Pay As You Go (PAYG): What You Need to Know

At the end of each financial year, many business owners struggle to comprehend how to process the many elements of both their company and employees’ taxes. For this reason, it is essential that employers utilise PAYG withholding, an accurate system which the ATO has designed to assist income-earning Australians at tax time. 

What is PAYG?

PAYG withholding is an acronym for Pay As You Go, in which it is a single system where an employer withholds income tax from an employee’s salary or wage, a director’s salary, businesses that don’t quote their ABN, and contractors engaged in a voluntary agreement with the employer.

Employers pay tax on their employee’s income on behalf of their employees, other businesses and other payees, directly to the Australian Tax Office (ATO). PAYG withholding is an important system to ensure that employees are paying tax on their income, so as not to be surprised at the end of the financial year when finalising their tax returns. The PAYG system combines income tax instalments and withholding tax obligations in one system, meaning employers have only one set of payment dates and one form to complete at tax time. 

What is the difference between PAYG withholding and payroll tax?

PAYG withholding and payroll tax are different taxes, paid on the wages and salaries of employees but for different purposes. Payroll taxes are used to finance social insurance programs such as Medicare. Currently for QLD, the payroll tax rate is 4.75% for employers paying less than $6.5 million in taxable wages.

Whilst employers are paying payroll tax on behalf of their employees to fund social insurance schemes, they are also paying PAYG instalments to the ATO to fund public goods and services for the country. Another main difference between the two is that payroll tax is generally paid on a flat rate up to a yearly cap, whereas PAYG withholdings and what amounts to income tax is paid on a progressive scale, based on an individual’s earnings. 

How is PAYG calculated?

PAYG withholding is calculated through using the instalment rate of (Estimated tax / instalment income) x 100. This rate is calculated based on the information provided in an employee’s most recent tax return. 

How do I know how much my employer withheld from me?

At the end of the financial year, employers are required to supply their employees with a payment summary stating how much income they were paid, and how much PAYG was withheld on their behalf to the tax office. Alternatively, it should be on your payslip under ‘Tax’ ‘PAYG’. 

How do I pay PAYG withholding?

As an employer, you must:

  1. Register for PAYG with the ATO
  2. Work out the status of your workers
  3. Calculate how much to withhold from payments based on the income tax bracket and report your calculations
  4. Report and pay the withheld amounts to the ATO
  5. Record the amounts in your quarterly business activity statement and annual tax return 
  6. At the end of financial year, provide payment summaries to employees and lodge an annual report with the ATO

The ATO also has calculators and tools to assist you with identifying the amount you should withhold from your employees.

What is the difference between PAYG instalments and PAYG withholding?

PAYG instalments are paid to the ATO quarterly by businesses and companies based on their business or investment income. PAYG withholding is paid on behalf of employees, by employers, to the ATO, This is where a certain amount of tax from an employee’s pay is withheld from them. Employers are obliged to both pay their own instalments and withhold their employees tax from them, and subsequently pay both to the ATO. 

Is PAYG withholding compulsory for employers?

Business owners have an obligation to those that they employ to utilise PAYG withholding, so that they can meet their annual tax liabilities. Employers are obligated to withhold tax if their business:

  • has employees
  • has other workers such as contractors that have voluntarily chosen for you to withhold amounts from your payments to them
  • makes payment to businesses that fail to quote their Australian Business Number (ABN)

Are PAYG instalments compulsory for employers?

Business owners are obliged to pay instalments to the ATO once the business’ income exceeds a certain amount. This instalment rate should be provided to you by the Tax Office, who will also inform the business owner of their tax duties. Additionally, these instalments are generally paid quarterly. This is to assist with avoiding a large tax bill following the lodgement of your income tax return at the end of the financial year. 

Legal Advice

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