PAYG Withholding
PAYG withholding is tax an Australian employer or payer takes out of certain payments and sends to the ATO on behalf of the person or business being paid.
PAYG means “pay as you go”. In everyday payroll, PAYG withholding is the income tax amount held back from an employee’s gross pay before the employee receives their net pay. The employer does not keep that money. It is reported and paid to the Australian Taxation Office (ATO) as part of the worker’s tax for the year.
PAYG withholding can also apply outside normal wages, such as payments to company directors, labour-hire workers, contractors under voluntary agreements, and some supplier payments where no Australian Business Number (ABN) is quoted.
Where PAYG withholding appears
Small businesses usually see PAYG withholding in payroll and tax reporting, including:
- employee setup, where tax file number and withholding details are recorded
- draft pay runs, payslips and payroll reports
- Single Touch Payroll (STP) submissions, where salary, wages and PAYG withholding are reported to the ATO
- Business Activity Statement (BAS) labels, especially W1 for gross payments and W2 for amounts withheld from salaries and wages
- ATO activity statements, payment reminders and accountant or BAS agent queries
- supplier bills when a supplier does not quote an ABN and withholding may need to be recorded separately
You may also see PAYG withholding beside Superannuation Guarantee (SG), because both are payroll obligations. They are different: PAYG withholding is tax held back from pay, while SG is an employer super contribution on top of eligible wages.
How PAYG withholding works in practice
If your business needs to withhold tax, you generally need to register for PAYG withholding before the first payment that is subject to withholding. The ATO’s PAYG withholding registration guidance explains when to register and how to add it to a business account.
For employees, the practical workflow is:
- Collect the employee’s tax file number and withholding details.
- Set up the employee correctly in payroll.
- Use payroll software or ATO tax tables to work out the amount to withhold.
- Pay the employee their net pay after withholding.
- Report the payroll information through STP and pay the withheld amount to the ATO through the required reporting cycle.
The amount to withhold depends on the employee’s pay, tax file number declaration, tax-free threshold choice, residency status, study loan details and other withholding information. The ATO’s tax file number and withholding declarations guidance is the official source for those employee setup details.
Simple example
Mia runs a small cafe and pays an employee $1,200 gross for a fortnightly pay run. Based on the employee’s tax details, the payroll software calculates $160 of PAYG withholding.
Mia pays the employee:
| Pay item | Amount | What happens |
|---|---|---|
| Gross wages | $1,200 | The employee’s pay before tax withholding |
| PAYG withholding | $160 | Held back and later paid to the ATO |
| Net pay | $1,040 | Paid to the employee’s bank account |
The $160 is not a business expense by itself. It is part of the employee’s wages that the business has withheld and must pass on to the ATO.
PAYG withholding versus PAYG instalments
The names sound similar, but they are not the same thing.
| Term | Who it relates to | Plain-English meaning |
|---|---|---|
| PAYG withholding | Employees, directors, some contractors and some suppliers | Tax held back from payments you make to someone else |
| PAYG instalments | The business or individual taxpayer | Prepayments towards your own expected income tax |
For example, PAYG withholding comes up when you pay staff. PAYG instalments come up when the ATO asks your business, company or sole trader to prepay part of its own income tax during the year. If you need the bookkeeping treatment for instalments, see Gimbla’s PAYG instalment posting guide.
Why PAYG withholding matters
PAYG withholding affects compliance, cash flow and payroll trust. Employees expect the tax shown on their payslip and income statement to be reported correctly. The business also needs to keep enough cash aside to pay the withheld amounts when the activity statement or withholding payment is due.
Mistakes can create awkward cleanup work. If the business withholds too little, the employee may face a larger tax bill at year end. If the business withholds, reports or pays incorrectly, the ATO may require corrections and penalties can apply.
No-ABN withholding is another common trap. Some supplier payments need separate withholding and reporting if the supplier does not quote an ABN. This is why supplier details should be checked before bills are paid, not after the payment has already gone out.
Easy way to remember it
PAYG withholding is tax you collect for someone else’s tax account. PAYG instalments are tax you prepay for your own.
How Gimbla can help
In Gimbla Payroll, PAYG withholding sits inside the pay-run workflow rather than in a separate spreadsheet. You can create employees, store payroll details, review gross pay, PAYG withholding, super and net pay before approval, then keep payroll records close to your accounting reports.
If you are setting up payroll, start with the create an employee guide. For the ATO connection step, use the register software ID guide. Gimbla’s Single Touch Payroll software helps keep payroll reporting, payslips and accounting records aligned.
Related terms
- BAS - Business Activity Statement
- ABN - Australian Business Number
- Superannuation Guarantee (SG)
- Superannuation clearing house
- Accounts payable
- GST - Goods and Services Tax
Helpful Gimbla guides
In short
PAYG withholding is tax taken from certain payments and sent to the ATO for the payee. For a small business, the practical job is to set up payroll correctly, review each pay run, report through STP where required, and keep withheld amounts ready for the ATO.