Pay As You Go (PAYG) Withholding is a system in which business owners make tax payments throughout the year on behalf of employees, contractors and other payees. By making partial payments during the year, there is less likelihood of the payees being lumped with a huge tax bill at the end of the year.
If your business makes payments to employees or other workers, under the PAYG Withholding system, you are required collect tax from their payments and send it to the Australian Tax Office (ATO) at certain times throughout the year.
Before we go any further, it is important to understand that Pay As You Go (PAYG) Withholding tax is not the same as Pay As You Go (PAYG) Instalment Tax. Many business owners find this confusing due to their almost identical names. Rest assured that PAYG Withholding and PAYG Instalments are different tax systems. If you are confused by the similar names, this article explains the differences between them.
Do I Need to Pay PAYG Withholding?
You need to make PAYG Withholding payments to the ATO if your business makes payments to any of the following:
- Company directors
- Office holders such as Members of Parliament
- Contractors with voluntary agreements for you to withhold tax
- Businesses that do not quote their ABN
One thing to keep in mind is that although PAYG Withholding tax applies to salaries and wages, it is not the same as payroll tax, which is a state tax.
Registering for PAYG Withholding
You are required to register for PAYG Withholding before making any of the payments listed above. There are a few different ways to register depending on whether you have an ABN.
If you have an ABN you can register for PAYG Withholding in one of the following ways:
- Through the ATO’s Business Portal
- Through a tax agent or BAS agent
- By phoning the ATO
If you do not have an ABN you can register for PAYG Withholding:
- Through a tax agent or BAS agent; or
- By phoning the ATO
How Much Do I Withhold?
For employees, the amounts to withhold are calculated in accordance with the ATO’s published tax tables. Each employee’s calculation will take into account factors such as:
- Personal income tax rate
- Medicare levy
- Offsets or rebates
- HECS / FEE HELP
- Residency status
If you pay your employees through a bookkeeping or payroll system, the PAYG Withholding amounts will automatically calculate each time you run your payroll. Your employees are entitled to claim withheld amounts as credits in their next tax return.
Where an employee has not provided a tax file number declaration, you must withhold tax at the highest marginal rate plus the Medicare levy. Where an employee has a variation notice from the ATO, you will need to withhold tax in accordance with the notice.
If you pay a contractor that has an ABN, you may withhold tax based on a voluntary agreement your business has in place with the contractor. Your contractors are entitled to claim withheld amounts as credits in their next tax return.
If you make a payment to a supplier that has not quoted an ABN, you must withhold tax at the top marginal rate plus the Medicare levy. Your suppliers are entitled to claim withheld amounts as credits in their next tax return.
How Do I Pay PAYG Withholding?
Depending on the size of your business, you may be required to report and pay withheld tax amounts via your BAS and IAS returns, or electronically. The size of your business also determines how often you are required to report and pay withheld amounts. This could be quarterly, monthly, or twice a week.
Businesses that withhold $25,000 or less a year are regarded by the ATO as small withholders. If you are a small withholder, you are required to report and pay withheld amounts quarterly through your BAS and IAS returns. If you want to report and pay monthly instead, you can arrange to do so with the ATO.
Businesses that withhold $25,001 to $1 million a year are regarded by the ATO as medium withholders. If you are a medium withholder, you are required report and pay withheld amounts quarterly through your BAS and IAS returns.
The ATO classifies large withholders as either an individual, a business or a company group that has withheld more than $1 million in a previous financial year. If you are a large withholder, you are required to report and pay withheld amounts electronically twice a week.
At the end of the financial year, you are required to lodge one or more annual reports. The reports you lodge depend on the types of PAYG Withholding tax you withheld during the year.
The ATO uses the information in the annual reports to pre-fill tax returns for people who lodge their returns online or through tax agents. It is therefore important to lodge your PAYG Withholding tax annual returns as soon as possible after you provide payment summaries to your employees.