Understanding pay as you go (PAYG) withholding from employees: What It Is and When to Pay

As a small business owner in Australia, managing payroll involves more than just

ensuring employees are paid on time. One critical aspect is PAYG.

This tax obligation is pivotal in keeping your business compliant and your employees’ tax affairs in order. Let’s break it down to help you understand what PAYG is, why it’s important, and how to manage it effectively.

What Is PAYG?

PAYG stands for Pay As You Go Withholding.

It’s the system through which employers collect tax from their employees’ wages and remit it directly to the Australian Taxation Office (ATO). This ensures that employees’ tax obligations are met gradually throughout the year, rather than in a lump sum at tax time.

For business owners, PAYG applies to payments made to employees, contractors (in

some cases), and other workers. This system also covers payments like directors’

fees, pensions, or other income-related distributions.

Why Is PAYG Important?

PAYG is a legal requirement in Australia. Beyond compliance, it helps your

employees manage their tax obligations and builds trust in your payroll processes.

Regular withholding reduces the likelihood of employees facing large tax bills,

making it a beneficial system for everyone involved.

Failing to meet PAYG obligations can lead to serious penalties, including fines and

interest charges from the ATO. It can also damage your reputation as an employer.

When Do You Need to Pay PAYG?

The payment schedule for PAYG depends on your business size and your ATO

classification:

1. Small Withholder

If your annual PAYG amount is less than $25,000, you’ll need to remit the

withheld amounts quarterly. The due dates align with your Business Activity

Statement (BAS) deadlines.

2. Medium Withholder

Businesses withholding between $25,000 and $1 million annually must pay

monthly, with due dates typically on the 21st of the following month.

3. Large Withholder

If your withholding exceeds $1 million annually, payments are required more

frequently. Specific arrangements will be set up by the ATO.

How to Calculate PAYG

The amount you need to withhold from each employee’s pay depends on their

earnings, tax file number declaration, and any applicable tax offsets. The ATO

provides tax tables and online calculators to ensure accurate calculations.

• Regular Salary or Wages: Use the ATO’s weekly, fortnightly, or monthly tax

tables – they can be found here.

• Additional Payments: For bonuses or commissions, refer to the ATO’s

guidelines for additional tax withholding here.

It’s crucial to keep detailed records of the amounts withheld and the dates payments are made to the ATO.

Reporting PAYG

Your PAYG obligations don’t end with withholding and payment. You’ll also need to

report it to the ATO:

1. Single Touch Payroll (STP): This streamlined reporting system requires

businesses to report employees’ wages, tax withheld, and superannuation

every time they process a payroll.

2. BAS Submission: For businesses lodging BAS, PAYG amounts must be

reported in the relevant sections of the statement.

3. Annual Payment Summaries: Though STP simplifies this process, you might

still need to provide summaries for certain employees or payments.

How to Make PAYG Payments

Paying PAYG is a straightforward process. Most businesses transfer withheld

amounts electronically to the ATO. Be sure to use your payment reference number

(PRN) provided by the ATO to ensure the payment is allocated correctly.

Tips for Managing PAYG Effectively

Managing PAYG can feel overwhelming, but with the right systems in place, it

becomes a seamless part of your payroll process. Here are some tips to stay on top

of your obligations:

1. Use Payroll Software

Invest in reliable payroll software that integrates with Single Touch Payroll.

Tools like Xero, MYOB, or QuickBooks can automate calculations and

reporting.

2. Keep Up-to-Date Records

Ensure your employees’ tax file numbers, income details, and other relevant

information are accurate and up-to-date.

3. Stay Informed

The ATO frequently updates tax tables and PAYG regulations. Regularly

check their website or subscribe to updates to stay compliant.

4. Seek Professional Help

If managing PAYG feels like too much to handle, consider hiring a bookkeeper

or payroll specialist. At The Small Business Book, we provide payroll services

tailored to small and medium businesses across Australia, ensuring your

PAYG and other payroll needs are managed with precision.

The Consequences of Non-Compliance

Failing to comply with PAYG obligations can lead to penalties, including fines and

interest on late payments. Additionally, the ATO may issue a Director Penalty Notice

(DPN), making company directors personally liable for unpaid PAYG amounts.

Keeping up with your obligations is essential to avoid these risks.

How We Can Help

Understanding and managing PAYG can be complex, especially when juggling other aspects of running a business. The Small Business Book offers expert payroll

support for businesses in Perth and across Australia. Our team ensures compliance

with all PAYG requirements, so you can focus on growing your business.

From setting up your payroll system to calculating and reporting PAYG, we provide a

seamless service designed for small business owners. Let us take the stress out of

payroll management!

PAYG is an integral part of running a compliant business in Australia. By understanding your obligations and implementing efficient processes, you can meet your PAYG responsibilities with ease. Whether you need guidance or hands-on

payroll management, The Small Business Book is here to help.