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. PAYG 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. PAYG was first introduced on 1 July 2000, deeming 11 existing reporting systems redundant and abolishing provisional tax payments. 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 when you are an employee vs contractor?
Generally, as an employee, your employer will withhold tax from you on your behalf, and lodge the amount with the ATO. As a contractor, an employer does not normally withhold an amount from you for tax purposes, based on payments made to you. However, you can request your employer make PAYG instalments to the tax office by entering into a voluntary agreement with them. This is usually due to a contractor having multiple employers over the course of the financial year, and therefore, it can be more convenient for the contractor to keep track of the amount of income tax themselves.
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.
What is a federal income tax bracket?
The Federal Government sets annual rates as to how much an individual will be taxed, based upon which taxable income bracket they fall into. The ATO has set up this system to ensure that the more people earn, the more they are required to pay back in tax based on their income.
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 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:
- Register for PAYG with the ATO
- Work out the status of your workers
- Calculate how much to withhold from payments based on the income tax bracket and report your calculations
- Report and pay the withheld amounts to the ATO
- Record the amounts in your quarterly business activity statement and annual tax return
- 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. See https://www.ato.gov.au/Calculators-and-tools/Tax-withheld-calculator/ for the calculator.
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) number.
Where businesses or employees to not quote their respective ABN or Tax File Number (TFN) employers must withhold tax at the rate of 47% under PAYG. An employer must register for PAYG withholding prior to when they are first required to make a payment that is subject to withholding. This is to ensure that business owners understand the process, and are capable of complying with ATO directives. Additionally, businesses should use a business activity statement to continually report all ongoing business tax obligations.
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.
As a business, how do I begin paying PAYG instalments?
As a business owner, you can either be entered into the system automatically when you lodge your income tax return quarterly, or you can voluntarily enter the system which reduces your chances of having to pay a large tax bill once you lodge your tax return. If this is the first time lodging your PAYG instalment, the ATO will assist you by explaining the different options available for calculating these instalments, and will determine how often you must lodge and pay. Additionally, there are tools available on the ATO’s website such as the individual PAYG instalment calculator: https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=PAYGI&anchor=PAYGI#PAYGI/questions.
How does PAYG withholding affect my HECS-HELP loan?
As a tertiary education student studying at a Commonwealth supported place, once you earn above the compulsory repayment threshold (which as of 2022 stands at $47 014), you are required to pay back your HECS-HELP debt. Although this threshold changes each year the principle is the same, in which your employer has withheld more tax from you, which combines with your normal PAYG withholding tax. At the conclusion of the financial year when you submit your tax return, the ATO will consider whether you need to pay off the HECS-HELP loan and add this to the tax required to be paid for the year. If your employer has withheld too much you will most likely receive a refund, and subsequently, if they have not withheld enough tax then you may be required to pay extra to the ATO. It is important that your employer is aware that you have a HECS-HELP loan, to avoid the latter from occurring.
What do I do if I have paid too much in tax?
You are likely, as an employee, to receive a tax refund as a result of your employer withholding too much of your salary. As saving tactic, some employees request their employers withhold more tax than required, so as to receive a larger tax refund in July of each year.
If you are still unsure about the mechanics of PAYG as an employer, Legal Kitz business specialists can assist with ensuring your group certificates are ‘tax ready’ for your employees.
Click here to book a FREE consultation with one of our highly experienced solicitors today or contact us at firstname.lastname@example.org or by calling 1300 988 954.
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