As a business owner, you have many responsibilities when it comes to managing your business. One of the first things to learn when you have employees is Pay As You Go (PAYG). In Australia, the term PAYG is often used to refer to two different processes systemised by the Australian Taxation Office (ATO): PAYG instalments and PAYG withholding.
In this article, we will go through everything you need to know about these two.
What is PAYG Withholding?
PAYG withholding is an employer’s legal obligation to withhold tax from payments made to their employees and contractors. As an employer, you are obligated to withhold a certain percentage of an employee's gross pay as income tax liabilities. These payments are then sent directly to the ATO.
As an employer, you are obligated to register for PAYG withholding if you have employees or contractors, or make payments to businesses without using their ABN. You can easily register for PAYG withholding on the ATO's website.
The amount withheld depends on an employee’s income. The employee is not liable to pay income tax until they earn over $18,200 annually. The net pay employees receive is their after-tax income. If you earn over the threshold of $18,200, the ATO will automatically enrol you for PAYG purposes.
What are PAYG Instalments?
PAYG instalments are regular prepayments of tax on your business and investment income. Whether you're a sole trader or a small business, the benefit of PAYG instalments is paying a quarterly tax voluntarily, rather than waiting to be hit with a massive tax bill when you lodge your tax return.
The ATO will provide you with a notice on how to make instalment payments. It is advisable to register for PAYG if you expect that your business will be making a profit. By making regular PAYG instalments, you can better manage your cash flow rather than paying the entire amount withheld in one lump sum.
PAYG instalments can be paid weekly, monthly, or quarterly, depending on whether you are an individual or a business.