- Withholding tax is money taken from a payment before you receive it, most often as PAYG withholding from wages.
- If a supplier doesn't quote an ABN, you generally must withhold 47% of the payment.
- How often you report and pay withheld amounts depends on your annual total: quarterly, monthly, or almost immediately for large withholders.
Withholding tax often turns up as a surprise: a client pays you less than the invoice said, or your payslip shows tax gone before you’ve banked a cent. If you’re a sole trader, contractor or small employer, that gap can feel alarming when nobody’s explained why it’s there.
The direct answer is that withholding tax is tax collected upfront and sent to the ATO on your behalf, and the no-ABN rate can reach 47%. It isn’t the same as PAYG instalments, which you prepay yourself toward your own tax bill. Below, we cover who has to withhold, what happens without an ABN, and how much to set aside.
What is withholding tax in Australia?
Withholding tax is money your payer takes out of a payment and sends straight to the ATO, before you ever see it. It applies to wages, some contractor payments, and investment income where no tax file number or ABN is quoted.
It’s easy to mix up withholding with PAYG instalments, but they run in opposite directions. Withholding is tax taken from a payment to you, or by you, from a payment you make to someone else. PAYG instalments are prepayments you make yourself toward your own expected tax bill.
This article covers withholding: what gets withheld, from whom, and what you owe as a result. If you’re ever unsure how a rule applies to you, speak to an Australian tax accountant before you register or make a payment. For the instalment side, read how PAYG instalments and withholding differ.
Who has to withhold tax?
If you employ staff, pay directors’ fees, or pay a supplier who hasn’t quoted an ABN, you generally have to withhold tax and pass it on to the ATO. Your obligations depend on who you’re paying and how that person is engaged.
The most common situations that trigger withholding are:
- Wages, salaries, commissions, bonuses or allowances you pay to employees
- Directors’ fees
- Payments to businesses or contractors that haven’t quoted their ABN
- Payments to independent contractors under a voluntary withholding agreement
- Investment income paid to someone who hasn’t quoted a tax file number
If your business operates as a sole trader or partnership, drawings you take from the business aren’t wages, so you don’t withhold from them. You cover that income tax yourself, through PAYG instalments instead.
If you’re not sure whether your setup requires registration, check the rules before you make your first payment. Getting this right early avoids a messy correction later, and it also matters for why your ABN matters for withholding when you’re the one being paid rather than paying.
Sole trader with a day job: how PAYG withholding affects you
If you have a job and also run a side business, your employer already withholds PAYG tax from your wages under the standard tax tables. Your sole trader income is a different story: nobody withholds anything from it automatically.
That means your side hustle earnings sit on top of your salary at tax time, taxed at your marginal rate. You’re responsible for putting aside enough to cover that bill yourself, since no one else is doing it for you.
This is one of the most common gaps we see among independent professionals juggling tax with a side hustle and a job. If the sole trader side grows, it’s worth getting tax help for freelancers and sole traders so nothing catches you out at lodgement.
What happens if a supplier doesn’t quote an ABN?
If a supplier doesn’t quote an ABN and the payment is more than $75 excluding GST, you generally must withhold tax and send it to the ATO. The rate is currently 47%, the top rate of tax. This applies whether you pay in cash or provide goods and services instead.
You’ll need to give the supplier a payment summary showing what you withheld, and keep separate records, because you can’t claim a GST credit on amounts withheld this way. If the supplier has applied for an ABN, you can agree to hold payment until they get one, but you can’t pay in full on a promise that it’s coming later.
|
Situation |
What the payer must do |
Rate or threshold |
|---|---|---|
|
Supplier quotes a valid ABN |
Generally no withholding required |
Not applicable |
|
Supplier doesn’t quote an ABN, payment over $75 (excl. GST) |
Withhold and remit to the ATO |
47% |
|
Supplier doesn’t quote an ABN, payment $75 or less (excl. GST) |
No withholding required |
Not applicable |
|
Investor doesn’t quote a TFN |
Withhold from investment income paid |
Top rate of tax |
If this happens often with the same supplier, it’s worth understanding paying and being paid as a contractor so both sides know what to expect on every invoice.
How much should I set aside?
There’s no single “set aside” number for every situation: how much you owe hinges on whether tax is already being withheld or you’re covering it yourself. Two scenarios cover most independent professionals.
If you’re the one being paid and you haven’t quoted an ABN, your client withholds 47% of the payment before it reaches you. Quoting your ABN on every invoice avoids this entirely.
