What Is PAYG Withholding?
Pay As You Go (PAYG) withholding is the system by which employers deduct tax from payments they make to employees and certain other payees, and send that money to the Australian Taxation Office (ATO). It's essentially collecting your workers' income tax on behalf of the ATO throughout the year, rather than leaving them with a massive tax bill at the end of the financial year.
If you employ anyone — even a single part-time worker — you almost certainly need to register for and operate PAYG withholding.
When Must You Withhold?
Payments to Employees
You must withhold tax from all payments to employees, including:
- Wages and salaries
- Commissions and bonuses
- Allowances
- Directors' fees
- Termination payments (employment termination payments have specific rules)
- Unused leave payments on termination
This applies from the first dollar paid. There is no minimum threshold for employee withholding.
Payments to Contractors (No ABN Withholding)
If a contractor provides services to your business and does not quote an ABN on their invoice, you must withhold 47% of the payment amount. This is called "no ABN withholding" and it's designed to prevent people from operating in the cash economy.
The withheld amount is sent to the ATO, and the contractor claims it as a credit on their tax return.
Voluntary Agreements With Contractors
If you engage a contractor who does have an ABN but wants tax withheld (to avoid a lump-sum tax bill at year end), you can enter into a voluntary agreement. Both parties sign an ATO form, and you withhold at the rate specified in the agreement.
This is increasingly common with contractors who work primarily for one or two businesses and prefer predictable tax payments.
Other Withholding Situations
You may also need to withhold from:
- Investment income — interest, dividends, and managed fund distributions (if payee hasn't provided a TFN)
- Payments to foreign residents — specific withholding rates apply
- Departing Australia superannuation payments
For most small businesses, employee wages and contractor payments are the main withholding obligations.
How Much to Withhold: Tax Tables
The amount you withhold from each payment is determined by the ATO's tax withholding tables. These tables are updated at the start of each financial year and account for:
- The employee's pay frequency (weekly, fortnightly, monthly)
- Their gross earnings for the pay period
- Whether they've claimed the tax-free threshold (only one employer can apply it)
- Any additional withholding amounts they've requested (using a Withholding Declaration)
- HELP/HECS, SFSS, or other study loan obligations
- Medicare levy adjustments
Using the Tax Tables
The ATO publishes tax tables in several formats:
- PDF tables — look up the withholding amount based on gross earnings
- Formula method — use mathematical formulas (better for payroll software)
- ATO online tax withheld calculator — enter earnings and get the withholding amount instantly
If you use payroll software, it calculates the withholding automatically based on the information the employee provides on their Tax File Number Declaration.
The Tax-Free Threshold
Each employee must complete a Tax File Number (TFN) Declaration when they start work. One of the key questions is whether they want to claim the tax-free threshold ($18,200 per year) from this employer.
- An employee should only claim the tax-free threshold from one employer
- If they have multiple jobs, they claim it from their primary employer
- Claiming it from multiple employers results in underwithholding and a tax bill at year end
Reporting Obligations
Single Touch Payroll (STP)
Since 1 July 2019, all employers must report payroll information to the ATO through Single Touch Payroll (STP). Every time you run payroll (every pay cycle), you submit a report to the ATO that includes:
- Gross wages
- Tax withheld (PAYG withholding)
- Superannuation
- Allowances
- Deductions
STP has effectively replaced the old payment summary (group certificate) system. At the end of the financial year, you make a finalisation declaration through STP, and employees can see their income statement in myGov.
BAS Reporting
PAYG withholding is also reported on your Business Activity Statement (BAS):
- W1: Total wages and other payments subject to withholding
- W2: Total amount withheld
If you lodge BAS quarterly, your PAYG withholding figures are reported quarterly. If you're a monthly BAS lodger, they're reported monthly.
The amounts on your BAS should reconcile with your STP reports. Discrepancies will trigger ATO queries.
Annual Reporting
At the end of each financial year (30 June), you must:
- Make your final STP submission for the year
- Complete the STP finalisation declaration by 14 July (or 31 July if you have fewer than 20 employees)
- Ensure all PAYG withholding amounts for the year have been paid to the ATO
PAYG Withholding vs PAYG Instalments
These are two different systems and people frequently confuse them:
- PAYG Withholding — tax you deduct from payments you make to others (employees, contractors) and send to the ATO
- PAYG Instalments — tax you pay on your own business income in quarterly instalments to the ATO
As a business owner, you may be subject to both systems. You withhold from your workers' pay and you also pay instalments on your own business profits.
Common PAYG Withholding Mistakes
1. Not Registering for PAYG Withholding
You must register before your first payday. Register through the Australian Business Register or your BAS. Failure to register doesn't exempt you from the obligation.
2. Using Outdated Tax Tables
Tax tables change every financial year. If your payroll software isn't updated, you'll be withholding the wrong amounts. Check for updates every July.
3. Not Getting TFN Declarations From New Employees
If an employee doesn't provide a TFN declaration, you must withhold at the top marginal rate (47% plus Medicare levy). This is painful for the employee and administratively messy.
4. Paying Withheld Amounts Late
PAYG withholding amounts must be reported and paid by your BAS due date. Late payment incurs interest charges and potential penalties.
5. Failing to Finalise STP
If you don't finalise your STP by the deadline, your employees can't complete their tax returns (their income statement won't show as "tax ready" in myGov). This creates problems for everyone.
How OneBookPlus Supports Your PAYG Obligations
Managing PAYG withholding correctly requires accurate records and timely reporting. OneBookPlus helps you stay on top of your obligations:
- Employee earnings tracking — record all wages, allowances, and payments in one system
- Tax calculation support — track withholding amounts alongside payroll records
- BAS preparation — generate W1 and W2 figures for your Business Activity Statement
- Deadline reminders — never miss a BAS or STP due date
- Integrated record keeping — all payroll data stored securely for the required 5-year retention period
Get Started
Don't let PAYG withholding compliance keep you up at night. OneBookPlus gives you the tools to track employee earnings, manage tax obligations, and prepare for BAS reporting — all in one platform. Sign up for free — PAYG, super, and BAS reporting in one platform.