As an employer knowing how PAYG withholding obligations operate will help you and your employees meet their tax requirements. PAYG is short for ‘pay as you go’, meaning that your employees will not face a large tax bill at the end of the financial year. PAYG makes it easier for everyone to complete their end of year tax return by the due date.
Through a simple online registration, PAYG withholding allows for employers to make payments that consider tax requirements within the Australian tax system. It is important for you, as the payer to have accurate record keeping practices, annual reports and business activity statements to know the amount of tax that is applicable.
You can do this by using Single-Touch Payroll (STP) which is a simple and easy way to ensure you meet your reporting obligations. This complete guide will outline what PAYG withholding is and how you can register for it.
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What is PAYG Withholding?
Pay as you go (PAYG) is a withholding tax or payroll tax which requires you to pay incremental amounts of your business’s income to the ATO. These payments accumulate towards your expected end of year income tax liability and differ from employee to employee depending on their salary. .
Before you lodge your income tax return, it is important to finalise your PAYG instalments. This will ensure that your income tax assessment takes into account the contributions you have paid throughout the year.
As a business with employees, you will need to collect Pay As You Go (PAYG) Withholding from employees, contractors, and businesses you pay that do not give you an Australian Business Number (ABN).
What are your PAYG obligations?
As a business owner, you have an obligation under the Australian Taxation Office (‘ATO’) rules to collect tax from the payments you make to employees and certain businesses to ensure that they meet their end of the financial year requirements.
To determine whether or not you have withholding obligation or payroll tax, check if the following applies:
- You’re an employer
- You employ other workers, such as contractors and both of you are entered into a voluntary agreement to withhold amounts from your payments to them
- You make payments to businesses that do not quote their ABN
If this criteria applies to your business, you must register for PAYG withholding (if you have not already) before you withhold a partial amount of a payment.
Your PAYG obligations
As a business owner, you have an obligation under ATO rules to collect tax from the payments you make to employees and certain businesses to ensure that they meet their end-of-year tax liabilities.
To determine whether or not you have withholding obligation, check if the following applies:
- You’re an employer
- You employ other workers, such as contractors and both of you are entered into a voluntary agreement to withhold amounts from your payments to them
- You make payments to businesses that do not quote their ABN
If this criteria applies to your business, you must register for PAYG withholding (if you have not already) before you withhold a partial amount of a payment.
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How to register for PAYG Withholding?
There are a few ways to register for PAYG payments. Note that in order to register for PAYG withholding, you need to have your business’s ABN on hand. If you already have an ABN, you can register:
- Online through the Business Portal on the ATO website
- Through a registered tax agent or BAS agent
- using your Standard Business Reporting (SBR) compatible payroll software
- by phoning our business line if you’re an authorised business contact.
You can also order and complete the following forms from the ATO’s publication ordering service for business:
- Add a new business account (NAT 2954) form
- Application to cancel registration (NAT 2955) form
What Payments do you need to withhold from?
The PAYG withholding system is based on withholding amounts of a payment that you as a business may make. The amount that you withhold in terms of the payroll tax is then sent to the ATO.
The types of payments that you withhold from are generally from the payments made to:
- Employees
- Directors
- Business that do not quote their ABN to you
- Contractor with which you have a voluntary agreement with
Business that operate as either a sole trader or as a partnership and simply have a tax file number which draws amounts from the business have an exemption and do not have to withhold these payments and adhere to these tax obligations as they are not classified as a wage.
How to handle PAYG when an employee leaves or retires?
Should an employee cease employment with you, some things you are required to do are:
- Make any final PAYG withholding payments that may be long standing, on the employee’s behalf
- Complete an employment termination payment (ETP) form, if applicable
- Send a payment summary to the employee
- Keep on record the employee’s TFN declaration till the end of the next financial year
- Keep records
Should a contractor under a voluntary agreement cease their contract with you, you must then withhold any final payments at the applicable rate and keep record of the necessary PAYG withholding.
This is also applicable to businesses that have not quoted their ABN.
When do obligations cease?
The situations in which you will no longer be obliged to withhold payment amount is if you should cease as an employer or if you no longer operate your business. Should you cease as an employer you will be advised to cancel your PAYG withholding registration. Should you cease operating your business then you may wish to cancel your ABN registration as well as your PAYG withholding registration.
However before commencing with either action you must ensure that you:
- Have lodged any outstanding activity statements; and
- Met all your registration requirements
To proceed with the cancellation of your PAYG withholding registration you may cancel it:
- Online through the Business Portal on the ATO website
- Through a registered tax agent or BAS agent
Key Takeaways
PAYG Withholding in Australia is a great way to make tax easier for your employees for both big and small business. This takes the strain off both you and the employee so you both can get back to working efficiently without extra distractions.
It is also important to consider how superannuation, goods and services tax (GST), the tax free threshold, tax repayments, fringe benefits tax (FBT) and medicare operates in addition to PAYG to have a comprehensive understanding of business requirements. So, it might be time to grab your calculator and asses PAYG withheld amounts and commonwealth entitlements.
If you are still having trouble understanding how PAYG impacts you and your business feel free to reach out to one of Lawpath’s knowledgeable tax lawyers so you can get the best advice possible regarding tax rates.
