What Is PAYG Withholding and How Do You Calculate It?

If you employ anyone in Australia (even just one casual on weekends), you need to withhold tax from their wages and send it to the ATO. This is called PAYG withholding. Get it wrong and you'll owe money at tax time. Get it right and nobody thinks about it.

Here's what PAYG withholding actually is, when you need to do it, and how to calculate it without losing your mind.

What is PAYG withholding?

PAYG stands for Pay As You Go. It's Australia's system for collecting income tax throughout the year rather than in one lump sum at tax time.

There are two parts:

• PAYG withholding: Employers withhold tax from employee wages
• PAYG instalments: Self-employed people pay tax directly to the ATO quarterly

This article is about the withholding part. If you pay wages, you're responsible for calculating and sending the tax to the ATO.

Who needs to withhold PAYG?

You must withhold PAYG if you:

• Have employees (full-time, part-time, or casual)
• Pay contractors who don't quote an ABN
• Make payments to foreign residents
• Pay directors fees or payments to office holders

Even if you only have one employee working 3 hours a week, you need to register for PAYG withholding.

How to register for PAYG withholding

If you're starting a business:

1. Get an ABN (if you don't have one)
2. Register for PAYG withholding through the ATO Business Portal or your tax agent
3. You'll get a withholding payer number if you don't have an ABN

Registration is free and takes about 15 minutes online.

How to calculate PAYG withholding

The ATO publishes tax tables that tell you exactly how much to withhold. You can calculate it manually or use software.

The manual method

For each employee:

1. Work out their gross pay for the pay period
2. Check if they've claimed the tax-free threshold
3. Look up the amount in the ATO tax tables
4. Withhold that amount

The ATO updates tax tables every financial year. For 2025-26, the tax brackets are:

• $0 – $18,200: 0%
• $18,201 – $45,000: 19c per $1 over $18,200
• $45,001 – $120,000: $5,092 + 32.5c per $1 over $45,000
• $120,001 – $180,000: $29,467 + 37c per $1 over $120,000
• $180,001+: $51,667 + 45c per $1 over $180,000

Plus the 2% Medicare levy on most payments.

Worked example

Sarah earns $1,200 per week and has claimed the tax-free threshold.

Using the weekly tax table:

• Weekly earnings: $1,200
• Tax-free threshold claimed: Yes
• Amount to withhold: $230 (approximate, check current tables)

Sarah takes home $970. You send $230 to the ATO.

Note: Use the actual ATO tax tables or our calculator for precise figures. The ATO also provides a tax withheld calculator online.

Using software

Most payroll software (Xero, MYOB, QuickBooks) calculates PAYG withholding automatically. You enter the employee's tax file number declaration once and the software does the rest.

Just make sure your software is updated for the current financial year.

The tax file number declaration

Every new employee must complete a Tax File Number (TFN) declaration. This tells you:

• Whether to apply the tax-free threshold
• If they have a HELP, VET, or TSL debt
• Whether they're claiming any tax offsets

If an employee doesn't give you a TFN, you must withhold tax at 47% (plus Medicare levy) on all payments.

Employees can complete the TFN declaration online or on paper. Keep it for your records.

Withholding for contractors

Most contractors look after their own tax. But you must withhold PAYG if:

• They don't quote an ABN
• They voluntarily agree to have tax withheld
• They work under a labour hire arrangement

If a contractor doesn't give you an ABN, withhold 47% of the payment and report it to the ATO.

How often do you pay the ATO?

This depends on your business size:

Small withholders (withhold less than $25,000 per year)

• Report and pay quarterly
• Due 28 days after quarter end

Medium withholders ($25,000 – $1 million per year)

• Report and pay monthly
• Due 21 days after month end

Large withholders (more than $1 million per year)

• Pay within 7 days of making payments
• Report via Single Touch Payroll

Most small businesses are quarterly withholders.

How to report and pay

There are two ways to report PAYG withholding:

1. Single Touch Payroll (STP)

Most employers must use STP. You report wages, tax withheld, and superannuation every pay run through your payroll software. The ATO gets the data in real time.

With quarterly payments, you still pay every 3 months but the reporting happens each payday.

2. Activity statement (BAS)

If you're not using STP (some exemptions apply), you report PAYG withholding on your Business Activity Statement and pay the same way.

Common mistakes to avoid

1. Using old tax tables

Tax rates change. Using last year's tables means you'll withhold the wrong amount. Update your systems every July.

2. Forgetting Medicare levy

The Medicare levy is 2% on top of income tax. Most employees pay it. Make sure your calculations include it.

3. Not withholding for contractors without ABNs

If a contractor can't give you an ABN, you must withhold 47%. Many businesses forget this and get caught at audit.

4. Missing quarterly deadlines

Quarterly PAYG is due 28 October, 28 February, 28 April, and 28 July. Late payments attract interest and penalties.

5. Not keeping TFN declarations

You must keep TFN declarations for the current year plus 4 previous years. The ATO checks these during audits.

What if you withhold the wrong amount?

Mistakes happen. Here's what to do:

You withheld too much

The employee will get a refund when they lodge their tax return. You can't claw back over-withheld amounts.

You withheld too little

You can make a voluntary agreement with the employee to withhold extra in future pay runs. Or they can pay the difference at tax time.

You forgot to withhold anything

If you should have withheld tax but didn't, you may be liable for the amount plus interest. Talk to your accountant immediately.

Sole traders and PAYG

If you're a sole trader, you don't pay yourself wages. Instead, you pay tax through PAYG instalments.

Once your business income exceeds the threshold (about $4,000 per year), the ATO will send you quarterly instalment notices. You pay tax based on your previous year's income, adjusted for growth.

The bottom line

PAYG withholding sounds complicated but it's mostly just maths. Register with the ATO, get the tax tables right, use decent software, and pay on time.

If you're unsure, a good bookkeeper or accountant will set up your systems correctly. The cost of getting it right is always less than the cost of fixing it later.

And remember: the money you withhold isn't yours. Set it aside in a separate account so you're not scrambling when the quarterly payment is due.