Tax to be withheld: A simple guide for employers in Australia

Published Thursday 20 November 2025

Table of contents

• What is withholding tax?
• Who needs to withhold tax from employees?
• How to register for withholding tax obligations
• How much tax should you withhold?
• Your employees pay tax through you
• The importance of keeping records
• What should you record?
• Looking after your records
• Simplifying the work with online payroll software
• Don't forget to pay withheld taxes on time
• Filing online – a choice or requirement?
• Stay compliant with payroll withholding taxes
• Frequently asked questions about tax withholding
• FAQs on withholding tax

Key takeaways

• Register for PAYG withholding with the ATO before you start employing staff, as this is legally required for all businesses with employees and enables you to meet your compliance obligations.

• Maintain comprehensive payroll records for 5 years including employee personal details, all payments, benefits, and tax withholdings, as accurate record-keeping protects your business from penalties and audits.

• Utilise the ATO's tax tables or online calculators to determine correct withholding amounts based on each employee's earnings and tax file number declaration, ensuring compliance with current tax rates and regulations.

• Implement automated payroll software to streamline tax calculations, record-keeping, and payment processing while reducing manual errors and staying current with tax rate changes.

What is withholding tax?

Withholding tax is the money you, as an employer, take out of your employees' pay to send to the Australian Taxation Office (ATO). In Australia, this system is called Pay As You Go (PAYG) withholding. It's not an extra tax. You help your employees pay their income tax throughout the year, so they avoid a large bill at tax time. This also helps you meet your compliance obligations.

Who needs to withhold tax from employees?

If you have employees, you generally need to withhold tax from their salary or wages. This applies to most businesses, from large companies to small businesses with just one employee. You also need to withhold tax from payments made to some contractors if they have a voluntary agreement with you or don't provide an ABN, and the tax office has published guidance on the ATO compliance approach for classifying workers.

If you're a sole trader or in a partnership, you don't withhold tax from your own income. Instead, you pay your income tax in instalments through the Pay As You Go (PAYG) instalments system.

How to register for withholding tax obligations

Before you can start withholding tax, you need to register for PAYG withholding with the ATO. You can do this when you first register your business, or you can add it later. You can register online through the Australian Business Register, through your registered tax agent or Business Activity Statement (BAS) agent, or by phone. Once registered, the ATO will expect you to lodge activity statements and pay the tax you've withheld.

How much tax should you withhold?

The amount of tax to withhold depends on how much you pay your employee and the information they provide in their tax file number declaration form. This form tells you if they are claiming the tax-free threshold or have a study loan.

The ATO provides tax tables and an online tax withheld calculator to help you work out the correct amount. Using Xero payroll software automates these calculations, making it easier to get it right every time and stay up to date with any changes to tax rates.

Your employees pay tax through you

Withholding tax is money you deduct from employee wages and pay directly to the tax office on their behalf. This system means employees don't pay their income tax directly – you handle it for them.

Common names for withholding tax:

• Pay-as-you-go (PAYG) tax
• Pay-as-you-earn (PAYE) tax
• Employment tax
• Deduction of tax at source

How it works: You calculate the tax owed based on each employee's salary and circumstances. You deduct it from their pay and send it to the government.

Keep accurate payroll withholding tax records to stay compliant and avoid penalties.

The importance of keeping records

Accurate payroll withholding tax records are legally required and protect your business from penalties and audits. You are responsible for collecting and recording tax correctly.

Why record keeping matters:

• Legal compliance: Avoid penalties and government audits
• Cost visibility: See true employee costs beyond base salaries
• Business insight: Track how payroll expenses impact your bottom line
• Audit protection: Demonstrate compliance if questioned by authorities

Keeping accurate records helps you avoid government audits and penalties. If your Pay As You Go (PAYG) liability is overdue, directors may be personally liable for penalties.

What should you record?

Record all items of monetary value you provide to employees, as these affect their taxable income and withholding requirements.

Essential employee information:

• Personal details: Names, addresses, tax file numbers
• Employment dates: Start dates, end dates, reporting periods

Payment records:

• Base compensation: Salaries, wages, hourly rates
• Additional payments: Overtime, bonuses, commissions
• Benefits: Pensions, retirement contributions, insurance
• Non-cash benefits: Company cars, goods, services provided

Special payments:

• Leave payments: Annual leave, sick leave, parental leave
• Expense reimbursements: All receipts and documentation

Looking after your records

The ATO requires that you keep these records for 5 years from the date you prepared them or completed the transactions, whichever is later.

Storage requirements:

• Security: Use encrypted, reliable storage methods to meet your obligations under the Privacy Act, which includes the Tax File Number) Rule that governs the security of TFN information
• Access: Ensure records remain accessible for the full retention period
• Format: Check whether your jurisdiction accepts digital or requires paper records

Use cloud-based accounting software to automatically encrypt and back up your records.

Simplifying the work with online payroll software

Online payroll software automates most withholding tax calculations and record-keeping, saving hours of manual work each pay period.

Key automation benefits:

• Automatic calculations: Software uses current tax rates and rules
• Real-time updates: Tax codes update automatically when rates change
• Integrated systems: Time-tracking, expenses, and payroll work together

Time-saving features:

• Electronic timesheets: No manual time-tracking paperwork
• Employee self-service: Staff update their own details and request leave
• Mobile access: Manage payroll from any device, anywhere
• Faster processing: Automated expense reports and approvals

These features make payroll record keeping easier and help you file your reports with the tax office.

See how Xero payroll software can help you simplify payroll tasks and stay compliant.

Don't forget to pay withheld taxes on time

Pay withheld taxes on time to avoid penalties and keep your business running smoothly.

Payment requirements:

• Accuracy: Pay the exact amount withheld from employees
• Timeliness: Meet all government deadlines
• Consequences: Penalties compound with each day of delay

Set up automatic payment reminders in your accounting software so you never miss a deadline.

Filing online – a choice or requirement?

Online tax filing is now mandatory in many jurisdictions, and while some may require reports after each pay run, businesses in specific industries like construction and information technology (IT) may need to lodge a taxable payments annual report (TPAR).

Filing frequency trends:

• Traditional: Quarterly or annual reporting
• Current: Monthly, fortnightly, or per-pay-period reporting
• Requirement: Accurate records regardless of filing frequency

How software helps:

Modern payroll software connects directly to government tax systems and updates automatically, so you always have the latest reporting tools without extra work.

Stay compliant with payroll withholding taxes

Manage your withholding tax obligations by registering, calculating accurately, keeping good records, and paying on time. Smart accounting software makes the process simple, so you can focus on running your business.

Start simplifying your payroll today. Try Xero payroll software for free.

Frequently asked questions about tax withholding

FAQs on withholding tax

Below are answers to common questions about withholding tax.

What taxes are required to be withheld?

In Australia, the main tax you're required to withhold from employee payments is income tax, through the PAYG withholding system. You may also need to withhold amounts for things like study and training support loans.

Why would tax be withheld?

Tax is withheld to help employees pay their income tax gradually throughout the year. It prevents them from facing a large tax bill at the end of the financial year and ensures a steady flow of revenue for the government.

How much is withholding tax in Australia?

There isn't a single rate. The amount of tax you withhold is based on the employee's earnings for the pay period and information from their TFN declaration. The ATO provides detailed tax tables to calculate the correct amount.

Is it good to have taxes withheld?

Yes, it's a good system for employees as it makes managing their tax obligations easier and avoids 'bill shock' at tax time. For employers, it's a legal requirement that, when managed well, becomes a smooth part of running your business.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.