As a business owner, you have probably heard of Pay As You Go (PAYG) withholding. But you may not completely understand what it is and what obligations come with it. PAYG requires businesses to withhold money when paying workers and divert it to the Australian Tax Office (ATO) on the worker’s behalf. If a business violates its PAYG withholding requirements, the company and its directors may face a penalty up to the amount which should have been withheld or paid. This article explains everything you should know about PAYG withholding, including: 

  • whether your business must register and pay; 
  • the practical steps you must take; and 
  • what happens if an employee resigns.

1. What Is PAYG Withholding?

Most Australian workers pay income tax, calculated as a percentage of the income that they earn. The ATO only confirms the total amount of tax owed by a worker after the worker files their tax return at the end of the financial year. 

The purpose of PAYG withholding is to avoid workers having to pay a big tax bill in one lump sum when the ATO confirms the amount payable, which could lead to issues if people have not saved the amount that they owe.

Therefore, PAYG withholding allows an employer to deduct money from the worker’s pay and send it to the ATO on the worker’s behalf throughout the year. This should occur every time the employer pays an employee and the employer should notify them of the amount withheld in tax on their paysheet. 

When a worker completes their tax return at the end of the financial year, the ATO confirms the income tax owed by the worker. 

Tax Refunds and Tax Bills

The amount of money withheld under the PAYG system will often differ from the tax they actually owe, as it is calculated on the basis that they earn that amount of money for every pay period.

For example, you might hire a casual graphic designer to work on projects on a needs basis. In a busy month you might pay the designer $5000 for their work. The PAYG system will presume that they earn $5000 every month and will tax them accordingly for that pay period. However, they may only make a combined $5000 over the remaining months of the year. The graphic designer was taxed under the PAYG system, even though their overall income was under the tax-free threshold.

If the ATO withholds too much money from the worker under the PAYG system, they will provide the worker with a tax refund. On the other hand, if they do not withhold enough money, they will be required to pay an additional tax bill.

PAYG withholding may also include other payments owed by the worker, such as: 

  • Higher Education Loan Program (HELP); 
  • Trade Support Loan (TSL); or 
  • Financial Supplement debt (SFSS).

2. Do I Need to Register for and Pay PAYG Withholding?

You are obliged to register for PAYG withholding if you:

  • have employees;
  • pay your directors;
  • have contractors and voluntarily agree to withhold PAYG payments from contractors; or 
  • make payments to businesses that do not have an ABN.

You do not need to pay PAYG withholding for employees under the age of 18 if you pay them less than:

  • $350 per week;
  • $700 per fortnight; or
  • $1,517 per month.

You must be registered for PAYG before you deduct amounts from a worker’s payment.

3. What Steps Do I Need to Take to Pay PAYG Withholding?

Step 1 – Register for PAYG Withholding

You will generally need an ABN to register for PAYG. Once you have an active ABN, you can register for PAYG:

Step 2 – Withhold Amounts From Wages or Payments

You should consider each worker your business engages to determine whether you need to withhold payments. This will include any:

  • employee;
  • paid director;
  • business without an ABN; or
  • contractor who you voluntarily withhold payments from.

You should then require those workers to complete a tax file number (TFN) declaration, lodge the form with the ATO and retain a copy for your records.

To determine the amount to withhold, you can use the ATO’s tax withheld calculators, including for:

The calculators take into account matters such as: 

  • income tax rates; 
  • HELP; 
  • TSL; and 
  • SFSS contributions.

You should then lodge your BAS and pay the withheld amounts to the ATO.

Importantly, once a valid TFN declaration is in place, an employee may choose to vary the amount of PAYG withholding using a withholding declaration.

Step 3 – Provide Payment Summaries

You must provide PAYG withholding payment summaries to the relevant workers by 14 July, for the preceding financial year. This is a statement which outlines how much they earned and how much you withheld in tax.

Additionally, you must also provide a PAYG withholding payment summary annual report to the ATO by 14 August, for the preceding financial year.

4. What Happens When the Employment Terminates?

If an employee resigns, you must: 

  • make employment termination payments; and
  • report those payments to the ATO. 

These payments include PAYG withholding. You may also be required to complete a PAYG payment summary – employment termination payment if you make this payment to a worker employed for a period before 1 July 2012.

You will need to provide the PAYG withholding payment summary to the relevant employee. To protect your business, you should also keep a record of the employee’s income withheld in tax and TFN declaration.

Key Takeaways

PAYG withholding enables workers to pay their tax bill periodically throughout the year, instead of in one lump sum. This requires businesses to register and pay the withheld money to the ATO on behalf of its workers. A company is obliged to register for PAYG if it has: 

  • employees; 
  • directors;
  • workers without ABNs; and
  • contractors if the business voluntarily agrees to withhold money. 

The business must: 

  • request a TFN declaration form from its workers; 
  • withhold and divert the calculated tax payable to the ATO; and 
  • provide summaries to workers and the ATO. 

If you are uncertain about your legal obligations surrounding PAYG withholding or other employment issues, contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

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