PAYG Withholding Guide for Australian Employers
As an Australian employer, you are legally required to withhold income tax (PAYG — Pay As You Go withholding) from your employees' wages and send it to the ATO. Getting PAYG withholding wrong can result in penalties, interest, and costly corrections.
This comprehensive guide explains how PAYG withholding works, how to calculate the correct amount to withhold, and how to report and pay it correctly via your BAS and Single Touch Payroll (STP) system.
What is PAYG Withholding?
PAYG (Pay As You Go) withholding is the system where employers deduct income tax from employee wages before paying them. This is separate from PAYG instalments (which apply to business income).
As an employer, you must withhold PAYG tax from:
- Employees' wages and salaries
- Directors' fees
- Payments to contractors who don't quote an ABN
- Payments for labour hire
- Some payments to foreign residents
You must register for PAYG withholding before you make your first payment to an employee. You can register through the ATO Business Portal or by calling the ATO.
How to Calculate PAYG Withholding
The ATO provides tax withholding tables (known as NAT 1008 for weekly, fortnightly, and monthly pay) that tell you exactly how much to withhold based on the employee's gross wages and their tax file number (TFN) declaration.
The amount to withhold depends on:
Gross wages
The total amount paid to the employee before any deductions. Include all allowances and bonuses.
Tax scale
Determined by the employee's TFN declaration (Scale 1 = residents, Scale 2 = foreign residents, Scale 3 = no TFN, Scale 4 = Australian resident with Medicare levy exemption).
Claim codes
Whether the employee claims the tax-free threshold, has a HECS/HELP debt, or has a Medicare levy variation.
Pay period
Whether you pay weekly, fortnightly, or monthly affects which column of the tax tables to use.
The ATO's Tax Withheld Calculator (available on the ATO website) can calculate the exact amount to withhold for each pay period based on an employee's specific circumstances.
Your PAYG Withholding Obligations
- Collect TFN declarations
Obtain a completed Tax File Number declaration (NAT 3092) from every new employee within 14 days. If not provided, withhold at the top rate (47%).
- Withhold the correct amount each pay period
Use the ATO tax tables or payroll software to calculate the correct withholding amount. Round to the nearest dollar.
- Report through STP (Single Touch Payroll)
Report each pay run to the ATO via your STP-enabled payroll software on or before payday. This replaced the old annual payment summary system.
- Pay withheld amounts to the ATO
Report and pay PAYG withholding via your BAS. Small withholders (annual withholding under $25,000) pay quarterly; medium and large withholders pay monthly.
- Provide payment summaries (STP finalisation)
At the end of each financial year (by 14 July), finalise your STP reporting. Your employees can then access their income statement via myGov.
PAYG Withholding Reporting Categories on BAS
On your BAS, you'll report PAYG withholding in specific fields:
- W1: Total salary and wages paid to employees (before tax)
- W2: Amount withheld from salary and wages (the PAYG tax you collected)
- W3: Other amounts withheld (e.g., from no-ABN payments to contractors)
- W4: Amount withheld from investment distributions
- W5: Total amounts withheld (W2 + W3 + W4) — this is what you pay the ATO
Penalties for Getting PAYG Wrong
The ATO takes PAYG withholding compliance seriously. Penalties can include:
- Failure to withhold: Penalty equal to the amount that should have been withheld
- Failure to report (STP): Up to $313 per 28-day period (for small businesses)
- Late payment interest: Applied to unpaid PAYG withholding amounts
- Director penalty notices: Company directors can be personally liable for unpaid PAYG withholding
Stay on top of your tax obligations
BillMate helps Australian businesses track their PAYG obligations, prepare BAS reports accurately, and stay ATO-compliant. Simple tools for complex compliance.
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