PAYG tax - All what you should know and a bit more
- Nov 08, 2022
- 10 min read
Hey entrepreneur, go you.
Your business has got to the point where you now need to employ others to continue to grow and build.
This is an exciting time.
However, employing staff comes with some responsibilities, namely, payroll and PAYG withholding tax.
These responsibilities are not to be taken lightly, but if you know what to do, it can be simple. There is so much help around (like us here at Sleek!).
What is PAYG tax?
PAYG tax is the prepayment of your employees’ end-of-year tax obligations to the ATO.
Essentially, you are taking out an employee’s tax from their wages or salary and forwarding it to the ATO.
To help you understand it better, there are two sides to the equation –
From an employee’s point of view, this tax is called PAYG. It is an acronym for Pay As You Go – employees pay their income tax as they earn their money.
From your business’ point of view, the payment you make on your employees’ behalf is called PAYG withholding – your business is withholding an employee’s PAYG.
Make sense?
Your obligation as a business owner is to collect an employee’s PAYG on their behalf and forward it to the ATO. These payments will be recorded against each employee, so they can submit their tax return at the end of the financial year to advise the ATO how much tax they have paid on their earnings.
PAYG sits within your payroll process. It records how much PAYG is taken out of your employee’s wages and salaries to then be forwarded to the ATO.
What is payroll?
To calculate your PAYG withholding and pass this on to the ATO, you will need to set up a payroll process to help you get it right.
Payroll is the means of paying employees. This is where all your staff’s work hours, salary and wages, taxes, superannuation and sick, carers and annual leave is recorded and reported to the ATO.
So, when you start to hire employees, you will need to complete the payroll process.
Don’t worry this may sound complicated, but it’s not!
Accounting software and your accountant make it super easy to set up and stay up to date with your obligations.
However, we do recommend you familiarise yourself with what your obligations are so you know your business is doing the right thing not just with the tax department but also with your employees.
PayG FAQs
We know you’re busy, so here’s some quick FAQs to get you started on the right foot with PAYG –
Do I need to register for PAYG withholding?
Yes, you must register before you pay someone and make your first payment, even if there is no PAYG withholding.
How do I register for PAYG?
You can register when you setup up your business, using your ABN.
If you have already set up your business, you can register for PAYG through your BAS agent, accountant, or your online services with the ATO.
How do I calculate PAYG?
If you are using the payroll function through your accounting software, the PAYG amounts will be calculated automatically with each employee’s pay.
You can then run a report for the period of your PAYG withholding to calculate the total amount of PAYG you need to pay to the ATO.
If you are making PAYG calculations outside of payroll – you may need to use the ATO calculator. This may be for PAYG withholding for contractor payments or for businesses that do not quote their ABN number.
Find the ATO calculators here.
Sleek top tip – Make sure you select the right calculator for each circumstance.
How do I pay my PAYG withholding obligation?
You will report your PAYG amounts regularly (either monthly or quarterly) on your ATO activity statements when you pay your other tax obligations. The amount of PAYG recorded to the ATO amount in your report will be paid at this time.
How often do I pay PAYG?
The ATO will advise you to pay either monthly or quarterly. You can check on your ATO Business Portal or with your accountant.
What happens if I don’t pay PAYG?
As a company director, you are responsible for paying all PAYG obligations. If these are not paid, you are personally liable for the penalty equal to the unpaid amount.
What is a PAYG Summary?
A PAYG Payment Summary shows how much your business has paid an employee over a financial year, and how much you withheld from the payments. This is provided to the employee to use when they are lodging their annual tax return.
If you are using Single Touch Payroll (direct reporting of payroll to the ATO) you do not need to submit this summary to your employees. It is automatically uploaded to their MyGov account.
Do I need to keep records of who I pay?
Absolutely.
These records will be held in your accounting software, so there’s no need to keep separate records.
Who else do I have to pay PAYG on behalf of?
PAYG withholding is not just for direct employees of your business. It is also paid on behalf of
- contractors where a voluntary agreement has been made to withhold amounts from your payments to them.
- for businesses you pay that do not quote their ABN.
- director payments that are not made through your payroll.
This can get a bit tricky, so if you are unsure, ask a Sleek team member here
Can you cancel your PAYG withholding registration?
Yes, you can cancel at any time – if you are no longer an employer or your business is no longer in operation.
Sleek top tip – Before canceling your registration make sure you have lodged and paid any outstanding PAYG obligations.
Can you be exempt from PAYG withholding?
If you are a sole trader or partnership, you may be exempt from PAYG withholding. The ATO does not consider the amounts drawn from a sole trader or partnership as a wage, so you do not have PAYG withholding obligations.
The sole trader or partners in the partnership should, however, make provisions for income tax liability through PAYG instalments.
Ready to set up your PAYG and payroll?
Do it with Sleek – we’ll set you up so it’s easy to meet your PAYG withholding obligations.
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