PAYG Withholding for Employees: What Business Owners Need to Understand
What is PAYG withholding and why must you do it?
PAYG (Pay As You Go) withholding is the system in which a business owner withholds part of an employee’s pay and remits it directly to the ATO on the employee’s behalf. This is not your money — you collect it on behalf of others and pass it on, as a compulsory intermediary in the tax system.
This obligation begins from the first pay run. Failing to register and carry out PAYG withholding is a breach of your tax obligations, not just an administrative oversight.
Registering for PAYG withholding
Before your first pay run, register for PAYG withholding with the ATO. You can register through myGov/online services or ask a tax agent. You need your business ABN.
After you register, the ATO assigns your reporting cycle (weekly, monthly, or quarterly) based on your expected payroll size.
Calculating the amount to withhold
The amount withheld depends on: the employee’s income, their tax circumstances, and the declarations they give you through their Tax File Number (TFN) declaration.
The ATO provides a Tax withheld calculator at ato.gov.au — this is the official and most accurate tool. Do not estimate it yourself by “multiplying by a percentage”, because Australian tax is progressive and depends on many factors.
An employee gives you a TFN declaration when they start — this form confirms their TFN and tax circumstances (resident, tax-free threshold, and so on). If an employee does not provide a TFN, you must withhold at the highest rate the ATO specifies.
Remitting the withheld amount to the ATO
The PAYG withholding amount you have withheld must be remitted to the ATO according to your assigned cycle:
- Weekly/monthly withholders: Pay within the timeframe the ATO sets after each period
- Quarterly withholders: Report and pay together with your quarterly BAS
Keep the PAYG withholding money in your business account and pay it on time — do not use this money to pay other business costs. It is the employee’s and the ATO’s money, not yours.
Paying late results in ATO interest charged on the late amount — and this is an amount you cannot claim as a tax deduction.
Single Touch Payroll (STP) — reporting every pay run
Once you have employees, you must report wage information, PAYG withholding, and super to the ATO after every pay run through the STP system. This is not a year-end report — you report every pay run.
Most accounting software (Xero, MYOB, QuickBooks) and payroll software has STP built in — when you process a pay run, the software automatically sends the STP report to the ATO. There is no separate form to lodge.
At the end of the financial year, employees receive an Income Statement through myGov instead of the old paper Payment Summary — the ATO takes the information from STP rather than waiting for you to lodge a year-end report.
Allowances, terminations, and special payments
Not every payment to an employee is withheld in the same way. Some payments have their own rules:
- Allowances: Depending on the type, some allowances must be withheld from and some must not
- Termination payments: Payments made when employment ends have PAYG rules that differ from ordinary wages — they are often withheld at a special rate
- Redundancy payments: Part of a redundancy payment may be tax-free for the employee under ATO rules — you have to calculate it correctly
For these special payments, do not calculate them yourself — ask your accountant or use the ATO’s Tax withheld calculator for each type.
End of the financial year
After 30 June, you must finalise the STP report for all employees — confirming to the ATO that the figures for the year are complete. Employees then see their Income Statement marked ready in myGov so they can prepare their tax return.
Finalisation is not automatic — you have to actively do it in your payroll software before the deadline the ATO sets.