PAYG withholding explained for employers in Australia

Published Friday 17 April 2026

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?
• Using PAYG tax tables and calculators
• What are PAYG withholding payment summaries?
• Understanding Single Touch Payroll (STP)
• When and how to pay withheld amounts
• Filing online – a choice or requirement?
• Record keeping for PAYG withholding
• Simplifying PAYG withholding with online payroll software
• FAQs on PAYG withholding

Key takeaways

• Register for PAYG withholding with the ATO before you start paying employees, as this is a legal requirement for all businesses with employees, regardless of size.
• Use the ATO's tax tables or online calculator to work out the correct withholding amount for each employee, based on their earnings and tax file number declaration.
• Keep detailed payroll records for five years, including employee personal details, all payments, benefits, and tax withheld, to protect your business from penalties and audits.
• Use automated payroll software to handle tax calculations, Single Touch Payroll reporting, and record-keeping automatically, reducing manual errors and keeping you current with tax rate changes.

What is withholding tax?

PAYG withholding is the system where you deduct tax from your employees' pay and send it to the Australian Taxation Office (ATO). It stands for Pay As You Go.

This isn't an extra tax. You're helping your employees pay their income tax gradually throughout the year, so they avoid a large bill at tax time. It also helps you meet your compliance obligations as an employer.

Who needs to withhold tax from employees?

You need to withhold tax if you pay employees or certain contractors. This applies to businesses of all sizes, including those with just one employee.

You must withhold from:

• employees: anyone receiving salary or wages from your business
• some contractors: those with a voluntary withholding agreement or who don't provide an ABN

You don't withhold from your own income if you're a sole trader or partner. Instead, you pay tax through the PAYG instalments system. The ATO has published guidance on classifying workers correctly, including Taxation Ruling TR 2023/4 for determining who is considered an employee.

How to register for withholding tax obligations

You must register for PAYG withholding with the ATO before you start paying employees. You can register when you first set up your business or add it later.

There are three ways to register:

• Online: through the Australian Business Register
• Through an agent: your registered tax agent or BAS agent can do it for you
• By phone: contact the ATO directly

Once registered, you'll need to lodge activity statements and pay the tax you've withheld.

How much tax should you withhold?

The amount you withhold depends on two things: how much you pay the employee and the details on their tax file number (TFN) declaration.

The TFN declaration tells you whether they're claiming the tax-free threshold or have a study loan, both of which affect the withholding amount.

The ATO provides tax tables and an online calculator to help you work out the correct amount. Payroll software like Xero automates these calculations and stays up to date with tax rate changes.

Using PAYG tax tables and calculators

The ATO provides tax tables to help you work out how much to withhold from your employees' pay. These tables cover different pay periods, such as weekly, fortnightly, or monthly.

You can also use the ATO's online tax withheld calculator for a quick estimate. If you use payroll software, these calculations are done automatically based on the latest tax rates, saving you time and reducing the chance of errors.

What are PAYG withholding payment summaries?

A PAYG payment summary shows how much you paid an employee and how much tax you withheld during the financial year. In the past, employers had to give these to employees by 14 July each year.

However, if you report through Single Touch Payroll (STP), you no longer need to provide payment summaries. Instead, employees can access their income statement directly through their ATO online services.

Understanding Single Touch Payroll (STP)

Single Touch Payroll is the way most employers report their employees' tax and super information to the ATO, and has been mandatory for all employers since 2019. Each time you run your payroll, your STP-enabled software sends the required details directly to the tax office.

This means you don't need to complete separate reporting at the end of the financial year, making it easier to stay on top of your employer obligations.

When and how to pay withheld amounts

You must pay withheld amounts to the ATO by the due dates on your activity statement. Meeting deadlines helps you avoid penalties that compound daily.

Here's what you need to know about payment requirements:

• Amount: Pay exactly what you withheld from employees
• Timing: Meet the due date shown on your BAS or IAS
• Reporting: Report amounts through your activity statement or Single Touch Payroll

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

Filing online – a choice or requirement?

Most Australian employers now report PAYG withholding through Single Touch Payroll (STP) each time they run payroll. This has replaced the need for separate annual reports for most businesses.

Some industries still have additional requirements. Businesses in construction and IT may need to lodge a taxable payments annual report (TPAR), which is due by 28 August annually.

Payroll software can simplify your reporting in several ways:

• Direct connection: Payroll software reports to the ATO automatically
• Automatic updates: Stays current with reporting requirements
• Less paperwork: Reduces manual filing tasks

Record keeping for PAYG withholding

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

Good record keeping is essential for several reasons:

• Legal compliance: Avoid penalties and government audits
• Cost visibility: See true employee costs beyond base salaries
• Business insight: Track how payroll expenses affect your bottom line
• Audit protection: Demonstrate compliance if questioned by authorities
• Personal liability: Directors automatically become personally liable for a penalty equal to any overdue PAYG amounts

What should you record?

Record everything of monetary value you provide to employees. This affects their taxable income and your withholding requirements.

Keep detailed records of everything you provide to employees:

• Personal details: Names, addresses, tax file numbers
• Employment dates: Start dates, end dates, pay periods
• Wages and salary: Base pay, hourly rates, overtime
• Additional payments: Bonuses, commissions, allowances
• Leave payments: Annual leave, sick leave, parental leave
• Benefits: Superannuation, insurance, non-cash benefits like company cars
• Expense reimbursements: All receipts and supporting documents

How long to keep records

You must keep payroll records for five years from when you prepared them or completed the transaction, whichever is later.

Follow these storage requirements to keep your records secure and accessible:

• Security: Use encrypted storage to protect TFN information under the Privacy Act, which regulates the collection, storage, and security of individuals' TFN information
• Access: Ensure records stay accessible for the full retention period
• Format: Digital records are generally accepted, but check your specific requirements

Cloud-based accounting software automatically encrypts and backs up your records.

Simplifying PAYG withholding with online payroll software

Payroll software automates withholding calculations and record-keeping, saving hours of manual work each pay period.

Automation can help streamline your payroll processes in these ways:

• Accurate tax rates: Calculates using current rates and updates automatically when they change
• Integrated systems: Time-tracking, expenses, and payroll work together
• Electronic timesheets: Eliminates manual paperwork
• Employee self-service: Staff update their own details and request leave
• Mobile access: Manage payroll from any device
• Faster reporting: File directly with the ATO through Single Touch Payroll

Focus on running your business while Xero payroll software handles these tasks automatically.

FAQs on PAYG withholding

Here are answers to common questions about PAYG withholding.

What happens if I don't register for PAYG withholding?

If you employ staff without registering for PAYG withholding, you may face penalties from the ATO. Registration is a legal requirement for all businesses with employees, so it's important to register before you start paying staff.

Can I use spreadsheets instead of payroll software?

While you can use spreadsheets, payroll software reduces errors and automatically updates when tax rates change. Software also reports directly to the ATO through Single Touch Payroll, saving you time and ensuring compliance.

How do I know if I've withheld the correct amount?

Use the ATO's tax tables or online calculator to check withholding amounts. The correct amount depends on the employee's earnings and their TFN declaration. Payroll software calculates this automatically.

What if an employee doesn't provide a TFN?

If an employee doesn't provide a TFN, you must withhold at the highest rate of tax. Encourage employees to lodge their TFN declaration as soon as possible to avoid over-withholding.

Do I need to withhold from contractors?

You only withhold from contractors if they have a voluntary withholding agreement with you or if they don't provide an ABN. Most contractors with an ABN handle their own tax obligations.