Pay As You Go (PAYG) withholding is a system that requires employers to withhold a certain amount of money from their employees' wages and pay it to the Australian Taxation Office (ATO) on behalf of the employee. The purpose of PAYG withholding is to ensure that employees pay their income tax in regular instalments throughout the year, rather than as a lump sum at the end of the financial year.
As an employer, you are responsible for withholding the correct amount of PAYG from your employees' wages and paying it to the ATO on their behalf. The amount of PAYG to be withheld is based on the employee's income tax scale and the information provided by the employee on their Tax File Number Declaration form. When you first hire or organise a salary or wage you should register the company for PAYG Withholding.
When you begin paying employees, you must register with the ATO as a PAYG withholder.
As part of each payrun for your staff, Xero will automatically calculate the amount of PAYG W from their gross wages to be held back (i.e. usually the difference between gross pay & net pay).
The amount withheld must be reported to the ATO on a regular basis, usually quarterly. This is usually calculated and paid as part of a Business Activity Statement (BAS) or Instalment Activity Statement (IAS).
Employers must also provide their employees with a payment summary at the end of the financial year, which shows the total amount of PAYG withheld and the gross and taxable amounts of the employee's income.
Smaller startups pay this PAYG W quarterly (as part of their quarterly Business Activity Statement), but if you expect to withhold more than $25k, you must lodge and pay via a monthly Instalment Activity Statement (IAS). You'll quickly reach this threshold if you have one employee earning $100,000 or two employees earning $60,000.
Of course, if Fullstack is handling your payroll, our team will handle everything for you.