PAYG withholding and PAYG instalments

What is PAYG?

One of the things you need to consider when you start employing people is how much money you need to set aside so you can pay wages related withholding tax. This is because the Australian Tax Office (ATO) requires employers to help their employees meet their income tax obligations by collecting PAYG withholding amounts from the payments you as an employer make to your employees.

‘PAYG’ stands for ‘Pay As You Go.’ There are two different processes the ATO uses to help businesses and individuals manage their tax obligations. These are pay as you go instalments and pay as you go withholding.

It’s important to note, the PAYG withholding isn’t a tax on your business’s income, it’s a tax on your employee’s income, that you help the Australian Taxation Office collect. In effect, the ATO is using your business to help ensure the income tax of your employees is properly provided for and collected.

PAYG withholding

The PAYG withholding system requires employers to withhold an amount of tax that is in anticipation of their year-end tax liability. The business reports on the amount withheld either monthly or quarterly when it lodges its Business Activity Statement and when lodging an Annual Income Statement (previously called an annual PAYG summary report). As an employer you are responsible for collecting pay as you go withholding amounts from payments that your business makes to its employees and contractors or businesses that don’t quote an ABN.

PAYG instalments

PAYG Instalments are income tax instalments paid on account of an anticipated tax liability.

Instead of paying a large tax bill at the end of the financial year (EOFY), these quarterly payments go towards the expected income tax obligation accumulated from your business and investment income for the current financial year. In this way, PAYG instalments help your business to meet its income tax obligations. The PAYG Instalment amount can be calculated using the ATO rate or ATO Instalment amount.

Don't worry if you're not certain what the rate should be; the ATO will calculate and notify you of your instalment rate based on your last lodged annual tax return.

Alternatively, you may be eligible to use the ATO instalment amount, which the ATO will calculate and advise.

How do I know if PAYG instalments apply to my business?

The ATO will let you know if you need to make these payments by writing to you and advising you of your anticipated notional tax for the upcoming financial year.

How do I know if PAYG withholding applies to my business?

PAYG withholding obligations will apply if:

• you pay salary and wages to employees
• you have other workers, such as contractors, and you enter into voluntary agreements to withhold amounts from your payments to them
• you make payments to businesses that don’t quote their Australian Business Number (ABN).

What do I do if I think PAYG withholding applies to my business?

If the above applies, then you must:

• register for PAYG withholding as soon as you know you need to withhold
• withhold amounts from wages and other payments
• lodge activity statements and pay the withheld amounts to the ATO
• report and lodge Annual Income Statements (called payment summaries prior to single touch payroll) to all employees and other payees by a set date
• lodge an Annual Income Statement (formerly called Annual PAYG withholding payment summary report) to the ATO by a set date

How to calculate PAYG withholding

In order to ensure that you withhold the correct amounts, it is important that you calculate how much you will need to withhold from each employee.

The ATO has provided an online calculator you can use to calculate the correct amounts to withhold for each employee. It’s important you get the amounts right because if you don’t withhold your business may incur a “failure to withhold” penalty. The penalty can be the amount that should have been withheld.

If you are unsure about how much you need to withhold, we suggest you speak with your accountant or bookkeeper.

How to register for PAYG withholding

You must register your business for PAYG withholding before you are required to withhold tax amounts from payments you make to your employees.

To register, go to this government website and select Pay As You Go withholding as per the image below. You will need your Business Name and the Australian Business Number (ABN) of your business in order to register for PAYG Withholding.

How to get an income statement (previously known as PAYG summary) from MyGov

You can access ATO online services via your MyGov App. Sign into the app using the following link and follow these 3 steps:

1. Select ATO Online Services

1. Select Employment

1. Select Income Statement

Next steps

If your business didn’t put aside the required PAYG withholding amounts throughout the year you may need a payment plan to help you meet your tax withholding obligations.

See our article on ATO Payment Plans for more details.

To recap, if you employ people in Australia, it is likely that you will have to withhold amounts to help them pay their tax.

To do this you need to do four things:

1. Work out how much you need to withhold for each employee

1. Report PAYG withholding amounts to the ATO throughout the year

1. Pay PAYG withholding amounts to the ATO when they are due

1. Include the withholding amounts in your employees’ pay slips and income statements (formerly called payment summaries).

If you currently employ people in your business but do not have a PAYG Withholding registration set up, please get in contact with us.‍

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Disclaimer

Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.