PAYG refers to the ‘Pay As You Go’ tax system and describes two different processes overseen by the Australian Tax Office (ATO). The two processes are PAYG instalments and PAYG withholding.
If you have employees you pay through the PAYG system, you will likely be required to withhold their income tax to pay to the ATO. It is important to note that PAYG differs from Payroll tax, which you may also be obligated to pay.
If you are a Sole Trader and do not pay yourself through the PAYG system, you may consider setting aside funds throughout the year, so you are not surprised by a large tax bill at the End of Financial Year (EOFY).
The PAYG tax system allows employers to vary the amount of tax that is withheld from employees on each payment. The amount is withheld in anticipation of the employees’ end of year tax liability and is paid to the ATO in instalments.
Rather than requiring employees to pay a large tax bill at EOFY, the PAYG system is designed to facilitate partial payments over the year, making it easier for those who are paid through PAYG to meet taxation obligations. When an employee does their tax return at the end of the year, they will get a tax bill or refund.
Let’s take a moment to take a deeper look at Withholding and Instalments:
PAYG Withholding
PAYG withholding is a system of withholding income tax from an employee or contractor’s salary or wages. The employer pays the tax directly to the ATO on behalf of the employee or contractor.
These payments are made based on your expected income level for the year (calculated by the corresponding tax bracket) and will be considered when assessing your tax at EOFY.
PAYG Instalments
Generally, PAYG instalments will apply to individuals, organisations or trusts who earn a certain amount of individual, gross business or investment outcome.
PAYG Instalments is a system for the business to make payments as quarterly instalments. These quarterly payments go towards the expected income tax obligation from your business (or investments) for the current financial year.
Special rules and exceptions apply to PAYG instalments for different business and company structures, trusts, primary producers, and consolidated groups. It is best to be prepared and chat with us to make sure you are across the obligations that apply to your circumstances.
Who does PAYG Withholding apply to?
You are obligated to withhold tax if your business:
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- Has employees
- Has contractors or other workers who have voluntarily agreed that you will withhold amounts from your payments to them
If an employee or contractor earns under the tax-free threshold, they can claim a tax refund through their individual tax return which is processed at the end of the financial year. As an employer, you must follow the guidelines for paying the appropriate level of tax.
If you are making payments to businesses that does not quote their Australian Business Number (ABN), you will be obligated to withhold tax.
PAYG Tax Variations
Your employee may request a tax variation to vary the rate of withholding so that they can:
- Lower the amount of tax withheld
- Increase the amount of tax withheld
- To avoid receiving a large tax bill at the end of the year
In the instance of a downward variation, the employee will need to submit a PAYG Withholding variation application.
Register for PAYG Withholding
If you are making payments under the PAYG system, you must be registered. This simple process can be done through the Australian Business Register on the ATO website. If you already have an ABN, you can use the ATO’s Business Portal to register.
You will need to be registered before you withhold your first payment.
Exceptions to PAYG Withholding Obligations
You may be exempt from withholding income if your business is a sole trader or partnership structure and you ‘draw’ amounts from the business. Meaning you are not paid through the PAYG system.
Owners’ drawings are not considered a wage, so these drawings are not subject to PAYG withholding.
It is essential to make sure you understand your tax obligations and that you are withholding the correct amount and paying your instalments on time. Failure to meet these obligations can result in fines and other easily avoided repercussions by the ATO.
I am here to help if you want to talk through your obligations and any compliance concerns. A correctly set-up bookkeeping system can minimise errors and streamline calculating withholding amounts and employee payments. I can review or set up your system to help minimise the administrative burden of meeting your business tax obligations. Book a chat with me to see how I can help.
This blog post is intended for informational and educational purposes only. The information provided in this blog post should not be taken as professional accounting advice or recommendations.
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