How to calculate your business's withholding tax
Work out how much PAYG tax to withhold each pay run, using the ATO calculator and tax tables.
Chesney McDonald–Small business & finance writer/editor. Read Chesney's full bio
Published Thursday 9 July 2026
Table of contents
Key takeaways
- PAYG withholding is an employer obligation and a credit toward the payee’s tax at the end of the year.
- Use ATO tax tables and the right scale to estimate PAYG each pay run.
- Report via STP Phase 2 every pay run and include PAYG on your BAS or IAS.
What is PAYG withholding for businesses?
PAYG withholding is the system where you, as an employer, collect income tax from your employee and worker payments and send it to the ATO on their behalf. Pay as you go, or PAYG withholding, is the process in which a business holds on to the income tax that their employees owe the government and pays it to the ATO (Australian Taxation Office) on their behalf. Tax withholding saves employees from having to put aside and pay their own tax bill when the return filing date rolls around each year. To estimate tax withheld from each employee requires meticulous tax record keeping, accurate calculations, and reliable accounting tools that integrate with Australian single-touch-payroll (STP). To further define tax withholding, it helps to know who businesses withhold tax for:
- employees
- company directors
- workers under labour-hire agreements
- contractors without an ABN (Australian business number)
Outside of the context of employment, withholding tax can also be required for supplies with no ABN quoted.
Who must withhold PAYG tax in Australia?
All Australian businesses who pay their staff must withhold and pay their tax to the ATO on their behalf, which is one of the main income tax obligations for a business. If you own a business, it’s essential that it’s registered for PAYG withholding even if you haven’t withheld any tax for an employee. You register for PAYG withholding before your first payment where tax must be withheld, using the ATO’s Business Registration Service. If you own the business and pay yourself as an employee, you still need to be withholding your own income tax if you’re registered for PAYG tax withholding.
How to estimate PAYG tax withheld per pay run
The easiest way to estimate tax withheld is to use the ATO’s tax withheld calculator alongside the relevant ATO tax tables. To help businesses estimate tax withheld for PAYG, the ATO offers a free online calculator, which works with a range of variables to work out tax withholding for weekly, fortnightly, monthly, and quarterly pay runs. To use this calculator, you’ll need to use the appropriate interactive tax table that the ATO provides and which takes into account information such as income tax rates, Medicare levies, study and training support loan contributions, as well as other important factors listed on the ATO site. There is also a simplified version of the calculator in the ATO app.
For a broad estimation, you can use the ATO’s tax tables to get simple output answers and get an idea of how much tax to withhold for each employee based on their individual circumstances. With this information collected, you can work out the total amount of withholding tax per pay run.
What changes how much you withhold
There are a range of circumstances that can influence how much tax withholding to account for relating to each employee. These can be categorised as:
Employee factors
Some adjustments depend on the employee’s own circumstances and what they’ve declared on their tax file number declaration.
- Receiving Medicare levy exemptions: Employees may be entitled to an exemption from paying the Medicare levy, which is 2% of their taxable income. In some cases, employees may also be entitled to a half-exemption, depending on their (or their spouse’s) circumstances.
- Repaying study and training support loans (HECS/HELP): Not only is federal tax able to be withheld from income, but study or training loans can also be withheld from employee payment and passed on to the government. This can relate to higher education such as university loans, or trade-specific training debt like apprenticeship loans from the Australian government.
- Claiming the tax-free threshold: Most Australians can claim the tax-free threshold on the first $18,200 they earn in a year, which reduces their overall tax obligation. Qualifying for the threshold depends on whether or not an employee is an Australian tax resident.
Pay run variables
Other adjustments change from one pay run to the next, depending on what you’re paying that week.
- Bonuses and commissions: These aren’t taxed as regular payments within one pay run, but spread across the payments in a set period. This is to stop the employee from being overtaxed in one pay cycle.
- Overtime pay: As with bonuses and commissions, clocking excessive overtime in a single pay run could bump an employee into a higher tax bracket for a single pay period. This can mean more tax withheld than normal, but this can be reconciled at the end of the year.
- Employee allowances: Some employee allowances are taxable, such as staff car allowances, for example. These must be correctly accounted for when estimating tax withheld. In some cases, this may be creditable withholding tax, and might be reclaimable when an employee does their end-of-year tax return.
- Lump-sum payments: Big lump-sum payments can make it look like an employee will be in a higher tax bracket than they would be if they were paid in smaller chunks. In this case, it can be wise to divide the lump sum into the relevant weekly, fortnightly, or monthly instalments of the pay period and spread out the estimated tax payments.
