How much tax to withhold¶

Once you know you must withhold PAYG withholding from an employee's pay, the next question is: how much? The amount is not the same for everyone. It depends on how much the employee is paid and on the answers they give on their TFN declaration.

You do not have to work the amount out by hand. The ATO publishes the maths, and payroll software does the calculation for you.

Why this matters¶

Withhold too little and your employee could face a tax bill at the end of the year. Withhold too much and they are short each pay. Knowing what the amount depends on helps you understand the number your software produces and answer employee questions about it.

What you will learn¶

• What the withholding amount depends on
• How the TFN declaration changes it
• That the ATO tax tables and software work out the amount

Understanding the concept¶

A TFN declaration is a form an employee completes when they start. TFN stands for tax file number — the personal reference number the ATO uses for a taxpayer. The ATO explains that the answers an employee gives on their TFN declaration determine how much you need to withhold from their pay.

Two answers make a big difference:

• The tax-free threshold. An Australian resident can usually earn a set amount each year tax free. An employee can choose to claim the tax-free threshold on their TFN declaration. If they claim it with you, less tax is withheld from their pay with you.
• Residency for tax purposes. Whether the employee is an Australian resident or a foreign resident for tax affects how much is withheld.

The other big factor is simply how much the employee is paid in the period — a larger pay generally means a larger amount withheld.

The ATO publishes tax tables (and a withholding formula) that turn the pay and the TFN declaration answers into the amount to withhold. You do not need to read the tables yourself — your payroll software applies them for you and produces the amount.

Example¶

Two employees, Jordan and Lee, are both paid the same gross amount this fortnight. Jordan claimed the tax-free threshold on their TFN declaration; Lee did not, because this is their second job and they claim the threshold elsewhere. Even on the same gross pay, the amount withheld from Lee is higher than the amount withheld from Jordan. The payroll software works out each amount from their pay and their TFN declaration answers.

Common mistakes¶

• Withholding the same amount for everyone on the same gross pay — the answers differ.
• Not collecting a TFN declaration, so the right amount cannot be worked out.
• Assuming an employee claims the tax-free threshold when they have not.
• Trying to read the tax tables by hand instead of letting the software apply them.

How this works in myaccountant¶

Key points¶

• The withholding amount depends on the employee's pay and their TFN declaration answers.
• Claiming the tax-free threshold and residency both change the amount.
• A larger pay generally means a larger amount withheld.
• The ATO publishes tax tables and a formula that produce the amount.
• Payroll software applies the ATO's tables for you — you do not do the maths by hand.

Learn next¶

• PAYG withholding explained
• The tax-free threshold
• What are deductions?

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