Payroll Tax vs Income Tax: What’s the Difference in Australia?

If you’ve ever stared at a payslip or a business tax notice and wondered why these seem to be two different taxes on wages, you’re not alone.

Payroll tax vs income tax is one of the most common points of confusion for Australian employers and employees alike. Both taxes are tied to wages, both show up around payday, and both are enforced by tax authorities.

However, they’re completely different taxes, collected by different levels of government, from different parties, for different purposes. Confusing the two can lead to payroll errors, missed registration requirements, or misunderstandings about what’s being deducted from your pay.

In this guide, we’ll explain the difference between payroll tax and income tax, who pays each tax, and how PAYG withholding fits into the picture.

The Core Difference Between Payroll Tax and Income Tax

The simplest way to understand the difference is this:

Income tax is a federal tax paid by individuals (and companies) on the income they earn. It’s collected by the Australian Taxation Office (ATO) and applies to salary, wages, business profits, investment income and more. For employees, income tax is withheld from each pay by their employer.

Payroll tax is a state or territory tax paid by employers on the total wages they pay their employees. There is no federal payroll tax in Australia. Each state and territory sets its own payroll tax threshold and rate.

Although both taxes are linked to wages, they apply to different people and serve different purposes.

The key distinction is simple:

• Income tax taxes what an individual earns.
• Payroll tax taxes what an employer pays in wages.

Who Pays Each Type of Tax?

This is where the difference becomes much clearer.

Income Tax

Income tax is paid by the individual employee.

For the 2026–27 financial year, Australian resident tax rates are:

• $0 – $18,200: No tax
• $18,201 – $45,000: 15%
• $45,001 – $135,000: 30%
• $135,001 – $190,000: 37%
• Above $190,000: 45%

Most Australian residents also pay a 2% Medicare levy.

Your employer does not pay this tax for you. Instead, they withhold the estimated amount from your wages through PAYG withholding and send it to the ATO.

Payroll Tax

Payroll tax is paid entirely by the employer.

It is:

• Not deducted from employees’ wages
• Paid using the employer’s own funds
• Only payable once a business exceeds the payroll tax threshold in its state or territory

Small businesses that remain below the relevant threshold generally do not pay payroll tax.

Payroll Tax Thresholds and Employer Obligations

Payroll tax thresholds and rates differ between states and territories.

Approximate thresholds for the 2025–26 and 2026–27 financial years include:

• NSW: $1.2 million threshold, 5.45% rate
• Victoria: $1 million threshold (with tapering for larger regional and metropolitan employers), around 4.85%, with a 1.2125% rate available for eligible regional employers
• Queensland: $1.3 million threshold, 4.75% (increasing to 4.95% for larger wage bills)
• Western Australia: Around 5.5%
• South Australia: Sliding scale up to 4.95%

Payroll tax is generally calculated on more than just salaries. Taxable wages may also include:

• Superannuation
• Bonuses
• Allowances
• Certain contractor payments

Because of this, some growing businesses exceed the payroll tax threshold sooner than expected.

Example

A Sydney marketing agency employs 15 staff earning approximately $90,000 each, plus 12% superannuation.

Its total taxable wages are approximately $1.512 million annually.

Since this exceeds the NSW payroll tax threshold of $1.2 million, payroll tax applies to the $312,000 above the threshold.

At 5.45%, the business pays roughly $17,000 in payroll tax each year.

This cost is paid entirely by the employer and is not deducted from employees’ wages.

Businesses expecting to exceed the threshold should:

• Register with their state revenue office
• Lodge payroll tax returns
• Complete annual reconciliations

Failing to register on time may result in penalties and interest.

PAYG Withholding vs Payroll Tax: Don’t Mix These Up

One of the biggest misconceptions is that PAYG withholding and payroll tax are the same thing.

They’re not.

PAYG withholding is simply the system employers use to collect employees’ income tax throughout the year.

Employers:

• Deduct tax from employees’ wages
• Send those amounts to the ATO
• Report the payments through Single Touch Payroll (STP)

The withheld money belongs to the employee’s income tax liability.

Payroll tax is completely separate.

It:

• Is paid by the employer
• Goes to the relevant state or territory revenue office
• Is based on the employer’s total taxable wages
• Has nothing to do with an employee’s personal tax return

Using the earlier example:

The Sydney agency:

• Withholds PAYG tax from employees’ wages and pays it to the ATO.
• Separately pays payroll tax from its own funds to the NSW revenue office.

These are two entirely different taxes applied to the same wage bill.

Why This Distinction Matters

Understanding the difference helps avoid costly mistakes.

Employees sometimes believe their employer is paying tax twice.

Business owners sometimes assume PAYG withholding satisfies their payroll tax obligations and fail to register when required.

Knowing how PAYG withholding and payroll tax work helps businesses:

• Stay compliant
• Avoid penalties
• Report payroll correctly
• Meet both federal and state tax obligations

Final Thoughts

The difference between payroll tax and income tax comes down to who pays it.

Income tax is paid by employees on the income they earn and is withheld by employers through PAYG before being sent to the ATO.

Payroll tax is a separate state-based tax paid by employers when their total taxable wages exceed the relevant threshold. It is an additional business expense and is never deducted from employees’ pay.

Whether you’re an employer or an employee, understanding the distinction can help you avoid confusion and stay compliant with Australian tax obligations.

If you need help understanding Australian payroll tax, PAYG obligations or income tax compliance, Clear Tax can help you navigate complex tax rules and ensure your business remains fully compliant.

FAQs

Is payroll tax the same as income tax?

No. Payroll tax is paid by employers whose total wages exceed the relevant state or territory threshold. Income tax is paid by individuals on their taxable income.

Who pays payroll tax in Australia?

Payroll tax is paid by employers once their total taxable wages exceed the payroll tax threshold in their state or territory.

Does payroll tax affect employees?

No. Payroll tax is not deducted from employees’ wages. Employees pay income tax, which employers withhold through PAYG and remit to the ATO.