What is PAYG Withholding?
Pay As You Go Withholding is the system Australian employers use to deduct tax from employee wages and remit to the ATO. Real-time reporting via Single Touch Payroll (STP) Phase 2 is mandatory at every pay event. Cash flow remittance is via BAS (quarterly or monthly).
Current Rate (Real-time STP at each pay event; remitted via BAS)
Marginal rates per ATO PAYG schedules + Medicare Levy
Example
An employer paying a A$80,000 salary withholds approximately A$15,500 tax + 2% Medicare across the year, reported at each pay run via STP.
How PAYG Withholding works in Australia
PAYG Withholding is the mechanism by which Australian businesses collect income tax on behalf of the ATO from employees and certain contractors. The employer withholds amounts from each payment and remits them to the ATO — effectively acting as an unpaid tax collection agent.
**What must be withheld**
- Salary and wages paid to employees - Allowances and overtime - Bonuses and commissions - Payments to contractors who do not provide an ABN (47% withheld) - Payments to employees who do not provide a TFN (47% withheld) - Director fees - Payments under a voluntary PAYG agreement with a contractor
**ATO withholding schedules**
The ATO publishes tax withholding tables (NAT 1008 for weekly/fortnightly/monthly pay). The amount withheld depends on the employee's gross income, residency status, tax offsets claimed on the TFN Declaration (NAT 3092), and any HECS-HELP debt. For FY2025–26, a full-time employee on A$80,000 salary has approximately A$19,000 withheld during the year.
**Single Touch Payroll reporting**
All PAYG withholding is reported to the ATO in real time via STP Phase 2. At every pay event, payroll software sends to the ATO: gross pay (disaggregated by component), tax withheld, super guarantee, and employee details. This replaced the old annual PAYG Payment Summary (Group Certificate) — employees now view their Income Statement in myGov.
**Remittance via BAS**
Reporting (STP) is real time; payment is on the BAS cycle: - Quarterly: employers with annual PAYG withholding under A$1 million - Monthly: employers with annual PAYG A$1 million or more
Remittance is via the W1/W2 fields on the BAS. You hold the withheld cash until the BAS due date.
**Director personal liability**
If a company fails to remit PAYG withholding to the ATO, the ATO can issue a Director Penalty Notice (DPN) and pursue company directors personally for the unpaid amount. Directors have 21 days to pay, enter a payment arrangement, or appoint a liquidator before the personal liability crystallises. The liability attaches to anyone who was a director during the period the withholding was due.
**Voluntary withholding agreements**
Contractors who quote an ABN are generally not subject to withholding — they pay tax via their own PAYG instalments. However, a contractor and principal can enter a voluntary PAYG withholding agreement (Section 12-55 ITAA 1997), which smooths the contractor's tax obligations and reduces the instalment burden at year end.
Related terms
Single Touch Payroll Phase 2 is the ATO's mandatory real-time payroll reporting system. Employers send pay information (gross pay, tax, super, allowances categorized) to the ATO with each pay event. Annual finalisation is due 14 July each year.
The Business Activity Statement is the quarterly (or monthly for large businesses) form Australian businesses use to report and pay GST, PAYG withholding, PAYG instalments, FBT instalments and Wine Equalisation Tax. Filed via myGov, ATO Online, or accounting software.
PAYG Instalments are advance company tax (or income tax for sole traders) paid quarterly via BAS, calculated by the ATO based on prior year tax. Reduces the year-end tax balance.
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