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What is PAYG withholding?

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)

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).

What is PAYG withholding in Australia? 

PAYG withholding is an accumulative tax that employers pay to the Australian Taxation Office (ATO) for businesses in Australia 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. 

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 employees 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 business has 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.

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 any payment you make to directors, employees, contractors, and businesses that still need to provide their ABN. The latter should provide you with a withholding payer number. 

As a sole trader, you do not need to worry about PAYG withholding because you're not dealing with payments classified as wages. The same goes for a business that operates as a partnership.

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 deductions simple, keep you legally compliant, and make easy record-keeping. 

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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