If you’ve just started a job or run a business with employees, you’re probably aware that you need to pay taxes on your income; it’s called income tax. The big question is how much, and how? That’s where PAYG comes in. There are two types of PAYG. One is called PAYGI which is an acronym for Pay As You Go Instalments and one is PAYGW which is an acronym for Pay As You Go Withholding. Quite different however very similar names, which confuses many.
What is PAYG Withholding?
PAYG stands for Pay As You Go. It's a system where your employer takes a bit of money from your gross pay to cover your taxes – this is called PAYG withholding. Then, they give you what's left as your take-home pay, which you might get weekly, every two weeks, or monthly. The money they took out is sent to the ATO on your behalf. When the year ends, the taxes you paid will be shown on your annual income statement.
Benefits of PAYG Withholding
In short, PAYG is great because it helps employees set aside tax throughout the year rather than getting hit with a surprise tax bill at the end of the year.
What PAYG means for employees
Ultimately your employer is obliged to sort out your PAYG Withholding but it’s good to know how your income tax works and check what amount you’re paying.
It is important to remember to notify your employer when your circumstances change, for instance after you have repaid your HELP/HECS debt or if you start a second job as this will change the amount of PAYGW that needs to be withheld from your gross pay.
What PAYG means for employers
As an employer, part of your responsibility is helping the people you pay to manage their tax obligations at the end of the year. To do this, you collect Pay-As-You-Go (PAYG) withholding amounts from the money you pay to:
- Your employees
- Other workers like contractors you have special agreements with
- Businesses that haven't provided their Australian business number (ABN)
Pay-as-you-go (PAYG) instalments are different to PAYG Withholding. PAYG Instalments are the regular prepayments made by your business to cover your investment/business’ tax obligations throughout the year instead of at the end. The advantage to your business is in avoiding a surprise tax bill at the end of the year.
The ATO formula is not perfect. The instalment is calculated by the ATO based on the last tax return lodged. It is common for one taxing year to be very different from another for many reasons, for example COVID. We suggest you contact your tax agent regularly during the year to prepare tax estimates as this is really the only way to ensure that you are putting aside enough PAYGI for the end of the tax year.
How are PAYG Instalments calculated?
When you prepay your income tax using pay as you go (PAYG) instalments, you may have a choice between:
- Paying an amount determined by the ATO (Australian Taxation Office) either on a percentage of income basis or a set instalment amount.
- You can vary your instalment, however we suggest you first speak to your tax agent, because if the figure you vary the instalment amount results in the year-end tax being out by more than 15%, the Commissioner has the ability to impose a penalty/interest.
When are PAYG Instalments due?
Generally, due dates for pay as you go (PAYG) instalments are 28 days after the end of each quarter.
How to lodge and pay PAYG Instalments
You have the option to submit and make payments for your PAYG instalments online, via mail, or with the assistance of a tax or BAS agent. See the ATO’s instructions for lodging your PAYG Instalments.
For payments, the easiest way is to pay the ATO electronically via BPAY®, credit card or debit card.
How to register for PAYG?
You can enter the PAYG instalments system manually or the ATO may enter you automatically. If you lodge a tax return with instalment income above the entry threshold, you may be required to pay PAYG instalments. These thresholds are different for individuals and sole-traders than they are for company’s and super funds. See the ATO for more info on how you enter the PAYG Instalment system.
In summary to register
- online through ATO Online Services for business
- through your registered tax agent or BAS agent
- using your Standard Business Reporting (SBR) compatible software
- by phoning ATO business line, if you're an authorised business contact.
People often ask:
What does PAYG stand for?
PAYG stands for Pay-As-You-Go
What is PAYG Tax?
PAYG Tax is a system in Australia that requires individuals and businesses to pay their income tax throughout the year as they earn income, rather than in a lump sum at the end of the year.
What is PAYG amount?
The PAYG amount is the portion of income withheld by employers or businesses to cover an individual's expected tax liability.
What is PAYG Withholding?
PAYG Withholding is the process of deducting and remitting tax from payments made to employees, contractors, or other entities as required by the Australian Taxation Office (ATO).
What is a PAYG Summary?
A PAYG Summary, now known as an Income Statement, is a document that summarises the income, tax withheld, and superannuation contributions made by an employer on an individual's behalf.
Do I have to use PAYG Withholding?
You are required to use PAYG Withholding if you make payments to employees or other entities and meet certain criteria outlined by the ATO.