PAYG
PAYG withholding
PAYG withholding is the system where employers and certain payers deduct income tax from payments such as wages and send it to the ATO on behalf of the worker.
PAYG withholding requires a payer to take tax out of certain payments before passing the balance to the recipient, and to send the withheld amount to the ATO. The most familiar example is wages: the employer deducts income tax from each pay and reports and pays it to the ATO. The worker then receives credit for the tax withheld when their income tax return is assessed.
The system covers more than employee wages. It also applies to directors fees, some payments to contractors under a voluntary agreement, certain payments to people who do not quote an ABN, and some other payments set out in the tax law. Businesses that make these payments must register for PAYG withholding, which is separate from GST registration though it shares the same activity statement.
To work out how much to withhold, employers use the ATO's withholding tax tables, or payroll software that applies them. The amount depends on the payee's earnings, pay frequency and the information on their TFN declaration, including whether they claimed the tax-free threshold and whether they have a study loan. If the worker does not provide a TFN, the highest withholding rates apply.
Withheld amounts are reported on the BAS at W2, with the gross payments at W1, and most employers also report through Single Touch Payroll at each pay run. The amounts withheld must be paid by the due date for your reporting cycle. Remember the money is held on behalf of your workers. Spending it on other costs is a serious problem that can lead to penalties, and personal liability for company directors.
Common misunderstandings include thinking that withholding only applies to full-time staff, or that casual workers or those paid cash do not count. Whether someone is an employee or contractor is a question of facts and law, not of what you call the arrangement. Getting it wrong can lead to unpaid withholding and super, with penalties. When unsure, seek advice before engaging the worker.
Keep your payroll and withholding records for five years. This is general information only, so confirm your obligations with the ATO or a registered tax professional.
Worked example
Matt employs a part-time assistant on $1,200 gross per fortnight. Using the ATO tables in his payroll software, he withholds $120 tax and pays the assistant $1,080. Over a quarter, withholding totals $720 across six pay runs. He reports $7,200 at W1 and $720 at W2 on his BAS, and pays the $720 to the ATO by the due date.
Practical tips
- Keep withheld tax in a separate account so it is there when the BAS is due.
- Make sure every new employee completes a TFN declaration, or the highest withholding rate applies.
- Check whether a worker is genuinely an employee or contractor before deciding if withholding applies.