- PAYG withholding is tax you deduct from employees and remit to the ATO. It is their tax, not yours.
- PAYG instalments are prepayments toward your own business or investment income tax.
- A business can have one, both, or neither, and both are reported through your activity statements.
PAYG tax in Australia is really two separate systems that share one confusing name: PAYG withholding, which is tax you take out of your employees’ pay, and PAYG instalments, which are prepayments toward your own income tax. Getting them mixed up is one of the most common sources of employer confusion, and it can lead to penalties. This guide splits them cleanly so you know which applies to you. If payroll is the part you would rather hand off, Sleek runs it end to end.
PAYG withholding vs PAYG instalments: what’s the difference?
The simplest way to tell them apart is whose tax it is. PAYG withholding is other people’s tax that you collect and pass on, while PAYG instalments are your own tax paid early. They share the Pay As You Go name because both spread tax across the year instead of leaving one big bill at the end.
| PAYG withholding | PAYG instalments | |
| Whose tax | Your employees’ and some contractors’ | Your own (business or investment) income tax |
| Triggered by | Employing staff or paying no-ABN suppliers | Business/investment income above ATO thresholds |
| Reported at | Labels W1 and W2 on your BAS or IAS | T labels on your BAS or instalment notice |
| Positioned with | Payroll | Accounting / tax planning |
PAYG withholding: what are your obligations as an employer?
If you pay employees, you must withhold tax from each payment and send it to the ATO on their behalf. You register for PAYG withholding before your first payment to a worker, which you can do when you apply for an ABN or later through ATO online services.
How much you withhold comes from the ATO’s tax tables, based on the employee’s earnings, whether they claimed the tax-free threshold, and any study-loan or Medicare adjustments. Two rules catch employers out:
- No TFN, higher rate: if a worker does not provide a tax file number, you withhold at 47%, the top marginal rate including the Medicare levy.
- Contractors usually excluded: you generally do not withhold from contractors, unless they fail to quote an ABN.
Your reporting frequency depends on how much you withheld in the previous financial year, which sets your withholder tier. Outsourcing this is common, and our guide on the benefits of payroll outsourcing explains why.
Withholder tiers and how often you pay
- Small withholder: A$25,000 or less withheld in the previous financial year. Report and pay quarterly with your BAS.
- Medium withholder: A$25,001 to A$1M withheld in the previous financial year. Report and pay monthly, using an IAS in non-BAS months.
- Large withholder: More than A$1M withheld in a previous year. Pay within 6 to 8 days of each pay event.
PAYG instalments: how do you pre-pay tax on business income?
PAYG instalments are regular prepayments toward the income tax on your own business or investment earnings, so you are not hit with the full amount at tax time. The ATO decides whether you are in the system based on your most recent tax return.
As an individual, sole trader, or trust, you are generally entered automatically when both of these are true:
- Your instalment income (gross business and investment income, excluding GST and capital gains) is A$4,000 or more.
- The tax payable on your latest notice of assessment is A$1,000 or more.
You can also enter voluntarily, which some property investors do to smooth cash flow. See our accounts for contractors guide for how this plays out for independent earners.
How are PAYG amounts calculated?
Withholding and instalments use completely different calculation logic, which is another reason they are easy to confuse.
Withholding
You do not do the maths by hand. Payroll software applies the correct ATO tax table to each employee’s pay and reports it through Single Touch Payroll as you run payroll.
Instalments
The ATO gives you one of two methods, and you keep the chosen method for the financial year:
- Instalment amount: the ATO calculates a set dollar figure for you, best when income is steady.
- Instalment rate: a percentage the ATO sets, applied to your gross instalment income each quarter, best when income fluctuates because the amount moves with what you earn.
If your circumstances change, you can vary either method through your activity statement, though under-varying can attract interest.
What are the reporting and due dates?
Both systems flow through your activity statements, so the deadlines line up with your BAS or IAS cycle. Most small businesses lodge quarterly.
- Quarterly BAS: due 28 October, 28 February, 28 April, and 28 July.
- Monthly lodgment: due on the 21st of the following month.
- STP finalisation: complete your end-of-year payroll finalisation by 14 July so employees’ income statements are marked tax ready.
Missing these dates can trigger a failure-to-lodge penalty plus interest, so a reliable calendar (or a provider who lodges for you) matters. Compare providers in our payroll providers Australia guide.
Set aside PAYG withholding and instalment amounts in a separate account as you go. That money belongs to the ATO, not your working capital, and treating it as spendable cash is how businesses fall behind at BAS time.
Which PAYG obligations apply to you?
It comes down to two questions, and you can answer both quickly. The two systems are independent, so you may land in one, both, or neither.
- Do you pay employees (or no-ABN suppliers)? If yes, PAYG withholding applies.
- Is your business or investment income above the ATO instalment thresholds? If yes, PAYG instalments apply.
A sole trader with strong income but no staff typically has instalments only. A company running at a loss with employees may have withholding only. Most established businesses with staff and profit have both. Sole traders taking on their first hire should read our sole trader employees guide.
How Sleek manages PAYG for you
Sleek covers both halves of PAYG in one place: our payroll service handles withholding, STP reporting, and lodgment, while our accounting team manages your instalments and BAS. That removes the split-brain problem of running two systems yourself and keeps you clear of penalties. Accounting starts from A$275/month for a Pty Ltd.
Sleek covers payroll on the withholding side and accounting for instalments and BAS.
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FAQs about PAYG tax in Australia
What is the difference between PAYG withholding and PAYG instalments?
PAYG withholding is tax you deduct from employees’ pay and send to the ATO on their behalf, reported at labels W1 and W2. PAYG instalments are prepayments toward your own income tax on business or investment earnings, reported at the T labels. One is other people’s tax you collect, the other is your own tax paid early.
Do I need to register for PAYG withholding?
Yes, if you pay employees or pay a supplier who does not quote an ABN. You must register before making the first payment subject to withholding, and you can do it when applying for your ABN or later through ATO online services. Registration is free and usually processed within a few days.
How much tax do I withhold if an employee gives no TFN?
You withhold at 47%, the top marginal rate including the Medicare levy, for resident employees who do not provide a tax file number. This is a legal obligation, not a choice. Once the employee supplies a valid TFN, you revert to the standard ATO tax tables for their pay.
When am I automatically put into PAYG instalments?
As an individual, sole trader, or trust, the ATO generally enters you automatically when your instalment income is A$4,000 or more and the tax payable on your latest assessment is A$1,000 or more. The ATO notifies you and works out your instalment amount or rate from your most recent return.
Can I have both PAYG withholding and PAYG instalments?
Yes, and many established businesses do. If you employ staff you have withholding, and if your own business income is above the thresholds you also have instalments. They are separate obligations that both appear on your activity statement, so you report and pay them together but calculate them differently.
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When are PAYG payments due?
For quarterly lodgers, PAYG amounts are due with the BAS on 28 October, 28 February, 28 April, and 28 July. Monthly lodgers pay by the 21st of the following month. Your STP payroll finalisation is separate and is generally due by 14 July after the end of the financial year.
