Employers have a legal responsibility to uphold a safe working environment for every employee. Although, what happens in the unlikely event that the standard slips or an unprecedented occurrence results in an injury? If the unforeseen injury takes an employee out of work then the employer is still obligated to pay that worker and that payment period will make up ‘workers compensation.’ Workers compensation can be a complex topic for employers and employees to understand, as there is an intersection of WorkSafe legislation, insurance providers and the Australian Taxation Office. 

Our i3Group payroll professionals work with clients to establish and honour a number of employment policies that are legally mandated. Here is how workers compensation is processed within your business and whether that is subject to payroll tax.

Workers compensation payroll definition

Workers compensation is a type of insurance payment that is extended to employees who injure themselves while at work or develop a sickness as a result of that work. These payments are made by the employer and insurance provider. They will not only cover the wages of work missed but will also cover medical expenses that have come as a result of that incident, forfeiting the employees right to sue the employer. 

Consider an example of an employee who has fallen off a ladder that was known to be faulty by the employer and not replaced. This employee would be paid for the period they are recovering (at their rate of pay) before safely returning back to work. Doctor, hospital, medication and any rehabilitation costs following treatment will also be paid. The employee would not pay for expenses related to the injury and would return to work when safe to do so.

Do you pay payroll tax on workers compensation?

Payments made by an employer or insurer as part of a workers compensation policy are exempt from payroll tax. This means that employees are not taxed for the wages paid during their period of incapacitation. As for whether or not you pay payroll tax on workers compensation that has been received as a lump sum for pain and suffering – this is not withheld from tax. 

For employers, it can be a bit more complicated, so The Australian Taxation Office clearly stipulates that tax withholding applies when:

  • Weekly payments (compensation) are made from the employer to the injured employee
  • Weekly payments are made to the injured employee’s spouse (in the event they take on carer responsibilities)
  • Weekly payments (compensation) are made by the insurer to the injured employee under a claim held by the employer
  • Lump-sum payment made to the injured employee for 4 weeks (set by the insurers or legislators rate)

If you require more clarity around the difference between payroll and compensation, speak with our i3Group payroll professionals.

Payroll compensation and benefits

Payroll compensation and benefits will vary slightly as each state in Australia will have its own worker’s compensation policy. In saying that, WorkSafe will be the entity that holds accurate policies and news pertaining to your state or industry. In addition to state-based policies, there are blanket Commonwealth workers compensation policies that serve specific professions (military, seafarers, etc). If your occupation falls under one such policy, understand what your entitlements are.

Sole traders and contract workers should also seek further information and self-insure to protect their interests, as they will not fall under a typical employment contract and will not always be entitled to the same benefits and cover. Of course, this will vary depending on the nature of the work.

Whose responsibility is managing payroll compensation and benefits?

SafeWork recommends that discussions pertaining to workers compensation should be collaborative, with all stakeholders involved. Given that the injured employee will not be at the place of work, or might not be able to communicate frequently, employers should communicate over the phone with an accompanying letter to address any decisions and changes to the worker’s compensation and employment terms. This record protects both employee and employer. The payroll department and Human Resources often work closely with the chosen insurer and SafeWork to best meet the legislative obligations.

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i3Group work closely with clients to make sure that the right processes are in place and being followed, according to the Australian Taxation Office. Our payroll professionals manage the entire payroll function of some organisations or are tasked with specific payroll tasks outside of the scope of internal payroll teams.

If you would like to learn more about how i3Group could assist with your operation, you can contact us online or see what our services cover on our website.