Understanding the Relationship between Car Use and Payroll Tax

Every business owner, especially one that has had issues with tax authorities in the past, knows that special attention needs to be paid to payroll tax. Failure in that regard could attract imposition of fines on a defaulting business. Now several factors could determine how much your business will have to pay in payroll tax – one of which is the use of motor vehicles in or for your business. The aim here is to show how car use can affect how much you part with in payroll taxes.

What is Payroll Tax?

Let’s start by defining more clearly what payroll tax is. This refers to a general purpose tax which is assessed on wages or salaries paid or payable to employees by their employers. In other words, payroll taxes are based on salaries you pay to your employees or staff. These taxes are usually classed into two. The first category is that of taxes withheld by employers from the wages or salaries of their employers, commonly known as a pay-as-you-earn (PAYE) or pay-as-you-go (PAYG) tax. The second tax variant is paid from the funds of an employer and its size may be connected to the wage bill of employees.

tax on payroll

Payroll Tax and Car Use

The use of motor vehicles in your business could affect the amount payable in payroll taxes. We examine a couple of scenarios below to get a better understanding of how this can be.

Providing company car for employee’s private use

It is possible for an employer to make a car he owns or leases available to an employee for private use. When you take such an action, you are assumed to have provided car fringe benefit to that employee of yours. A fringe benefit is viewed in the same light as wages or salaries. This is because such a benefit is provided only because the beneficiary works for you or has done so in the past. The private use of your company’s car by an employee, therefore, is taxable since you are assumed to be providing extra income to the employee in another form.

Use of employee’s car for business purposes

Another scenario that could play up with regards to car use and how it affects payroll tax is when your employees use their private cars for work purposes. In this case, you may pay such employees allowances to cover the use of their private motor vehicles for your business. Allowances paid to employees are typically subject to payroll tax. However, all or part of the allowance paid for the use of an employee’s car for your business purposes may be exempted from payroll tax. The amount of payroll exemption will be determined based on the number of kilometres an employee has used his car for your business during a period. In Queensland, for example, the exemption amount per kilometre is $0.77 for the 2014-15 financial year.

It is the relationships such as that between car use and payroll tax that makes the use of a payroll service provider advisable. The information provided should give you an idea of the intricacies involved in payroll management. This justifies seeking the help of a professional to avoid running into issues with tax authorities.