Staying on top of tax requirements can be one of the trickiest parts of running a business in Australia. If you have employees or make certain types of payments, understanding Pay-As-You-Go (PAYG) Withholding is essential. This system, overseen by the Australian Taxation Office (ATO), helps you manage your tax obligations and support your workers in meeting theirs.
What PAYG Withholding Means for Your Business
PAYG (Pay As You Go) withholding is a core part of the Australian tax system. It requires employers to withhold tax from employee payments, certain contractors, and other workers, then send these amounts to the ATO. This process helps employees and other recipients manage their income tax throughout the financial year, rather than facing a large bill at tax time.
When you pay wages, salary, or allowances, you’re responsible for deducting a set amount-known as PAYG withholding tax-from each payment. The total amount you withhold each pay period depends on factors like your employee’s tax file number, whether they claim the tax free threshold, and if they have any deductions or additional amounts such as bonuses or allowances. Withholding the right amount means your workers are more likely to have the correct tax withheld, making their income tax return process smoother.
PAYG withholding also applies to other payments, including business and investment income, and some payments to contractors under a voluntary agreement. If a supplier doesn’t provide their Australian Business Number (ABN), you may need to withhold tax at a flat rate as well.
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Who Needs to Register and When
If you employ staff, pay contractors under a voluntary agreement, or make payments where an ABN isn’t provided, you must register for PAYG withholding before your first payment. This includes businesses of all sizes, from sole traders to large companies, and even those making household payments to workers like nannies or gardeners.
When you register, you’ll use your Australian Business Number (ABN). If you don’t have an ABN but still need to withhold tax, you can register directly with the ATO. Registration can be done online, through your tax agent, or by contacting the Australian Taxation Office ATO by phone.
It’s important to note that you don’t need to register for PAYG withholding if you’re only taking business profits as a sole trader or partner, as these are not treated as employee payments.
Calculating How Much Tax to Withhold
Getting the withholding amounts right is crucial. The amount of PAYG withholding tax you deduct from each pay depends on several details:
Your employee’s income and wages
Whether they claim the tax free threshold
If they have a study or training loan
Residency status (for example, foreign residents may have different rates)
Any additional amount or deductions they request
To calculate how much tax to withhold, you’ll need a completed tax file number declaration from each worker. The ATO provides online calculators and tax tables to help you work out the correct withholding amounts for regular pay, bonuses, or other payments.
If you pay contractors under a voluntary agreement, the amount you withhold is usually a percentage of their pay, as agreed. For payments where no ABN is provided, you’ll withhold tax at a flat rate set by the ATO.
Reporting and Paying PAYG Withholding
Once you start withholding tax, you need to report and pay these amounts to the ATO. The frequency depends on your business size and the total amount you withhold:
Small businesses (withholding $25,000 or less per year): report and pay quarterly
Medium businesses (withholding $25,001 to $1 million): report and pay monthly
Large businesses (withholding over $1 million): report and pay twice weekly
You’ll report PAYG withholding through your business activity statement (BAS), which includes details like total wages, tax withheld, and other relevant information. The BAS is also where you report PAYG instalments if you’re required to pre-pay income tax on business or investment income.
Single Touch Payroll (STP) has made reporting easier for many employers. Each time you pay your employees, your payroll software sends the wage, PAYG withholding, and superannuation details straight to the ATO. This means you no longer need to issue payment summaries or annual reports for most employees-income statements are now available through their myGov account.
Staying Compliant with PAYG Withholding
It’s important to stay on top of your PAYG withholding obligations to avoid penalties. This means:
Registering before you make your first payment
Withholding the correct amount from each pay
Reporting and paying to the ATO on time
Keeping accurate payroll records, including employee payments, tax withheld, and any additional amounts like bonuses or allowances
If you don’t meet your obligations-such as failing to deduct the right amount, missing deadlines, or not reporting correctly-the ATO may apply penalties. These penalties can’t be claimed as deductions and can add up quickly.
To help you stay compliant, the ATO offers resources and calculators, and your payroll software can automate much of the process. If you need to adjust for things like additional amounts, business and investment income, or payments to foreign residents, it’s a good idea to check the latest guidance from the Australian Taxation Office.
What to Do at the End of the Financial Year
At the end of the financial year, your PAYG withholding responsibilities continue. Thanks to Single Touch Payroll, most employees can access their income statements online, and you won’t need to provide separate payment summaries. You’ll still need to finalize your payroll records, ensure all tax withheld amounts are reported, and check that your business activity statements are up to date.
If you’ve made PAYG instalments on business or investment income, these will be credited when you lodge your income tax return. This helps balance out your tax position for the year.
For contractors, other workers, or payments not covered by STP, you may still need to provide payment summaries and lodge an annual report with the ATO.
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How ACT Tax Group Can Help
Managing PAYG withholding can seem like a lot, especially when you’re focused on growing your business. Our team at ACT Tax Group is here to help you with every step-from registering with the ATO and setting up payroll to calculating withholding amounts and lodging your BAS.
We understand the challenges of staying compliant with the Australian tax system, and our IPA-certified accountants are ready to support you with clear, practical advice. Whether you’re dealing with employee payments, business and investment income, or PAYG instalments, we make the process simple and stress-free.
Conclusion
PAYG withholding is a key part of being an employer in Australia. By understanding your obligations, registering with the ATO, calculating and deducting the right amount of tax, and reporting on time, you’ll support your workers and keep your business on track. If you’re unsure about any part of the process, our approachable team at ACT Tax Group is here to help.
Ready to take the hassle out of PAYG withholding and payroll? Reach out to us today for expert support and peace of mind-so you can focus on what you do best: running your business.
