 22 employees in South Australia or Northern Territory. Monitor total wages, not just headcount.
Can I reduce payroll tax by using contractors instead of employees?
Only if they're genuinely independent contractors under ATO tests. Misclassifying employees as contractors to avoid payroll tax (and super and other entitlements) is illegal and results in back-payment of all obligations plus penalties. State revenue offices actively investigate this.
Do super and other on-costs count toward payroll tax threshold?
The threshold is based on wages paid. Most states include superannuation in the payroll tax base, meaning you pay payroll tax on super you contribute. Workers comp premiums don't count toward threshold. Check your specific state's definition of taxable wages.
How much should I budget for workers compensation insurance?
This varies dramatically by industry. Office workers: 1 to 2 percent. Light manufacturing: 2 to 4 percent. Construction: 5 to 10 percent. High-risk industries: 10 percent-plus. Your industry classification and claims history determine actual rate. Get quotes from multiple insurers.
What happens if I miss payroll tax payments?
State revenue offices charge interest on late payments and can impose penalties. Repeated non-compliance leads to audits of entire payroll records. Once above threshold, lodge and pay on time. It's not optional.
Can payroll tax apply even if I'm below threshold?
Yes, if you're part of group of related businesses. State revenue offices have grouping provisions combining wages across related entities. If your business plus related businesses exceed threshold in aggregate, all members of group have payroll tax obligations.
Should I slow hiring to avoid crossing payroll tax threshold?
Not if hiring serves legitimate business needs. Avoiding payroll tax by constraining growth makes no sense. The tax is 4.75 to 6.85 percent of wages. Limiting growth to save 5 percent on employment costs while missing business opportunities is poor strategy. Plan for the tax, don't avoid the growth.
Revenue NSW. (2026). Payroll Tax Rates, Thresholds and Calculation Guidelines for 2025-26.
State Revenue Office Victoria. (2026). Payroll Tax Information and Compliance Requirements.
Queensland Revenue Office. (2026). Payroll Tax Framework and Employer Obligations.
Revenue SA. (2026). Payroll Tax Administration and Thresholds.
Department of Finance Western Australia. (2026). Payroll Tax Guidelines and Rates.
Fair Work Ombudsman. (2026). Employment Costs Calculator and Entitlements Guide.
Australian Taxation Office. (2026). Superannuation Guarantee Rates and Compliance for 2025-26.
SafeWork Australia. (2026). Workers Compensation Premium Benchmarking by Industry Classification.
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