If nobody withholds anything, such as sole trader income earned alongside a job, you need to estimate your own marginal rate. Say you earn $70,000 in salary and $20,000 from sole trader work in the same year. Under the 2026-27 resident tax rates, that extra $20,000 sits in the $45,001 to $135,000 bracket, taxed at 30% plus the 2% Medicare levy. That works out to around $6,400 owed in tax on the side income alone.
TIPOpen a separate savings account and transfer roughly a third of every untaxed invoice the day it’s paid, so the tax is never sitting in your everyday spending money.
When do you report and pay withheld amounts?
How often you report and pay withheld amounts to the ATO depends on your total annual withholding. There are three cycles, and most sole traders and small employers sit in the first two.
- $25,000 or less a year: you’re a small withholder and report and pay quarterly
- More than $25,000 and up to $1 million a year: you’re a medium withholder and report and pay monthly
- More than $1 million a year: you’re a large withholder and must pay within six to eight days of the withholding event
Most employers also report through Single Touch Payroll, so amounts are sent to the ATO each pay run rather than saved up. If the reporting side feels like a lot to manage alongside everything else, Sleek’s accounting and tax service can take PAYG withholding lodgement off your plate.
What can go wrong with withholding tax?
Getting withholding wrong is costly: the penalty for failing to withhold or pay an amount you should have is equal to the amount itself. That’s on top of the tax you already owed.
Company directors carry extra personal exposure. If a company doesn’t meet its PAYG withholding obligation in full by the due date, the director automatically becomes personally liable for a penalty equal to the unpaid amount.
There are three other consequences worth knowing about.
You can lose the deduction
If you should have withheld from a payment and didn’t, or you withheld but didn’t report it, you lose the tax deduction for that payment. Fixing your own mistake quickly, before the ATO starts checking, can help protect the deduction.
Interest compounds daily
Unpaid withholding amounts attract the general interest charge, which compounds daily and is reviewed every quarter. The longer an amount sits unpaid, the more expensive it becomes.
Directors can carry a personal tax debt
Company directors and their associates can also become liable for a separate non-compliance tax if the company’s PAYG withholding debt goes unpaid, even after the company winds up.
How Sleek helps you stay on top of PAYG withholding
Sleek’s tax agents handle PAYG withholding registration, reporting and lodgement, so a missed deadline doesn’t turn into an ATO bill you didn’t see coming. Sleek’s accounting and tax service starts at $1,620 a year for sole traders on revenue under $75,000.
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Frequently Asked Questions
What's the difference between PAYG withholding and PAYG instalments?
Withholding tax is taken out of a payment before you get it, such as wages or a no-ABN supplier payment. PAYG instalments are amounts you prepay yourself toward your own expected tax bill. Individuals only start owing income tax once their earnings pass the $18,200 tax-free threshold, which affects how much some contractors get back at tax time.
Do I have to withhold tax from a contractor who has an ABN?
Generally, no. If a contractor quotes a valid ABN, you don’t withhold unless you’ve both entered a voluntary withholding agreement. It’s worth checking the ABN is active on the free ABN Lookup register before you pay, since a cancelled or incorrect ABN can trigger no-ABN withholding by mistake.
What's the current withholding rate when a supplier doesn't quote an ABN?
The rate is 47%, made up of the top individual marginal rate of 45% plus the 2% Medicare levy. It applies once the payment for goods or services exceeds $75, excluding GST.
How do I register for PAYG withholding?
You must register before you’re first required to make a payment subject to withholding, even if the amount withheld turns out to be nil. Businesses with an ABN register through the Australian Business Register, while those without one, such as a household employing a nanny or gardener, use a separate PAYG withholding account application form.
What happens if I forget to withhold or pay on time?
You become liable for a penalty equal to the amount you should have withheld. Company directors can also be personally liable for the same amount if the company doesn’t pay in full by the due date. Unpaid amounts attract the general interest charge, which compounds daily.
Does withholding apply to investment income too?
Yes. If you don’t provide your tax file number to a bank or fund, withholding can apply to interest, dividends and similar investment income at the top rate of tax. Quoting your TFN when you open the account avoids this.
Can I ask for a lower withholding rate if the standard amount feels too high?
In some cases, yes. The ATO allows a PAYG withholding variation application for people who expect the standard rate to over-withhold against their actual tax position, such as those with large deductible expenses. A variation changes future withholding only; it doesn’t refund amounts already withheld.
