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Payroll

PAYG Withholding: What It Means & How To Calculate in Australia

Employers have a role to play in helping their employees meet their end-of-year tax liabilities. When you pay your employees you have to withhold tax and pay it directly to the Australian Taxation Office (ATO) – this is known as ‘pay as you go withholding’ (or PAYG withholding). 


Withholding amounts depend on the employee's salary. You need to collect Pay As You Go (PAYG) Withholding from employees, contractors, and businesses you pay that do not provide you with their Australian Business Number (ABN).


This guide will provide answers for anyone asking: What is PAYG in Australia? Here, we’ll explain Australian taxation regulations, and clarify your obligations as an employer.

Keep reading for answers to these FAQs about PAYG withholding:


  • What does ‘PAYG withholding’ mean in Australia? 
  • What type of income is subject to PAYG withholding?
  • Why do you need to withhold from payments?
  • Do I have to use PAYG withholding?
  • How to calculate PAYG withholding tax?
  • Where to register for PAYG withholding?
  • What payments do you need to withhold amounts from?
  • When do you need to pay and report PAYG withholdings?
  • What are the requirements for annual reporting?
  • How does PAYG withholding work when a worker leaves or retires?
  • Are there exceptions to PAYG withholding obligations? 
  • How do I stay on top of PAYG withholding?


What is PAYG withholding in Australia? 

The PAYG meaning in Australia is ‘pay as you go’ – PAYG withholding is an accumulative tax that employers pay to the Australian Taxation Office (ATO) for businesses on behalf of their employees. 


The simplest way to ensure you meet your obligations is to use Single Touch Payroll (STP), a process that automatically reports to the ATO so you don't have to. You need to ensure all PAYG instalments are up-to-date before you file your income tax return. The purpose of this is to ensure your tax assessment takes all contributions throughout the year into account.

What type of income is subject to PAYG withholding?

In Australia, PAYG withholding applies to a wide range of income types. The most common type is employment income, which includes wages, salaries, bonuses, allowances, and paid leave entitlements. Employers are required to deduct tax from these payments before providing them to employees. 


Beyond employment income, PAYG withholding extends to other payments, such as those made to contractors who have not provided an Australian Business Number (ABN), payments under labour-hire arrangements, and government payments like unemployment benefits or scholarships. It also covers investment-related income, including interest, dividends, and royalties paid to non-residents, as well as certain social security and compensation payments.

Why do you need to withhold from payments?

Your responsibility as an employer is to ensure your employees meet their tax liabilities, and avoid burdening them with a substantial tax obligation at the end of the financial year. PAYG variation is possible, but you need to be certain that your variation is accurate. Otherwise, you may incur penalties. 


You can also complete a PAYG withholding variation application if you need to vary withholdings to avoid a large tax credit or ensure liabilities are met.

Do I have to use PAYG withholding?

You have a legal obligation to withhold tax, if your business makes payments to any of the following:


  • Your employees 
  • Contractors you have voluntary agreements with
  • Businesses that do not provide their ABN to you


To qualify for a claim against the withheld amount, employees or contractors earning below the tax-free threshold must file an individual tax return at the end of the financial year. Before withholding the amount, it is necessary for you to register your business for PAYG withholding.

How to calculate PAYG withholding tax

To calculate PAYG withholding tax, you need to consider the employee’s taxable income, tax-free threshold eligibility, and any additional factors such as allowances or offsets. You can calculate PAYG withholding based on the tax rates tables throughout the year and remit it to the ATO on behalf of your employees, deducting it from their pay. These tax tables, provided by the ATO, outline the amount to withhold for various income levels and account for Medicare Levy and other tax obligations.


Here’s a step-by-step method for calculating PAYG withholding tax:


  • Identify gross income: Determine the employee's gross income for the pay period (weekly, fortnightly, or monthly).
  • Check tax-free threshold: Determine if the employee has claimed the tax-free threshold on their Tax File Number (TFN) Declaration.
  • Use ATO tax tables: Refer to the appropriate PAYG withholding tax table provided by the ATO for the pay frequency, considering Medicare Levy and other applicable adjustments.
  • Apply allowances or offsets: Factor in additional allowances, deductions, or offsets (e.g., student loan repayments or tax offsets).
  • Calculate withholding: Deduct the withholding amount from the gross income to determine the employee's net pay.


