PAYG withholding is the employer's legal obligation to withhold income tax from employee wages and remit it to the ATO each pay run.
Amounts withheld are calculated using the ATO's published tax tables (or schedules) based on the employee's TFN declaration; not having a TFN means withholding at the top marginal rate.
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Reporting is via Single Touch Payroll Phase 2 — every pay event is sent to the ATO at the time of payroll, not annually.
Withheld amounts are remitted to the ATO via the BAS (quarterly) or IAS (monthly) — small employers report monthly above $25k, quarterly below.
Penalty for failing to withhold can reach 100% of the unwithheld amount, plus interest.
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.
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.
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.
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)
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.
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
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.
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.
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.
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.
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.
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 — BAS-ready record keeping in one platform, with payroll, STP, and super available via the separate Rostering & Payroll add-on.
