03 9726 4650PAYG Withholding Explained: A Simple Guide for Employers & Employees
If you’ve ever looked at your payslip and wondered where part of your pay went, or if you’re an employer trying to stay on top of your tax obligations, chances are you’ve come across PAYG withholding.
It might sound technical, but it’s actually a simple system that helps everyone stay on top of their taxes.
Let’s break it down.
What is PAYG Withholding?
PAYG stands for Pay As You Go withholding. Using this method, tax is collected gradually from employees' wages throughout the year, rather than all at once when tax time rolls around.
Here’s how it works:
- Employers withhold a portion of their employees’ wages each payday
- That amount gets sent directly to the Australian Taxation Office (ATO)
- The withheld amount counts towards the employee’s income tax
With this system, when tax time comes, most of the tax is already paid and employees are less likely to face a big bill.
Why PAYG matters (for both sides)
For employees:
- No pressure to save up for a large tax bill at the end of the financial year
- Tax is taken care of little by little as part of every pay cycle
- Managing personal finances is easier
For employers:
- Staying compliant with the ATO helps your business avoid penalties
- It shows your team that you’re doing the right thing by them
- It builds trust with your employees
How does PAYG withholding work?
Here’s a quick step-by-step for employers:
1. Work out how much to withhold
Use your employee’s Tax File Number (TFN) declaration form and the ATO’s tax tables or online calculator to determine the right withholding amount.
2. Withhold tax from wages
Each time you run payroll, deduct the calculated amount from your employee’s gross pay.
3. Report and pay tax to the ATO
You’ll need to report the amount your business has withheld through your BAS (Business Activity Statement) or IAS (Instalment Activity Statement) — and pay it to the ATO by the due date.
4. End-of-year wrap-up
At the end of the financial year, your business will need to provide an income statement/payment summary to your employees (via Single Touch Payroll, or STP). This shows how much tax was withheld and helps them complete their tax return. In the past, you needed to issue a certificate.
PAYG: Handy tips for employers
Managing PAYG withholding doesn’t have to be stressful. Here are a few ways to stay on track:
- Stay organised: Keep clear records of wages, tax withheld and payment dates
- Use payroll software: STP-compliant software can automate most of the work
- Check ATO resources: The ATO website has helpful calculators and checklists
If you’re ever unsure, speaking to a registered tax agent can save you from costly mistakes.
For employees: What your payslip can tell you
Every payslip gives you a snapshot of your income and tax.
Look out for:
- Gross pay – what you earned before tax
- PAYG withheld – the amount your employer sent to the ATO
- Net pay – what lands in your bank account
If something doesn’t look right, your employer or payroll team can help clear things up. You can also connect with a tax accountant for help deciphering your tax obligations.
When PAYG does apply
Not all workers have the benefit of tax being paid on their behalf. If you outsource to freelancers or contractors who use an ABN, or to people based in another country, it’s likely they are responsible for paying their own tax.
In this case, they will invoice you for the full amount of work required to complete an assigned task or project, and pay tax themselves from this amount.
If you’re unsure about the status of your workers and whether PAYG applies, reach out to your tax accountant for more information.
PAYG: A little knowledge goes a long way
Once you understand how PAYG withholding fits into your payroll or payslip, it becomes much easier to manage.
For business owners, it’s part of running a responsible, compliant operation. For employees, it’s a helpful way to keep your tax payments up to date without lifting a finger.
Taking the time to learn the basics means fewer surprises and more confidence when tax time rolls around.
Need help with PAYG?
At Clarity Taxation, we take the confusion out of compliance. If you’re unsure how to handle PAYG for your business, or just want someone to double-check your setup, we’re here to help.
Reach out today for friendly, expert support that makes tax easier.