An easy way to do this is to use QuickBooks Accounting Software to automate this process – saving you time and helping to maintain accuracy.

Where to register for PAYG withholding?

You can register for PAYG withholding on the ATO website. While you register for PAYG withholding, you can also register for other taxation services. You can also register through your tax agent. 


If you close your business or no longer employ people, you need to cancel your registration for PAYG withholding. This is not the same as the state payroll tax. You may also want to cancel your ABN registration. 


Before you move forward with either of those actions, ensure any outstanding activity statements are filed, and that you have met all requirements. You can use the ATO website to cancel your PAYG withholding registration or do so through your tax agent. 


Once registered, you need to lodge activity statements and the withheld amounts to the ATO. You also need to provide all employees and paid parties with a payment summary by July 14 each year. The ATO should receive your annual payment summary report by August 14. 

If you use STP, then you do not need to provide payees with payment summaries or send the annual report to the ATO. As long as the amounts have been reported and finalised through STP, this is handled automatically. 



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What payments do you need to withhold amounts from?

You need to withhold amounts from payments made to directors, employees, contractors, and businesses that have not provided their ABN. These withheld amounts form part of your PAYG withholding payable, which must be remitted to the ATO. Businesses without an ABN should provide you with a withholding payer number.


As a sole trader, you typically do not have PAYG payable obligations because you are not making payments classified as wages. Similarly, a business operating as a partnership is generally not required to handle PAYG withholdings payable, as it does not involve payments to employees.

When do you need to pay and report PAYG withholdings?

The ATO requires businesses to pay and report PAYG withholding based on their withholding amounts. The following table outlines the reporting and payment frequency based on the size of the withholder:

Size of WithholdersAmountPayment & Reporting Frequency
Small WithholdersWithholds $25,000 or less annuallyPay and report quarterly
Medium WithholdersWithholds $25,001-$1 million annuallyPay and report monthly
Large WithholdersWithheld more than $1 million in the previous financial yearPay and report twice weekly

Annual Reporting

With the introduction of mandatory Single Touch Payroll (STP), employers are required to send detailed reporting to the ATO throughout the financial year. At the end of the financial year, gross wages and PAYG withholding amounts must be finalised and submitted via accounting or payroll software. This finalisation ensures that employee income statements are accurate and ready for their tax returns.


It is crucial that the information in the finalisation report is 100% accurate, with gross wages and PAYG withholding matching the payments made to employees throughout the year. Employers must ensure that all figures reconcile correctly to avoid discrepancies. This finalisation report must be submitted to the ATO no later than 14th July each year to meet compliance requirements.

PAYG withholding when a worker leaves or retires

When an employee leaves your business or retires, you need to: 


  • Make final withholding payments 
  • Send the employee a payment summary and complete the Employment Termination Payment ETP form
  • Ensure that the payment summary is sent to the employee no later than 14th July
  • Keep their TFN declaration on file until the end of the following financial year
  • Keep financial records of employment in your PAYG payment summary statement


You should always keep records of employment for at least 5 years and follow the same process if a contractor, or business, ceases working with you. 


*You might have obligations regarding superannuation and Fringe Benefits Tax (FBT).



Exceptions to PAYG withholding obligations 

Here are exceptions to obligations:


  • Sole traders or partnerships drawing amounts from their business may be exempt from income withholding. This is because drawings from the business for sole traders or partnerships are not considered wages and are not subject to PAYG withholding. Instead of PAYG withholding, these drawings are provisions for the business's income tax liability through PAYG Instalments. 
  • Employees or contractors earning below the tax-free threshold are not exempted from PAYG withholding obligations. However, they can claim the amount withheld by the business through their individual tax return at the end of the financial year.

Stay on top of PAYG withholding with QuickBooks Payroll Software 

It’s important to note that before you make a payment that is subject to withholding (such as paying a salary to an employee), you must have registered for PAYG withholding, even if you don’t withhold an amount from that payment (which can happen, for example, if the amount you pay to the employee is too low). 


While you can download free payslip templates from the internet to provide your employees with, the safest route is to use reliable cloud payroll software. Your payroll system will make PAYG deduction simple, keep you legally compliant, and make record-keeping easy. 


With Quickbooks Payroll Software powered by Employment Hero, you have an easy-to-use STP-compliant payroll software that can help you sort out your PAYG withholdings seamlessly. 

You can book a free set-up session today, or if you are not yet a QuickBooks user, you can try it for free.



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