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What is Withholding Tax: How to Calculate it?

How to Calculate Withholding Tax

Withholding tax is what employers deduct from gross wages to pay directly to the Australian Taxation Office (ATO). It is essentially an income estimated tax credit, which means if too little is taken, your employee could end up owing money at the end of the tax year. 

Conversely, if you take too much, they could be due a tax refund. It is essentially the most effective method for the ATO to manage the PAYG withholding system. The income tax is applied at the source of income so people aren't lumped with a large bill at the end of the financial year. 

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What is Withholding Tax? 

If you employ people, you need to register for PAYG withholding

It is your responsibility to withhold a specific amount from each payment when you pay: 

  • Employees
  • Businesses
  • Certain contractors 

This withholding should be automatically sent to the ATO. This is to ensure nobody faces a large tax bill when they file their tax return. 

If you are a partnership or a sole trader, you do not need to withhold from amounts you withdraw for personal use. This isn't considered a wage; while it should be listed in your tax income, it does not require tax withheld. 

If you need to know how to calculate withholding tax, you can use the ATO's tables to calculate withholding. Once you have the correct withholding tax rate, there are reporting requirements. 

Use the tax table to calculate the correct amount to withhold. When you withhold amounts from payments, you need to pay this tax withheld to the ATO. You need to report it on your activity statements and detail it on the annual report you lodge. 

When do you need to pay the income tax withholding? 

The due date depends on whether you are classified as a small withholder. A small withholder, someone who withholds under $25,000 a year, is required to pay quarterly. For a medium withholder, over $25,000 but under $1 million, they need to pay monthly withholding tax Australia. For withholders of over $1 million a year, the payment needs to be made within eight days of the tax withholding

How do you pay the withholding to the ATO? 

You can pay online or over the phone via credit or debit card. Thanks to Single Touch Payroll, a reliable payroll software like QuickBooks will automate the process and directly report and transmit tax withholding to the ATO on your behalf. 

Your payroll software can also automatically report payment summaries after each pay cycle. You do need to provide the ATO with an annual payment summary, but again, QuickBooks makes it simple. 

With Single Touch Payroll, you no longer need to provide employees with payment summaries to highlight their wages, deductions, and withholdings. This is accessible through the online portal for them to view as soon as they have been paid. 

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Tax Tables 

Once you are PAYG withholding registered, you can use the tax withholding estimator to ensure you withhold the correct amounts. With reliable cloud payroll software, you can set up automated payments to the ATO. You will need to report tax withheld on activity statements, provide payment summaries to your employees and file an annual report with the ATO. 

If you make payments to employees, voluntary agreement workers, directors and contractors (who don't provide their ABN), then you need to withhold. The ATO provides tax withheld calculators as well as tax tables that highlight the tax rates for weekly, fortnightly or monthly pay cycles. These will determine the correct tax withholding rates for employees and contractors. 

The online tax calculators are the simplest way to understand income tax rates, but you can use separate tax tables if you prefer. You will need to factor in the 2% Medicare levy, training and study support loans, as well as the tax-free threshold. 

Additionally, some of your employees may pay less than or more than the 2% Medicare levy, so you need to be certain you have the correct information for all of your employees. 

What You Need To Know 

If an employee leaves, you no longer need to worry about withholding once you have issued their final paycheck. If you close your business or you simply no longer have employees, you need to cancel your PAYG Withholding registration. Before you cancel your registration, you need to ensure you have met all of your withholding obligations and payment obligations and lodged any outstanding activity statements. 

If you withhold more than you should have, you need to refund it to the payee. If the ATO already received the extra amount you withhold, you can offset it against another amount you are liable to pay to the ATO. You do, however, still need to refund the payee regardless. Additionally, you will need to keep a record of the offset in your general ledger and accounts. 

If this takes place after 30 June, the process is different. You cannot refund the amount to the payee. If you do this, the ATO cannot refund the over-withholding to you and it will come directly out of your pocket. You need to provide the payee with a payment summary that has been amended to show the mistake. You will also need to send the ATO an amended payment summary. If the payee has lodged their tax file for the year, they must also request an income tax amendment

QuickBooks Payroll 

If you want to know how much to withhold for taxes and manage the payroll process efficiently, QuickBooks Payroll powered by Employment Hero is the solution for you. The right software can help you manage how tax is calculated, handle the medicare levy, and apply employee withholding. QuickBooks Payroll can process hours worked, withholding amounts, automate payments and even allow you to manage your team. 

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