Most owners believe payroll tax is a tax on employees. The legislation disagrees: under the relevant contract provisions, harmonised across the states, payments to contractors are deemed wages and taxed accordingly unless one of a short list of exemptions applies, and the burden of fitting an exemption sits with the business, per contractor, per year, on evidence. A business with $1 million of employee wages and $600,000 of regular contractor spend is not a sub-threshold employer in NSW. It is very likely a $1.6 million payroll taxpayer that has not registered yet, with roughly $21,800 of annual tax on the excess over a $1.2 million threshold at 5.45%. This guide covers how the deeming works, each exemption and its traps, the all-or-nothing 90-day rule that catches more SMEs than any other, and worked examples that show where the lines actually fall. It is general information only, not tax advice.
Published: July 2026
The provisions start from a wide net: a relevant contract is, broadly, any arrangement under which a business is supplied with services in the course of its business. Payments under relevant contracts, to sole traders, partnerships, trusts or companies alike, are deemed wages of the business, and the contractor is deemed an employee, for payroll tax purposes only. Corporate structure that shelters an arrangement from superannuation’s mainly-labour rules does nothing here: the payroll tax net is drafted wider on purpose, and the interposed company is caught unless an exemption saves it.
From that starting point, the architecture inverts the usual compliance logic. The question is never “is this person really a contractor?” Their contractor status can be entirely genuine, and the deeming still applies. The only question is which exemption applies, and can you prove it? No exemption, and the payments join your wages: pushed against the threshold, taxed at the state rate, aggregated across any payroll tax group, and assessable retrospectively for up to five years when an audit asks the question you did not.
One relieving mechanic before the exemptions: where a caught contract includes materials and equipment, the revenue offices publish approved deduction percentages by contractor type, so a plumber or electrician supplying their own materials has a set portion of the payment excluded and only the deemed labour component taxed. The percentages are published per trade and applied to the contract payments. They soften the result for the trades, and they do nothing for pure-labour service arrangements, which is most consulting, IT, admin and professional contracting.
See also payroll tax Australia, state-by-state payroll tax thresholds, and the payroll tax threshold calculator. For employment characterisation more broadly, use the contractor vs employee cost calculator and contractor versus employee classification checklist.
The harmonised exemptions are specific gates, not vibes, and each carries its own trap.
Every exemption shares one operational feature: it is claimed on facts you must be able to demonstrate, per contractor, per year. The revenue offices audit from your own ledger. Every supplier paid regularly for services is a candidate, and “we assumed they were exempt” is the most expensive sentence in the field.
The embedded IT contractor: caught. A sole trader developer works three days a week, year-round, for a marketing business, invoicing $150,000. Day count: roughly 140 days, so the 90-day gate fails. The business needs development year-round, so 180 days fails. She has one other small client, so services-to-the-public is unpersuasive. She works alone. No exemption. The $150,000 is deemed wages. Added to the business’s $1.1 million of employee wages, the business crosses the NSW threshold it believed it was under, owing roughly $27,000 for the year on the excess, and the same again for each prior year the arrangement ran, plus interest, when the audit arrives.
The 91st day. A CAD drafter serves a manufacturer 85 days one year: exempt, in full. The next year, a rush project takes him to 96 days: every dollar paid that year is deemed wages from day one. Same contractor, same rates, an $11,000 swing in payroll tax created by eleven days nobody was counting.
The two-person crew: exempt. A shopfitting contractor company puts a crew of three on a retailer’s refurbishments through the year. The contractor engages two or more persons to perform the work, the exemption applies, and the payments stay out of the retailer’s payroll tax wages, with the rosters and payroll of the contractor as the evidence.
The trades deduction. A builder pays a plumbing contractor $200,000 across a caught arrangement where the plumber supplies materials. The published deduction for the trade excludes a set percentage for materials, and only the deemed labour balance joins the builder’s taxable wages, a material saving that exists only if someone applies it.
The professional practice pattern. Medical and allied health practices operating service arrangements with practitioners have been the most litigated corner of this field in recent years. The pattern matters well beyond medicine: any structure where a practice collects fees and remits to practitioners under service agreements sits squarely in the provisions’ sights.
The compliance system is four habits.
Layer this over the grouping map: deemed contractor wages aggregate across a group like any other wages, and the annual payroll tax position becomes something you know rather than something an assessment tells you. It is exactly the standing register an embedded finance team maintains, and it costs a fraction of one year’s retrospective assessment.
Do contractor payments really count for payroll tax?
Yes, by default. Under the relevant contract provisions, payments for services are deemed wages unless a specific exemption applies, regardless of the contractor’s ABN, invoicing or corporate structure. The business bears the onus of establishing an exemption per contractor per year.
Does it matter that the contractor is a company?
Not for this tax. The provisions capture payments to sole traders, partnerships, trusts and companies alike, which is deliberately wider than the superannuation rules. An interposed company changes the super analysis, not the payroll tax one.
What is the 90-day exemption and its trap?
Payments to a contractor who provides the services for no more than 90 days in the financial year are exempt, but the exemption is all or nothing: at 91 days, every payment for the year is caught retrospectively, not just the excess, and any part of a day counts as a day. Day tracking per contractor is the control.
What is the difference between the 90-day and 180-day rules?
The 180-day rule tests the business’s need for that type of service across all providers in the year. The 90-day rule tests the individual contractor’s days. A year-round function staffed by rotating short-stint contractors fails the 180-day gate even though each contractor stays under 90.
What does “services provided to the public generally” require?
The Commissioner’s satisfaction that the contractor runs a genuine independent business serving a real spread of clients, evidenced by client mix, advertising and the ordinary indicia of independent practice. Heavy income dependence on one payer is usually fatal to the claim.
Is there any relief where contractors supply materials?
Yes. Revenue offices publish approved deduction percentages by contractor type, excluding a set materials-and-equipment portion from the deemed wages so only the labour component is taxed. The deduction applies only if claimed, which requires knowing the arrangement is caught in the first place.
How far back can we be assessed?
Audits routinely assess up to five years, with interest and penalties, and the audit trail is your own ledger of regular service suppliers. Voluntary review and disclosure lands in a materially better place than discovery.
How does this interact with payroll tax grouping?
Deemed contractor wages aggregate across a payroll tax group exactly like employee wages, so a group of entities each running contractor spend can cross the threshold collectively while every member believes itself under it. The contractor analysis and the grouping map have to be run together.
Are genuine contractors still caught?
Yes. Genuine contractor status under employment law or super rules does not automatically create a payroll tax exemption. Payroll tax has its own exemption gates that must be met on the facts.
Is this tax advice?
No. This is general information. Relevant contract rules and exemptions are technical and state-administered. Confirm your contractor book with a qualified adviser before registering, objecting or restructuring arrangements.
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We review and check this guide periodically. At the time of writing (July 2026), all information was current. Scale Suite is a registered BAS Agent, not a licensed tax advisor or financial advisor. This content is general information only and does not constitute professional tax, financial, or legal advice. Some details may change over time.
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
Employment Hero Gold Partner, CA-qualified, and Xero Certified, we replace fragmented finance and HR processes with one responsive, senior-level function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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