PAYG withholding is the tax an Australian business takes out of payments to employees, and some other payees, and sends to the ATO. You must register before you're first required to make a payment subject to withholding, even if you end up withholding nothing, and how often you pay depends on how much you withhold: $25,000 or less a financial year means quarterly, more than that up to $1 million means monthly.
It's the employer side of the tax your staff see on their payslips. Here's who you withhold from, how the payment cycle works, and the reporting dates that still apply even if you use Single Touch Payroll.
Who you withhold from
The ATO says your obligations depend on whether a worker is an employee or an independent contractor. You generally withhold from employees, and generally don't withhold from contractors. The most common payments you withhold from are:
- Your employees.
- Businesses that don't quote their ABN to you.
- Independent contractors who've entered into a voluntary agreement with you to have tax withheld.
Other payments can need withholding too, including investment income paid to someone who doesn't give you their TFN, dividends, interest and royalties paid to foreign residents, and some payments to foreign residents for entertainment, sports and construction work.
One thing that isn't a wage: if you run a business as a sole trader or partnership, your own drawings. You don't withhold from those; you cover your own tax through PAYG instalments instead.
Registering for PAYG withholding
- Check you need to. You must register before you first make a payment that's subject to withholding, even if no amount ends up withheld.
- If your business has an ABN, register through the Australian Business Register or your online services for business. A registered tax agent can do it for you.
- If you need to withhold but don't need an ABN, for example as an employer of household staff, register for a PAYG withholding account instead.
- Work out how much to withhold from each pay; the ATO publishes tax rates and calculators to help.
- Set up your payroll to report through Single Touch Payroll, so pay and withholding go to the ATO each pay run.
How often you pay the ATO
| Withholder status | Amount you withhold a financial year | How you report and pay |
|---|---|---|
| Small withholder | $25,000 or less | Quarterly, on your activity statement (you can ask for monthly) |
| Medium withholder | $25,001 to $1 million | Monthly, on your activity statement |
| Large withholder | More than $1 million | Electronically, within 6 to 8 days of a withholding event such as payday |
The activity statement you receive shows the date your completed form and payment are due. If you withhold $25,000 or less in a financial year you're a small withholder; once it goes past $25,000, you're a medium withholder and pay monthly. If you're new to activity statements, what a BAS is explains where PAYG withholding sits on it.
Annual reports: the dates to diary
| What you report | Report | Due |
|---|---|---|
| Wages and other work payments not finalised through STP | PAYG payment summary annual report | 14 August |
| Payments to businesses that didn't quote an ABN, and amounts withheld | PAYG withholding where ABN not quoted annual report | 31 October |
| Contractor payments | Taxable payments annual report | 28 August |
Here's the good news hidden in the ATO's guidance. For amounts you've reported and finalised through STP, you don't need to give payment summaries or lodge an annual report. That's one of the best reasons to get Single Touch Payroll right: finalise it correctly and the 14 August report largely disappears.
A worked example of the cycle
As of October 2026, the ATO's thresholds work like this in practice. A café owner with two part-time staff withholds well under $25,000 across the financial year, so she's a small withholder: she reports PAYG withholding on her quarterly activity statement and pays by the date printed on it. If she hires enough staff that her withholding passes $25,000 a year, she becomes a medium withholder and reports and pays monthly instead. Either way, STP sends each pay run's details to the ATO, and finalising STP after 30 June means no separate payment summaries for those employees.
The figures in that example are the ATO's own thresholds; the café is just there to show how they apply.
What happens if you don't comply
The ATO warns that you may lose deductions or face penalties if you don't meet your PAYG withholding obligations. In particular, it says you can only claim deductions for payments to workers if you've complied with PAYG withholding and reporting. So getting it wrong doesn't just mean a penalty: the wages themselves can stop being deductible.
Getting the employee or contractor question right first matters most. The ATO says you need to review the whole working arrangement, not just what the contract calls the person.
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The verdict
PAYG withholding is routine once it's set up, and STP does most of the reporting for you. The two things I'd get right on day one are registering before your very first payday, because the ATO says registration comes first even if nothing's withheld, and deciding whether each worker is really an employee. After that, pay on your activity statement schedule, finalise STP at year end, and the only report you're likely to see is the activity statement itself.
Frequently asked questions
What is PAYG withholding?
It's the tax an Australian business withholds from payments to employees and certain other payees and sends to the ATO.
When do I need to register for PAYG withholding?
Before you're first required to make a payment that's subject to withholding, even if you don't end up withholding any amount.
How often do small businesses pay PAYG withholding?
Small withholders, who withhold $25,000 or less a financial year, pay and report quarterly on their activity statement.
Do I withhold PAYG from contractors?
Generally no, unless the contractor has a voluntary agreement with you, or they're a business that doesn't quote its ABN.
When is the PAYG payment summary annual report due?
By 14 August, for payments not reported and finalised through Single Touch Payroll.
Do sole traders withhold PAYG from their own drawings?
No. The ATO says drawings aren't a wage; you provide for your own tax through PAYG instalments.
What happens if I don't withhold PAYG?
You may face penalties, and the ATO says you can only claim deductions for payments to workers if you've complied with your withholding and reporting obligations.
