PAYG withholding¶

When you pay your employees, you do not hand over the full amount they earn. You take some tax out first and send it to the Australian Taxation Office (ATO). That job is called PAYG withholding. PAYG stands for pay as you go.

This is one of the obligations you can report on your Activity Statement — the form you send the ATO to report and pay certain amounts. The money you withhold is not your own tax. It is tax you collect on the ATO's behalf and pass on for someone else.

In one line

PAYG withholding is tax you take out of payments to employees (and some others) and send to the ATO — you report it on your Activity Statement at labels W1 and W2.

Why this matters¶

If you have staff, the ATO expects you to withhold the right amount, report it, and pay it on time. Getting this wrong means an employee's tax can fall short at the end of the year, and it can also leave your business owing money it thought it had. Knowing how PAYG withholding works helps you keep those amounts separate and pay them when they are due.

What you will learn¶

What PAYG withholding is and who it applies to
How you report and pay withheld amounts on your Activity Statement
Why the withheld tax is collected for the ATO, not your own tax

Understanding the concept¶

The ATO explains that under PAYG withholding you take an amount of tax out of certain payments and send it to the ATO. The most common example is paying employees, but it can also apply to some other payments, such as paying a business that has not given you their Australian Business Number (ABN).

There are three steps.

Register first. Before you start withholding, you register for PAYG withholding with the ATO. You usually need to be registered before you make your first payment that you must withhold from.

Withhold and report. Each time you pay, you hold back the tax and give the employee the rest. You then report two totals on your Activity Statement:

Label W1 — the total gross (before-tax) wages and other payments you withheld from.
Label W2 — the total tax you withheld from those payments.

Pay the ATO. You send the withheld amount (the W2 total) to the ATO. Because it is money you collected for someone else's tax, it was never really yours to keep.

The gross wages at W1 and the tax at W2 are two different numbers. W1 is the bigger, before-tax figure; W2 is only the tax you held back.

For accountants & bookkeepers

The ATO describes PAYG withholding as amounts withheld from payments to workers and others, which are reported in the PAYG tax withheld section of the activity statement and remitted to the ATO. Gross payments sit at W1 and amounts withheld at W2. How often a business reports and pays depends on its withholder size, which the ATO sets based on the amounts withheld. Failing to withhold or report correctly can affect deductibility and may attract penalties.

Example¶

Priya runs a small cafe and employs two people, Jordan and Sam. In a quarter she pays them a combined gross wage of about $40,000. When she runs each pay, she works out the tax to withhold and holds it back — say around $7,000 in total across the quarter.

On her Activity Statement, Priya reports:

W1 — $40,000, the gross wages before tax.
W2 — $7,000, the tax she withheld.

She then pays that $7,000 to the ATO. That money was never hers to spend — she was only holding it so the ATO could put it towards Jordan's and Sam's tax for the year.

Common mistakes¶

Treating the withheld tax as business income — it is money collected for the ATO.
Spending the withheld amount before it is due, then being short when payment time comes.
Confusing PAYG withholding (tax on other people's pay) with PAYG instalments (pre- payments of your own income tax).
Putting the tax figure at W1 — W1 is the gross wages, and the tax goes at W2.

How this works in myaccountant¶

In the app — when you run a pay run, myaccountant works out the PAYG withholding for each employee automatically. When you prepare your Activity Statement, it pre-fills the gross wages at W1 and the tax withheld at W2 from your payroll, so you can check the figures against your records before you lodge.

Key points¶

PAYG withholding is tax you take out of payments to employees and some others.
You register for PAYG withholding before you start withholding.
Gross wages go at label W1; the tax withheld goes at label W2.
You pay the withheld amount to the ATO.
The withheld tax is collected for the ATO — it is not your own tax.
It is different from PAYG instalments, which are pre-payments of your own income tax.

Learn next¶

General information only — not tax, super or financial advice.

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