PAYG withholding explained¶

PAYG withholding is the tax an employer takes out of an employee's pay and sends to the Australian Taxation Office (ATO). PAYG stands for pay as you go. Instead of the employee facing one large tax bill at the end of the year, small amounts are held back from each pay and sent to the ATO along the way.

It is the largest deduction on most payslips, and taking it out is not optional — the ATO requires it.

In one line

PAYG withholding is tax the employer withholds from an employee's pay and sends to the ATO — it goes towards the employee's end-of-year tax.

Why this matters¶

If you employ people, PAYG withholding is one of your core payroll jobs. You need to take the right amount out of each pay, send it to the ATO, and register for PAYG withholding before you first have to withhold. Getting this right keeps you compliant and keeps your employees' tax on track.

What you will learn¶

What PAYG withholding is
Where the withheld amount goes and why
That an employer must register for PAYG withholding

Understanding the concept¶

When you pay an employee, you do not hand over the full gross amount. The ATO explains that you must withhold an amount of tax from the payment and send that amount to the ATO. The employee is paid the rest.

The amount you withhold is not an extra cost to the employee on top of their tax — it goes towards their tax for the year. When the employee lodges their tax return, the amounts you withheld count as a credit against the tax they owe. If too much was withheld across the year, they can get some back; if too little, they may have more to pay.

Before you are first required to withhold, the ATO says you must register for PAYG withholding. You need to register even if there is a pay where you do not end up withholding any amount. You then report and pay the amounts you have withheld to the ATO.

For accountants & bookkeepers

Withholding is reported and paid through the business activity statement (BAS): the ATO uses labels W1 for gross payments and W2 for the amount withheld. A business with an active ABN can register a PAYG withholding account through the ATO's online services. Amounts withheld from payees flow through to their end-of-year assessment as a credit.

Example¶

Priya runs a small café and hires her first employee. Before that first pay, she registers for PAYG withholding with the ATO. Each pay, she works out the amount of tax to withhold, takes it out of the employee's gross pay, and pays the employee the rest. She sets aside the withheld amounts and sends them to the ATO when they are due. At the end of the year, those withheld amounts count towards her employee's tax.

Common mistakes¶

Paying an employee the full gross amount and forgetting to withhold any tax.
Not registering for PAYG withholding before the first pay that needs it.
Withholding the tax but not setting it aside to send to the ATO.
Thinking the withheld amount is an extra tax — it goes towards the employee's own tax.

How this works in myaccountant¶

In the app — when you run a pay run, myaccountant works out the PAYG withholding for each employee automatically, based on their pay and their tax details. The withheld amount is shown on each employee's payslip alongside the gross and net pay, so you can see exactly what was taken out and sent towards their tax.

Key points¶

PAYG withholding is tax the employer takes out of an employee's pay.
The employer sends the withheld amount to the ATO.
It goes towards the employee's tax for the year, not an extra tax.
Employers must register for PAYG withholding before they first need to withhold.
It is usually the largest deduction on a payslip.

Learn next¶

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

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