PAYG withholding

What is PAYG Withholding?

PAYG Withholding, short for Pay As You Go Withholding, is a system used by the Australian Taxation Office (ATO) that requires employers to withhold a portion of payments made to employees and certain contractors, and remit that amount directly to the ATO. This system ensures that income tax obligations are progressively met throughout the financial year.

Every time an employee is paid, a portion of their income is withheld and forwarded to the ATO on their behalf. These amounts are then applied as credits when the individual lodges their annual tax return.

ATO – PAYG Withholding Overview

Who Needs to Withhold PAYG?

Employers and business operators must withhold PAYG amounts if they:

• Employ staff
• Have contractors with voluntary agreements
• Make payments to other businesses that don’t provide an Australian Business Number (ABN)

If you’re registered for PAYG withholding, you are legally responsible for:

• Withholding the correct amount
• Reporting to the ATO
• Paying the withheld amounts to the ATO

How PAYG Withholding Works

Here’s how the PAYG process typically unfolds:

1. Employee Provides a Tax File Number (TFN) Declaration
   When starting a job, the employee completes a TFN declaration form, which provides necessary information (e.g. residency status, tax-free threshold) that determines how much should be withheld.
2. Employer Uses ATO Tax Tables or Tools
   Based on the information provided and the employee’s earnings, the employer uses ATO resources (like Schedule 1, Schedule 15, or the ATO tax calculator) to determine the withholding amount.
3. Amounts Withheld from Gross Pay
   This tax amount is subtracted from the employee’s gross pay, with the balance becoming their net pay.
4. Reporting and Payment to ATO
   Employers report and pay the withheld amounts on a regular cycle—usually monthly or quarterly, depending on their withholding status (small, medium, or large).
5. End-of-Year Reporting via STP
   The employer finalises their records at the end of the financial year via Single Touch Payroll (STP), allowing employees to see their income and tax withheld in myGov.

Common PAYG Withholding Scenarios

PAYG Withholding vs PAYG Instalments

It’s important not to confuse PAYG Withholding with PAYG Instalments:

• PAYG Withholding: Employer obligation, deducted from employee payments
• PAYG Instalments: For businesses and sole traders to prepay their own income tax

Key Employer Responsibilities

Employers must:

• Register for PAYG withholding with the ATO
• Accurately calculate withholding amounts using ATO tables or software
• Withhold and pay the correct amount on time
• Provide payslips showing gross pay, tax withheld, and net pay
• Submit STP reports with each pay event
• Provide Income Statements via STP (replacing traditional Payment Summaries)

Failing to meet these responsibilities can result in penalties, interest charges, and compliance actions from the ATO.

How Microkeeper Automates PAYG Withholding

Microkeeper simplifies PAYG compliance by:

• Automatically calculating tax based on employee classifications, tax declarations, and earnings
• Applying the correct withholding rates from current ATO tax tables
• Integrating with STP Phase 2 for accurate and timely reporting
• Generating compliant payslips showing withheld tax
• Supporting real-time reconciliation and end-of-year finalisation

This reduces manual work, ensures accuracy, and helps employers stay compliant with ATO requirements.

Explore Microkeeper’s Payroll Software

FAQs About PAYG Withholding

What happens if I don’t withhold PAYG properly?

‍You may be penalised and lose the ability to claim tax deductions for the wages paid. The ATO may also impose administrative penalties or interest charges.

Do casual and part-time employees require PAYG withholding?

‍Yes. PAYG withholding applies to all types of employees, regardless of full-time, part-time, or casual status.

What if an employee doesn’t provide a Tax File Number (TFN)?

‍You must withhold tax at the highest marginal rate (currently 47%) until the TFN is provided.

Best Practices for Managing PAYG Withholding

• Ensure all employees complete TFN declaration forms before their first pay
• Regularly review ATO tax table updates
• Use STP-compliant payroll software like Microkeeper
• Set calendar reminders for BAS and PAYG payment due dates
• Reconcile PAYG withheld with ATO reports at the end of each BAS period

Final Thoughts

PAYG withholding is a vital part of Australia’s tax system and a key employer obligation. With the right systems in place, like Microkeeper’s payroll platform, you can automate calculations, minimise errors, and stay compliant with minimal admin.

By understanding how PAYG works and your responsibilities, you’ll reduce your risk and provide employees with confidence that their tax is being handled correctly.

_{Disclaimer: This content is for informational purposes only and does not constitute financial or legal advice. Please consult the ATO or a registered tax agent for specific guidance.}