PAYG Withholding: What Employers Need to Know

What Is PAYG Withholding?

Pay As You Go (PAYG) withholding is the system by which employers withhold tax from payments made to employees, contractors (in certain circumstances), and other payees, and remit that tax to the Australian Taxation Office (ATO).

Think of it as collecting income tax on behalf of your employees and sending it to the ATO throughout the year, rather than the employee paying a lump sum at tax time.

When Do You Need to Withhold?

You must register for PAYG withholding and withhold amounts from:

Employee wages and salaries - This is the most common scenario. Every time you pay an employee, you withhold tax based on their earnings and tax file number (TFN) declaration.

Directors' fees - Payments to company directors are subject to PAYG withholding.

Payments to contractors without an ABN - If a contractor does not provide an ABN, you must withhold 47% from their payment.

Voluntary agreements - You and a contractor can enter a voluntary agreement where you withhold from their payments.

Labour hire payments - Payments to labour hire firms may require withholding under certain arrangements.

How to Calculate Withholding Amounts

Tax File Number Declarations

Every new employee must complete a TFN declaration (form NAT 3092) before or when they start work. This tells you:

• Their TFN (or that they have applied for one, or are claiming an exemption)
• Whether to apply the tax-free threshold
• Whether they want to claim HELP/HECS debt, SFSS, or other offsets

If an employee does not provide a TFN within 28 days, you must withhold at the top marginal rate (currently 47% plus Medicare levy).

Using the Tax Tables

The ATO publishes withholding tax tables that tell you exactly how much to withhold based on:

• The employee's gross pay for the period
• Their pay frequency (weekly, fortnightly, monthly)
• Whether they claim the tax-free threshold
• Whether they have a HELP/HECS debt

Most payroll software calculates withholding automatically using these tables. If you are doing it manually, use the ATO's online tax withheld calculator.

Common Scenarios

Full-time employee claiming the tax-free threshold on a fortnightly pay cycle - use the standard fortnightly tax table.

Part-time employee - same process as full-time, just with lower gross amounts.

Casual employee - withhold based on the gross payment for that pay period. Casuals can claim the tax-free threshold if they are not claiming it elsewhere.

Employee with HECS-HELP debt - withhold an additional amount based on the HELP repayment income thresholds.

Employee with no TFN - withhold at 47% plus Medicare levy from every dollar (no tax-free threshold).

Reporting Through Single Touch Payroll (STP)

Since July 2019, all employers must report payroll information to the ATO through STP each time they run payroll. This includes:

• Gross wages
• PAYG withholding amounts
• Superannuation information
• Allowances, deductions, and other details

STP replaces the old payment summary system. Employees can view their year-to-date pay and tax information through myGov.

Your payroll software handles STP reporting automatically. When you finalise a pay run, the software transmits the data to the ATO.

Remitting Withheld Amounts

You report and pay your PAYG withholding obligations through your Business Activity Statement (BAS).

Reporting on BAS

The PAYG withholding amount appears at label W1 (total salary, wages, and other payments) and W2 (amount withheld) on your BAS.

Payment Frequency

• Quarterly - Most small businesses report and pay PAYG withholding quarterly on their BAS
• Monthly - Required if you withhold more than $25,000 per month, or if directed by the ATO

Due Dates

Quarterly BAS due dates:

• Q1 (July-September): 28 October
• Q2 (October-December): 28 February
• Q3 (January-March): 28 April
• Q4 (April-June): 28 July

Monthly BAS is due on the 21st of the following month.

Year-End Finalisation

At the end of the financial year (or when an employee leaves), you must finalise your STP data. This is called an STP finalisation event and must be completed by 14 July.

Finalisation confirms the year-to-date figures and makes the information available to the employee (through myGov) for their tax return. It replaces the old payment summary that employers used to provide.

Common Withholding Mistakes

Not registering for PAYG withholding - You must register before making your first payment to an employee. Register through the ATO's business portal or when you register for an ABN.

Using the wrong tax tables - Ensure your payroll software is using the current year's tax tables. The ATO updates them each financial year.

Not withholding from contractors without an ABN - If a contractor cannot produce a valid ABN, withhold 47%. No exceptions.

Forgetting HECS-HELP - If an employee has ticked the HELP box on their TFN declaration, you must withhold the additional HELP amount.

Late payment - PAYG withholding must be remitted by the BAS due date. Late payment attracts the general interest charge, and persistent late payment can result in director penalty notices.

Not finalising STP - Failure to finalise STP by 14 July can result in penalties and delays in employee tax returns.

Practical Tips

1. Use payroll software - Manual calculations are error-prone. Software handles tax tables, STP reporting, and super calculations automatically.
2. Process payroll on a regular schedule - Consistent pay cycles reduce errors and help cash flow planning.
3. Reconcile your payroll to your BAS - Before lodging your BAS, verify that the PAYG withholding amount matches your payroll records.
4. Keep TFN declarations on file - Store them securely for the required retention period (five years after they are no longer in use).
5. Set aside funds - The money you withhold is not yours. Set it aside in a separate account so it is available when the BAS is due.
6. Use SortBooks to keep your expense transactions correctly categorised, freeing you to focus on payroll accuracy.

PAYG withholding is a fundamental employer obligation. Get the setup right, use reliable payroll software, and stay on top of your reporting deadlines.