Compliance factors
A few adjustments come down to meeting your reporting obligations and applying the right rate.
- Employees missing their TFN (tax file number): Without a tax file number, employers are required to use the maximum tax rate to ensure that enough tax is withheld. The tax rate for employees who can’t provide a TFN is 47% for Australian residents, and 45% for non-residents.
- ATO-approved withholding variations: In some cases, the ATO may grant variations to the tax rate you should withhold for specific employees in circumstances that mean they would otherwise receive an excessively high credit after filing their return. Employees receive an official letter from the ATO to prove approval of the variation.
When to report and pay PAYG withholding
The minimum frequency to report and pay PAYG withholding depends on your withholding status, which is determined by the size of your business (in other words, how much ATO tax is withheld on behalf of employees each year), being either a small, medium, or large withholder. Report any withheld amounts in the PAYG tax withheld section of your BAS (business activity statement). Here are the brackets for different statuses of withholding:
- Small withholder ($25,000 or less): quarterly requirement for notification and payment of withheld tax
- Medium withholder ($25,001 to $1 million): monthly requirement for notification and payment of withheld tax
- Large withholder (more than $1 million): Pay electronically within 6 to 8 business days of each withholding event (such as when staff are paid). This replaced the old twice-weekly payment cycle from 1 July 2026. You'll also be issued a unique Payment Reference Number (PRN) to use when making these payments, and if you report through STP, the amounts you pay must match what you've reported.
Submitting PAYG withholding through STP
Once you know the minimum frequency with which to report and pay the withheld tax via your BAS, feeding tax withholding information to the ATO can happen in real time by being integrated with STP, or single touch payroll. If you report through STP, which you can do with every pay run through your payroll software, you pay the matching withheld tax to the ATO when you file your BAS (or monthly instalment activity statement for medium withholders). For employee payments not reported through STP, you need to provide comprehensive payment summaries to those payees, and lodge an annual report with the ATO to confirm your total withholding outside of the single-touch-payroll system.
Simplify PAYG withholding with Xero
If estimating PAYG tax withholding still seems like a mind-numbing process, having the right tools at your fingertips can simplify an arduous and time-consuming series of steps. Xero helps small businesses by doing the maths and plugging their accounting system into the ATO. Apply the correct tax and withholding rate, submit accurate and timely reports through single touch payroll, and pull this information into your BAS and IAS (instalment activity statement). Even scary tasks like adjusting over or under-withheld amounts can be done in one place. Want to find out how Xero can help you estimate tax withheld?
FAQs on PAYG withholding for businesses
Still have a few questions? Here are some answers to common questions about how to estimate tax withheld and navigating tax withholding for small businesses.
How much tax is withheld from weekly wages in Australia?
It depends on the wage and whether the employee claims the tax-free threshold. Under the ATO’s weekly tax table that applies from 1 July 2026, someone earning $563 a week has $33 withheld if they claim the tax-free threshold, or $108 if they don’t. Enter each employee’s weekly earnings into that table, then adjust for the Medicare levy, tax offsets, or study and training loans using the other tax tables the ATO provides.
What do I put for estimated tax payments vs PAYG withholding?
Estimating income tax for your business and its profit is another significant aspect of small business accounting, but this is different to estimating PAYG withholding. When you’re required to pay PAYG instalments on your business’ income, you use the previous year’s tax return and other predictions to estimate the tax you’ll owe at the end of the year, and pay that to the ATO in instalments throughout the year. Just like PAYG tax withholding, this helps to avoid a hefty tax bill at the end of the year, although these are different parts of your business activity statement.
Does PAYG withholding include super?
No, PAYG withholding doesn’t include superannuation guarantee, as this is a separate contribution employers make. PAYG withholding may only apply to super payments when they’re made directly to the employee rather than the government, as with lump sum payments or salary sacrifice arrangements.
How do I fix under-withholding from a prior pay run?
In the event that you under-withheld from a pay run, you must correct this by withholding the remaining amount in the next pay cycle. You must then pay that additional withheld amount on to the ATO, and ensure you keep accurate and reliable records of this correction. This can often be done within the same software in which you figure your payroll taxes and pay staff. Bigger errors may even require you to revise your BAS, or contact the ATO for transparency.
How do I fix over-withholding from a prior pay run?
If you find the error early, refund the extra amount to the payee before you send it on. If you’ve already paid it to the ATO, you can offset it against a future withholding amount or lodge a revised activity statement to recover it.
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