Wrong tax was withheld¶

Sometimes an employee looks at their pay and feels too much — or too little — tax was taken out. This worry is common, and in most cases nothing is broken. The amount of tax withheld is worked out from a set of inputs, and usually the fix is just to check those inputs are right for future pays.

The tax taken out of a pay is called PAYG withholding. PAYG stands for pay as you go. The Australian Taxation Office (ATO) explains it is worked out from how much the employee is paid and from the answers they gave on their tax file number (TFN) declaration — such as whether they are claiming the tax-free threshold.

Why this matters¶

Employees often assume a payroll error when the withholding just reflects their own tax settings. Understanding where the number comes from lets you answer calmly, fix anything that is genuinely set up wrong, and avoid promising an outcome you can't control.

What you will learn¶

• How PAYG withholding is worked out
• Why small differences square up at tax-return time
• How to check and fix the employee's tax settings

Understanding the concept¶

PAYG withholding is the tax an employer takes from an employee's pay and sends to the ATO during the year. It is not a final tax bill — it is an estimate, paid as you go.

The ATO explains that how much gets withheld depends mainly on two things: how much the employee is paid, and the answers on their TFN declaration. A big one is the tax-free threshold — the amount a person can earn each year before tax applies. If an employee claims the tax-free threshold, less is withheld; if they don't, more is withheld. Not providing a TFN can also lead to the top rate being withheld.

This is why "too much" or "too little" tax often traces back to the declaration rather than a payroll fault. For example, someone with a second job who has claimed the tax-free threshold in the wrong place, or someone who never claimed it, can see a result that surprises them.

Here is the reassuring part. Withholding is only an along-the-way amount. The ATO works out the employee's actual tax for the year when they lodge their tax return. If a bit too much was withheld across the year, that is squared up then; if a bit too little was withheld, that is squared up then too. Small differences are normal and are sorted out at tax time.

What you can do as the employer is make sure the settings are right going forward. If an employee's situation has changed, the ATO's path is for them to give you an updated declaration, and the change then applies from the next payment you make. You update their tax settings to match, and future pays come out right.

One thing to avoid: don't tell the employee what their final tax result will be. That depends on their whole year and everything on their return, which is not something payroll can predict.

Example¶

Jordan starts a second casual job and, out of habit, claims the tax-free threshold on the TFN declaration for it as well. A few pays in, Jordan feels not enough tax is coming out and worries the payroll is wrong.

The employer checks Jordan's tax settings and sees the tax-free threshold is claimed. Nothing was calculated incorrectly — the withholding matches the declaration. Jordan decides to change the setting for this job and gives the employer an updated declaration, which the employer applies. From the next pay, the withholding reflects the new choice. Whatever small difference built up earlier is squared up when Jordan lodges a tax return.

Common mistakes¶

• Assuming the payroll is broken when the withholding simply matches the declaration.
• Not checking whether the tax-free threshold is set the way the employee intends.
• Telling the employee what their tax refund or bill will be — payroll can't know that.
• Trying to "fix" past pays for a tax change that should apply from the next pay on.
• Forgetting to update the employee's tax settings after they change their situation.

How this works in myaccountant¶

Key points¶

• PAYG withholding is worked out from the pay plus the TFN declaration answers.
• The tax-free threshold choice is a common reason withholding looks high or low.
• Withholding is an along-the-way amount, not the final tax.
• Small differences are squared up when the employee lodges their tax return.
• Fix the employee's tax settings so future pays are right — changes apply from the next pay.
• Don't predict the employee's final tax outcome; that depends on their whole return.

Learn next¶

• An employee's details are wrong
• An employee questions their pay
• Where to get help with payroll

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