PAYG Withholding Explained: A Practical Guide for Australian Small Businesses

Hiring your first employee is a huge milestone. It means your business is growing, and you need help to keep up. But it also means you’ve stepped into a new world of tax obligations — and PAYG withholding is the first one you’ll need to get right.

The good news? It’s more straightforward than it sounds. Here’s everything you need to know.

What is PAYG withholding?

Pay As You Go (PAYG) withholding is the system the ATO uses to collect income tax from workers throughout the year. Instead of your employees facing one large tax bill at the end of the financial year, you withhold a portion of their pay each cycle and send it to the ATO on their behalf.

You’re essentially acting as a middleman between your employee and the tax office. The money you withhold isn’t yours — it’s tax your worker owes, and you’re just passing it along.

It’s worth noting that PAYG withholding is different from PAYG instalments. Withholding applies to payments you make to others (employees, contractors). Instalments are prepayments of your own income tax. They’re reported on the same BAS, but they’re separate obligations.

When do you need to register?

You must register for PAYG withholding before you make your first payment that requires withholding. In practice, that means registering before your new employee’s first payday.

You need to register if you pay wages to employees, make payments to directors, make payments to contractors under a voluntary agreement, or receive payments where the supplier hasn’t quoted their ABN.

Registration is free and can be done online through the Australian Business Register, through your BAS or tax agent, or by calling the ATO on 13 28 66.

If you’re already registered for GST and you’re adding your first employee, you just need to add PAYG withholding to your existing registrations — you don’t need a new ABN or anything like that.

How much do you withhold?

The amount you withhold from each pay depends on a few things: how much the employee earns per pay period, their tax file number (TFN) declaration, whether they’ve claimed the tax-free threshold, and any offsets or additional withholding they’ve requested.

The ATO publishes withholding tax tables each financial year that tell you exactly how much to withhold based on these factors. You don’t need to calculate it from scratch — it’s a lookup.

What if an employee doesn’t provide a TFN?

If a worker doesn’t give you a completed TFN declaration within 14 days of starting, you’re required to withhold at the top marginal rate — currently 47% for Australian residents. That’s a strong incentive for new starters to get their paperwork sorted quickly.

Contractors: do you need to withhold?

Generally, no. If you’re paying an independent contractor who quotes their ABN, you don’t withhold anything. They manage their own tax through PAYG instalments.

However, there are two situations where you do withhold from contractor payments. First, if you’ve entered into a voluntary agreement with the contractor (common for regular, ongoing arrangements). Second, if the contractor doesn’t provide an ABN — in that case, you must withhold 47% from any payment over $75 (excluding GST).

How to report and pay

Your PAYG withholding obligations are reported on your Business Activity Statement. The specific section is labelled W1 (total amounts withheld) and W2 (amounts withheld from employees paid under a voluntary agreement or no-ABN situations).

Payment frequency

How often you pay depends on your total annual withholding amount. Small withholders (withholding $25,000 or less per year) report and pay quarterly, aligned with your BAS cycle. Medium withholders ($25,001 to $1 million per year) pay monthly by the 21st of the following month. Large withholders (over $1 million) pay within six to eight days of each payday.

Most small businesses fall into the quarterly category, which keeps things simple — you’re already lodging a BAS each quarter, so the PAYG withholding just becomes another section of the same form.

Quarterly due dates

The standard quarterly deadlines are 28 October, 28 February, 28 April, and 28 July. These are the same dates as your GST reporting, so you’re handling everything in one go.

Single Touch Payroll: your reporting friend

If you’re using payroll software that supports Single Touch Payroll (STP), a lot of the reporting burden disappears. Every time you run a pay cycle, your software automatically sends salary, wage, and PAYG withholding data to the ATO in real time.

This means you no longer need to provide payment summaries to employees at the end of the financial year — it’s all already reported through STP. Your employees can see their year-to-date figures any time through their myGov account.

STP doesn’t change what you owe or when you pay it. You still need to lodge your BAS and make your withholding payments. But it does eliminate a lot of the end-of-year paperwork that used to make July stressful.

A practical example

Let’s say you run a landscaping business and you’ve just hired Sam as a full-time employee earning $60,000 a year, paid fortnightly. Sam has completed a TFN declaration and claimed the tax-free threshold.

Using the ATO’s fortnightly tax table, you’d withhold approximately $358 from each fortnightly pay of $2,307.69. That $358 goes to the ATO, and Sam receives the rest.

Over a quarter, you’d withhold roughly $4,654 across 13 fortnights. That total gets reported in the W1 field on your quarterly BAS, and you pay it by the due date along with any GST you owe.

If Sam’s pay changes — overtime, a bonus, a pay rise — the withholding amount adjusts according to the tax tables. Your payroll software handles this automatically.

Common mistakes to watch for

Not registering before the first pay run. You must be registered for PAYG withholding before you make your first payment. The ATO takes this seriously.

Mixing up withholding and instalments. PAYG withholding is tax you hold from payments to others. PAYG instalments are prepayments of your own tax. Different obligations, different sections of the BAS.

Forgetting no-ABN withholding. If a supplier or contractor doesn’t quote an ABN on their invoice, you need to withhold 47% from payments over $75. Many small business owners miss this one.

Not keeping TFN declarations on file. You need to keep these for the current financial year plus one year after the employee leaves. If you can’t produce them in an audit, you could face penalties.

Late payments. Missing a BAS deadline means interest charges and potential penalties. Set calendar reminders or, better yet, use software that tracks your obligations.

Keeping it simple

PAYG withholding sounds complex, but the actual process is fairly mechanical. Register before your first payday, use the ATO’s tax tables (or let your payroll software do it), report on your BAS each quarter, and pay on time.

The key — just like with GST and bookkeeping generally — is staying on top of things as you go rather than scrambling at the end of the quarter. When your payroll is running smoothly and your records are current, the compliance side takes care of itself.

Accounting software that connects your payroll, bank feeds, and BAS reporting in one place makes the whole thing almost invisible. Set it up once, run your pay cycles, and the numbers are ready when you need them.