We’re often asked what PAYG is and if it’s a separate tax that has to be paid if you run a small business? Let’s clear up some answers.
PAYG stands for Pay-As-You-Go, which is a withholding income tax set by the Australian Taxation Office (ATO). PAYG is income tax you’re obligated to pay in instalments rather than a lump sum at the end of the year either for yourself or your business on income tax you’ll need to pay to the ATO on behalf of your employees and eligible contractors.
Why Pay PAYG?
The ATO reasons that paying tax in instalments was beneficial to avoid paying an unknown lump sum at the end of the financial year. It’s common to misjudge the amount of tax a person was obligated to pay and often people ran into trouble. Paying in instalments set by the ATO rather than a lump sum offers a solution to avoid that situation. Obligations are spread throughout the year in quarterly instalments. Tax deductions are then made during tax time and any overpayments are refunded to you in your tax return.
Pro Tax Tip: If you pay with PAYG instalments, you still need to lodge an annual income tax return.
There are two parts: PAYG instalments and PAYG withholding.
PAYG instalments are the payments paid in a quarterly rate during the year that an individual is required to make. These payments add to your yearly obligations for your business or you as an individual Australian. The ATO will notify you if you’re required to pay PAYG instalments.
PAYG instalments are generally for individuals, businesses and trusts who earn over a certain amount of money annually as business or investment income. Different rules for sole traders, partnerships, trusts and companies apply.
PAYG withholding is the system through which employers pay an employee’s or contractor’s income tax from their salary or wages. These payments are made on your estimated yearly gross income through which it will be calculated and offset against tax deductions at tax time.
Do You Need To Use PAYG Withholding?
You’ll need to make PAYG withholding payments if:
- You employ staff
- Your directors
- Contractors you have a voluntary agreement with
- Business that do not quote their ABN number
Firstly, you’ll need to register to pay PAYG withholding before you make a payment that is subject to withholding. You’ll need to do this even if you don’t have any withholding amount to make. If you stop employing staff and contractors, you’ll need to cancel your PAYG withholding registration. If your employee or contractor earns under the tax-free threshold of $18,200 per year, they’ll have their tax returned to them when they lodge their tax return.
Sole traders and partnerships may be exempt from withholding income if you draw amounts from the business as this isn’t considered to be a wage. There are provisions for your income tax liability for your business and these will need to be paid as PAYG instalments.
Pro Tax Tip: You’ll need an Australian Business Number (ABN) to register to make PAYG withholding payments.
You can make your PAYG withholding payments to the ATO using Single Touch Payroll (STP).
Other PAYG Payments
There are some other employment types that you may need to pay as PAYG withholding, and include:
- investment income to someone who does not provide their TFN
- dividends, interest and royalties paid to non-residents of Australia
- payments to certain foreign residents for activities related to gaming, entertainment and sports, and construction
- payments to Australian residents working overseas
- super income streams and annuities
- payments made to beneficiaries of closely held trusts.
Single Touch Payroll
Your STP-enabled accounting software sends the ATO information on your employee’s and valid contractor’s salary or wage, their PAYG withholding tax and their super liability information. The ATO will then match your STP information to the employer and employee records.
STP is a requirement starting from 1 July 2019. Stage 2 began on 1 January 2022 in which there were changes made to the way in which the information was reported and what is required to be reported. Read for detailed information: Changes to Single Touch Payroll Reporting https://itp.com.au/changes-to-single-touch-payroll/
Due Dates for PAYG Withholding
- 14 July – payers must issue PAYG withholding summaries or income statements to payees (that is, employees and other workers).
- 31 October – PAYG withholding annual report – payments to foreign residents, where ABN is not quoted and PAYG withholding from interest, dividends and royalties paid to non-residents.
Due dates for PAYG instalments
- 28 July – Quarter 4 (April–June)
- 21 October – Annual PAYG instalment notice
- 28 October – Quarter 1 (July–September)
- 28 February – Quarter 2 (October–December)
- 28 April – Quarter 3 (January–March)
Annual PAYG instalment notice
You’ll need to lodge an annual PAYG withholding annual report for all payments not reported and finalised through STP. Your report should include all non-STP reported payments and the amounts for those payments.
Your end of year report for your employee’s and valid contractors is used by them to lodge their tax return. In this report, you’ll need to include:
- Wages, salaries and other work-related payments you paid
- Payments to and amounts withheld from businesses that did not quote their ABN to you
- Interest, dividend and royalty payments to non-residents, and amounts withheld from those payments
- Payments to foreign residents, and amounts withheld from those payments
- Information about payments you made and amounts withheld from an investment where a payee did not quote their TFN (or in some cases, their ABN)
- Information and amounts withheld from super payments paid to a temporary resident, permanently departing Australia
- Information about payments you made and amounts withheld from natural resource payments to foreign residents
PAYG instalments and withholding can become complex, but ITP have you covered. Our bookkeeping service will keep you on track. We work hand-in-hand with our accountants who’ll make sure your obligations during the year are well taken care of. Phone 1800 367 487 and chat with a friendly professional today.