7 min Do you ever wonder how doing tax deductions and paying employees so easily happens for Australian businesses?
It all comes down to PAYG withholding, which stands for Pay As You Go. PAYG withholding is how income tax is withheld from employee wage payments and paid directly to the Australian Taxation Office (ATO). For businesses, PAYG is not just compliance, it is the basis of payroll that’s accurate and provides trust from the employee’s perspective.
The following guide explains the workings of PAYG, why understanding PAYG is important in the context of the Australian payroll environment, and how businesses can practically reduce PAYG compliance with new technology.
What is PAYG Withholding?
The ATO uses PAYG or Pay As You Go to collect income tax as it is accrued, instead of letting employees face the tax bill after a period of time. In the PAYG system, the employer estimates the tax payable and withholds a part of the tax from every wage payment and pays this on behalf of their employees directly to the ATO.
For companies who use payroll services in Australia, PAYG withholding is essential to ensure those employees are being paid correctly and, as the employer, they are fully compliant with all necessary regulations.
How Does PAYG Work?
Managing PAYG may sound complex, but the process can be broken into clear steps:
- Register for PAYG withholding
The first step for any employer utilising payroll solutions in Australia is to register your business for PAYG withholding.
- Collect declarations
Tax file number (TFN) and withholding declarations need to be collected from your employees.
- Payments made
Once you start withholding tax from the employee and you have to pay the employees, you need to remit the amounts withheld to the ATO at the frequency required.
- Report amounts withheld
The PAYG amounts would need to be included in your business activity statements (BAS).
- Use STP software
STP-enabled software that automatically collects the PAYG and payroll information and reports directly to the ATO with each pay run.
- Pay-PAYG information
Employees can now access PAYG summaries via MyGov, with no need for payment summaries to be created.
- Annual report
The PAYG withholding annual report to the ATO is due to be lodged by 14 August every year.
Is PAYG Withholding Compulsory?
Yes, in nearly all cases. You must apply PAYG withholding if:
- You employ staff.
- You engage contractors who request voluntary withholding.
- You are making payments to other businesses that have NOT provided an ABN.
Not complying can incur penalties and reputational consequences, which no business wants.
Organizing PAYG Withholding
REGISTRATION MUST BE COMPLETED PRIOR TO PAYING EMPLOYEES FOR THE FIRST TIME.
You can do this to:
Registering online via the ATO Business Portal.
Using the Australian Business Register (ABR).
Registering over the phone with the ATO.
For businesses expanding across states, an important part of a successful global payroll solution is registration in a timely manner and being compliant.
When do I remit and report PAYG?
Reporting PAYG is not optional – it is a fundamental requirement of being a withholder. Since STP reporting means the amounts you withhold go to the ATO with every pay run, you also need to record them as a part of your BAS and lodge the annual summary by 14 August.
The remit frequency depends on the size of the withholder:
– Small: Less than $25,000 annually → remit quarterly.
– Medium: $25,000 – $1M annually → remit monthly.
– Large: More than $1M annually → remit twice weekly.
This system will ensure larger employers remit regularly and there is less risk of them under remitting.
PAYG Installments
PAYG installments are different to employee withholding and allow businesses to prepay their own tax obligations, usually in relation to business and investment income. The ATO generally will notify you if you are required to make PAYG installments quarterly.
Special rules apply with companies, trusts, and consolidated groups, depending on their structure and income. For businesses that operate in multiple states, understanding the PAYG installments is just as important as managing the employee withholding.
Exemptions from PAYG Withholding
You may be exempt from PAYG withholding if:
- You are a sole trader or partnership drawing profits and not animals (wages).
- Employees are compensated below the tax-free threshold (which they can claim back after).
Despite being exempted, however, businesses must still consider compliance obligations. For companies growing internationally, exemptions typically behave similar to the broader global payroll solutions with multi-jurisdiction rules.
The Importance of Accuracy in PAYG Withholding
Accuracy in PAYG withholding is important for more than avoiding penalties. It:
- Provides your employees peace of mind with accurate and timely payments.
- Reduces your employees’ end-of-year tax obligations.
- Reduces the time and money spent on administration and costly compliance mistakes.
For employers, administering PAYG accurately and effectively is part of the employee experience when delivering a professional and reliable employer brand.
Why Procloz?
Administering PAYG withholding and broad payroll obligations across states (and borders) can become overwhelming as a business, even established ones. Procloz steps in to help.
We do not just run pays; we offer global payroll services designed to keep compliance simple, integrate payroll with finance systems, and scale-ups your businesses in the future. With the best payroll solutions in Australia, STP capability, and Employer of Record services, Procloz keeps you in compliance, so you can focus on growing your business.
