If you employ staff, PAYG withholding is one of your key tax responsibilities. While it can sound complex at first, PAYG withholding is straightforward once you understand what applies to your business and how to manage it properly. Getting it right helps you stay compliant with the ATO and avoids unnecessary penalties.
What Is PAYG Withholding?
PAYG withholding is the system where employers withhold tax from certain payments and send it to the ATO on behalf of others. As an employer, you are responsible for calculating, withholding and reporting the correct amounts.
PAYG withholding generally applies to payments you make to:
- Employees
- Company directors
- Workers under labour hire arrangements
- Contractors who have a voluntary withholding agreement
- Businesses that do not quote an ABN
The amounts you withhold are credited to the individual or entity when they lodge their tax return.
How Much Tax Do You Need to Withhold?
The amount of tax you withhold depends on several factors, including:
- The employee’s earnings
- Whether they have claimed the tax free threshold
- Any study or training support loans such as HELP
- Their residency status
The ATO provides tax tables and calculators to help employers work out the correct withholding amount. Using payroll software that is kept up to date can reduce errors and save time.
When Do You Pay PAYG Withholding to the ATO?
PAYG withholding is reported and paid through your Business Activity Statement BAS. How often you lodge depends on your business size and ATO requirements.
- Small businesses usually lodge BAS quarterly
- Some employers may be required to lodge monthly
It is important to lodge and pay on time, even if you cannot pay the full amount. Late lodgement or payment can result in penalties and interest charges.
Reporting Through Single Touch Payroll
Most employers are required to use Single Touch Payroll STP. This means you report employee wages, PAYG withholding and super information to the ATO each time you run payroll.
STP does not replace paying PAYG withholding. You still need to lodge your BAS and make payments by the due dates.
At the end of the financial year, STP also replaces payment summaries, as income statements are made available to employees through myGov.
PAYG Withholding and Contractors
Not all contractors require PAYG withholding. In most cases, if a contractor has an ABN and invoices you for their work, you do not withhold tax.
However, PAYG withholding may apply if:
- The contractor does not provide an ABN
- There is a voluntary withholding agreement in place
It is important to correctly identify whether someone is an employee or contractor, as getting this wrong can lead to back payments and penalties.
Common PAYG Withholding Mistakes
Some common issues employers face include:
- Forgetting to register for PAYG withholding
- Using outdated tax tables
- Missing BAS lodgement deadlines
- Incorrectly classifying workers
- Not keeping proper payroll records
Regular reviews of your payroll and reporting processes can help catch problems early.
Tips to Stay on Track
To manage PAYG withholding with confidence:
- Register for PAYG withholding before you pay staff
- Use reliable payroll software
- Set aside withheld amounts so they are not spent
- Review payroll reports before lodging BAS
- Seek advice if your workforce changes or grows
How Hervey Bay Tax Solutions Can Help
PAYG withholding is a critical part of running a business, but you do not have to manage it alone. Hervey Bay Tax Solutions supports local employers with payroll setup, compliance checks and ongoing tax advice.
If you want help understanding your PAYG obligations or need support keeping your payroll compliant in the 2025 to 26 financial year, the team is ready to assist.