Q&A: What is PAYG withholding?

If you’re running a business in Australia, or thinking of doing so, you've likely wondered, 'What is PAYG withholding?' In short, it's something that you can't just ignore. It’s an integral part of the tax system that every employer has to get right to comply with Australian Taxation Office (ATO) regulations.

Pay As You Go (PAYG) withholding is the process where businesses take out a portion of tax from payments made to employees (and occasionally contractors) and send it off to the ATO on their behalf.

In this simple guide, we define PAYG withholding, explain why it matters, and share what employers need to know to stay compliant.

All information contained in this article is accurate as of 16.10.2024. For the most up-to-date information, please refer to the Australian Taxation Office.

What is PAYG withholding?

PAYG withholding is a system that ensures businesses collect income tax from employees regularly throughout the year, rather than waiting until tax time at the end of the financial year. It involves withholding a portion of an employee's wages or salary when you pay them and sending it directly to the ATO.

If you have employees, there's a legal requirement for you to undertake PAYG withholding. Generally, you don't have to undertake PAYG withholding for the contractors you pay, unless they don't provide an Australian Business Number (ABN), or they've agreed to a voluntary withholding arrangement, in which case you do. Failure to comply can result in penalties.

PAYG withholding affects everyone involved. For employers, it’s about meeting tax obligations. For employees and some contractors, it ensures their income tax is being taken care of regularly, so they don’t end up with an unmanageable income tax bill at the end of the financial year.

Pay As You Go withholding keeps things running smoothly for both businesses and employees. Ultimately, it’s a system designed to make tax payments easier for everyone.

PAYG withholding obligations for employers

As an employer, understanding your PAYG withholding obligations is key to staying compliant. Here’s a brief overview of what you need to do:

1. Calculate the tax

First, you need to calculate how much tax to withhold from your employees' pay using the ATO’s tax tables or payroll software that automatically calculates it. These tools factor in details like the employee's wages, salaries, bonuses, applicable allowances, and whether they’ve claimed the tax-free threshold on their tax file number (TFN) declaration. The ATO offers specific tax tables for various situations, such as when employees receive lump-sum payments or fail to provide a TFN/ABN.

2. Withhold tax from payments

Once you calculate the tax, you deduct the correct amount from each payment to your employees (and some contractors, like those who fail to provide an ABN or enter a voluntary PAYG withholding agreement). After withholding the tax, you set the amount aside to pay to the ATO on behalf of the employee.

3. Report and pay to the ATO

You report the total PAYG withholding when you lodge your Business Activity Statement (BAS), either quarterly or monthly, depending on your business size. At the same time, you pay the withheld tax to the ATO. Using Single Touch Payroll (STP) simplifies this process by automatically reporting much of the necessary information each time you run payroll, helping you stay compliant and avoid penalties.

4. Complete end-of-year reporting

With STP, most of the reporting happens automatically throughout the year, as you continuously report employee payments and PAYG withholding to the ATO in real time with each pay run. At the end of the financial year, you simply finalise your STP data by confirming that you've accurately reported all payments for the year. Once you complete this step, employees can access their Income Statements via their myGov accounts, which replaces the old PAYG payment summaries.

In some cases, such as for contractors under voluntary agreements, you may still need to provide a traditional PAYG payment summary statement. It’s always best to check if this applies to your specific business setup.

How to register for PAYG withholding

If you’re a new business or hiring employees for the first time, you need to register for PAYG withholding. To do this, log into the Australian Business Register (ABR) using your Australian Business Number. Once logged in, select the option to update your ABN details and follow the prompts to add PAYG withholding. You can also register for PAYG withholding through your accountant or tax adviser.

Take the stress out of PAYG withholding with Rippling

Complying with PAYG withholding requirements can be complex, but Rippling’s payroll software simplifies the process, from calculating tax withholdings to submitting real-time reports to the ATO via STP. Built on a unified record of employee data, Rippling ensures that your payroll stays accurate and compliant by automatically factoring in wages, bonuses, allowances, and other employee information.

With all your employee data in one place, Rippling simplifies payroll and tax reporting, reducing errors and ensuring compliance. Plus, you can easily manage PAYG withholding for both employees and contractors in the same system, helping you stay on top of tax obligations and avoid penalties.

PAYG withholding FAQs

What is the PAYG withholding rate in Australia?

If the recipient fails to provide a TFN or an ABN, you must withhold tax at a rate of 47% under the PAYG withholding system.

Do I need to make PAYG instalments for my business?

If your business earns business and investment income, you may need to make PAYG instalments. PAYG instalments are regular prepayments of the tax on that income, which help smooth out your tax liabilities throughout the year. 

This works similarly to PAYG withholding for employees, ensuring that you're keeping up with your tax obligations as you earn the income, rather than facing a large lump-sum payment when it's time to file your income tax return.

Is PAYG withholding compulsory?

Yes, PAYG withholding is compulsory for businesses with employees in Australia. You must withhold a portion of your employees' pay and send it to the ATO, or potentially face financial penalties and legal repercussions. 

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.