Pay as You Go (PAYG) Tax

Pay as you go (PAYG) withholding is a system for withholding amounts from payments you make to employees and businesses so they can meet their end of year tax liabilities.  You will have withholding obligations if you have employees or make payments to businesses that do not quote their Australian Business Number (ABN).  You can enter into a voluntary agreement to withhold amounts from payments made to contractors - it is advisable to check the requirements for this with the Australian Tax Office (ATO).

What you need to do
Step 1 - Register for PAYG withholding

You must be registered for withholding before you are required to withhold an amount from a payment.  You can register by completing an Application to register a PAYG withholding account (NAT 3377) or by phoning the ATO on 13 28 66 (8am to 6pm Monday to Friday).  You will be issued with a withholding payer number (WPN) once the form has been processed.

Step 2 - Tax file number (TFN) and withholding declarations

Each employee should complete a Tax file number declaration (NAT 3092).  This declaration will give you information that will help you work out how much to withhold from your employees' payments. You must complete the payer section of the declaration and send the original to the ATO within 14 days and keep a copy for your records.

If an employee does not quote their TFN, claim an exemption for quoting their TFN on the declaration or does not provide a declaration you must complete the payee section with as much information you know about your employee as well as the above and return within the 14 days.  You then must withhold the top rate of tax plus medicare levy.  If your employee has indicated on their declaration that they have applied for a TFN you do not have to withhold at the highest rate for the first 28 days.

Step 3 - How much to withhold

Your withholding obligations vary depending on whether your worker is an employee or a contractor.  Other factors that can affect the amount you withhold include an employees' Higher Education Loan Program (HELP) or financial supplement debts and eligibility for tax offsets.

To work out the correct amount to withhold from payments you make to employees use the Tax file number declaration and your employees may also provide you with a completed Withholding declaration (NAT 3093) to tell you what adjustments to make to the standard rate of withholding shown in the tax tables

Step 4 - Recording, reporting and paying withheld amounts

Fair Work Australia provides information about pay slip requirements

The ATO provides information about records you need to keep

A payment summary shows how much you paid a worker and how much you withheld during the financial year.  The payment summary you need to use and when you provide it depend on a range of factors including whether the worker was a contractor or an employee.  An annual report summarizes all payments and amounts withheld for the year.  Link to find out about Payment summaries and annual reports.

Once you are registered for PAYG, the ATO will send you an activity statement, usually on a quarterly basis.  You will need to complete and return the activity statement, pay any amounts withheld from payments made to your employees and provide each employee with a PAYG payment summary - individual non business (NAT 0046) by 14 July after the end of each financial year.

You will also need to complete an annual report and send it to the ATO by 14 August after the end of each financial year.  This report consists of a PAYG payment summary statement (NAT 3447) and 'ATO original' copies of all payment summaries you have issued for that financial year.

Things to remember:

  • Register with PAYG withholding as described above
  • Obtain Tax File Number and Withholding declarations from anyone you employ - there are two copies: the ATO original you send to the ATO within 14 days and  the payer's copy you keep for 5 years
  • The information provided on these declarations will give you the information you need to know about how much tax to withhold - the tax table you use will depend on how often you pay workers and what their other tax obligations are as indicated on the withholding declaration. 
  • You are required to provide each employee with a pay slip after each pay day and an annual payment summary by the 14th of July each year.
  • You are required to submit a quarterly activity statement and pay any the ATO the total of amounts withheld from payments to your employees.
  • You are required to provide the ATO with an annual report by 14 August each year.
  • You must keep your records for 5 years.

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