Overview of PAYG for Employers
If you have employees or pay employees of another business, you must withhold an amount from payments you make to them. If you operate your business as a company, you must also withhold amounts from payments you make to your company directors for their services. You may also have to withhold from payments you make to other workers such as contractors and you must also withhold an amount from payments you make to other businesses if they don't quote their ABN to you on an invoice or other document if required.
The idea is to make regular installments to the ATO for the estimated full year tax liability on their investment and business income so that ATO is not out of pocket for the duration of the year. Under the PAYG arrangements, installments are based on their actual ordinary income for the quarter (installment income) and the PAYG installment rate is determined by the ATO. You report and send all amounts to the ATO using the PAYG withholding system - this is called 'withholding'.
Under the PAYG withholding system, if you are an employer or you operate a business and you make payments subject to withholding you must follow the 8 steps below. (More details are available in the ATO's PAYG witholding guide for employers from where the below summary is sourced).
Step 1. Register for PAYG withholding.
As with other forms of taxes, you can register online via the ATO's online business portal but before you do so you should ensure you follow the below steps do determine wether you are required to register or not.
Step 2. Determine wether your workers are employees or contractors
Payments to employees or voluntary payments to contractors need to have amounts withheld and remitted to the ATO. Payments to genuine contractors who quote their ABN would not require withholding. Whether a worker is an employee or a contractor depends on how you engage them and how the work is performed. Contractors are those workers who are self-employed and have a contract with you to provide services. It is important to note that if If you obtain workers from a labour hire firm, and you pay the labour hire firm, not the workers, you do not withhold amounts from payments you make to the labour hire firm (unless it fails to quote its ABN).
The determination as to wether someone would qualify as a contractor is not a definitive issue and you should discuss with your accountant and review the following ATO tool for guidance on the status of a worker.
Step 3. Familiarise yourself with the types of payments you need to withhold from.
Payments (wages and allowances) to employees, your directors, businesses that do not quote their ABN to you, contractors who have a voluntary agreement with you and individuals (not a company) under labour hire arrangements.
If you operate your business as a sole trader with no other employees or a partnership and you draw amounts from the business, this is not a wage and you do not have to withhold from these drawings. You make some provision for your income tax liability through the PAYG installments system.
Step 4. Work out the amount to withhold.
Employee withholding
make reference to the ATO’s PAYG withholding tax tables at the following link . The rates of withholding provided in the tax tables are designed to approximate the amount of tax your employees are liable to pay at the end of the financial year .To assist you in calculating the amounts (as the circumstances of the employee dictate what to withhold) all of your employees need to make a tax file number declaration which you submit to the ATO and super fund or retirement savings account if you make contributions for them, within 2 weeks of receipt. Failure to provide their TFN without an available exemption or pending application will require you to withhold 46.5% (45% for non-residents) from all payments you make to that employee. Employees under 18 years old have special exemptions from withholding dependant on the amount and timing of the wage.
Your employees must give you a completed Withholding declaration if they want to:
(a) amend any of the details previously provided,
(b) increase the rate to withhold (e.g. to cover for non employment taxable income – positively geared rental property) or
(c) claim their entitlement to tax offsets by having a reduced amount withheld from payments made to them.
In certain circumstances you can apply to have the withholding rate reduced for an employee if it can be demonstrated that the withholding rate is inappropriate. (e.g due to non employment losses – negatively geared rental property)
Payments to contractors under a voluntary agreement
If you enter into a voluntary agreement with a contract worker, you must withhold amounts from payments you make to them, as detailed in the agreement. This helps the worker pay their income tax. You cannot enter into a voluntary agreement if a worker’s payment is covered by another specific PAYG withholding category; for example, if the worker is being paid as an employee or under a labour hire arrangement. A voluntary agreement can cover a specific task or apply to successive arrangements between you and the worker. Either you or the worker can end a voluntary agreement at any time by notifying the other in writing. The amount you must withhold under a voluntary agreement is generally the greater of the worker’s PAYG installment rate notified by the ATO or a flat rate of 20% . Withholding of calculated by multiplying the worker’s invoiced amount by the withholding rate specified in the voluntary agreement..
Payments to labour hire workers
If you are a labour hire firm providing individual workers (as employees or contractors – i.e. not operating as a corporation, partnership or trust) under a labour hire arrangement, your workers are taxed at the same rate as employees. You work out how much to withhold using the weekly, fortnightly, monthly or quarterly tax tables, together with information provided on your workers’ tax file number and withholding declarations.
When a business does not quote an ABN
If a business supplies you with goods or services, that business should quote their ABN. If they don’t, generally you must withhold 46.5% of the payment you make to them and send the withheld amount to the ATO. You do not have to withhold from payments if any of the following apply:
- the total payment you make to the supplier is $75 or less, excluding goods and services tax (GST)
- the supplier is an individual under 18 years of age and your payments to that person are $120 or less each week
- the goods or services are supplied through an agent who has quoted their ABN on an invoice or some other document relating to the supply
- the goods or services supplied are wholly input taxed under GST
- the entire payment you make is exempt income for the supplier or the supplier is not entitled to an ABN as they are not carrying on an enterprise in Australia. Also, you should not withhold from the payment you make if the supplier states in writing that the supply is either of the following:
- made in the course or furtherance of an activity done as a private recreational pursuit or hobby wholly of a private or domestic nature.
- If you are aware that any one of the above conditions applies, you do not have to withhold, even where they have not quoted an ABN. However, you must have sufficient records to show the reason for not withholding.
- If you are unsure, ask the supplier to give you a written statement that states the supply of goods or services is excluded for one of these reasons. The supplier may use the Statement by a supplier (reason for not quoting an ABN to an enterprise) (NAT 3346), or create their own statement containing the same information. You must keep their statement for five years.
- If you have reason to believe the statement is false or misleading, you must withhold 46.5% of the total payment.
- If a supplier has applied for an ABN, you can offer to hold payment until the supplier has obtained and quoted their ABN. This is a matter for you and your supplier to work out. However, you must not make full payment to the supplier on the understanding that an ABN will be quoted later. If you do, you may be subject to penalties for the amount you did not withhold. If you withhold 46.5% of the payment, you must complete a payment summary and give it to the supplier at the same time you pay them the net amount or as soon as practicable thereafter
Step 5. Report and pay withheld amounts to the ATO via the BAS
The amount withheld is to be reported on your BAS. You may not always have an PAYG withholding in which case there is nothing to report on the BAS submitted. The due date for payment depends on the size of withholder you are:
- Small Withholder: Businesses or Individuals Withholding <= $25,000 per year. payments are due quarterly on the date quoted on the BAS supplied by the ATO.
- Medium Withholder: Businesses or Individuals Withholding > $25,000 and < $1,000,000 per year. payments are due monthly on the date quoted on the BAS supplied by the ATO.
- Large Withholder: Businesses or Individuals Withholding > $1,000,000 in a previous income year
Step 5. Report and pay withheld amounts to the ATO via the BAS
The amount withheld is to be reported on your BAS. You may not always have an PAYG withholding in which case there is nothing to report on the BAS submitted. The due date for payment depends on the size of withholder you are:
- Small Withholder: Businesses or Individuals Withholding >= $25,000 per year. payments are due quarterly on the date quoted on the BAS supplied by the ATO.
- Medium Withholder: Businesses or Individuals Withholding > $25,000 and < $1,000,000 per year. payments are due monthly on the date quoted on the BAS supplied by the ATO.
- Large Withholder: Businesses or Individuals Withholding > $1,000,000 in a previous income year
Step 6. Provide payment summaries to employees / Suppliers
- You need to supply your employees with a summary of payments and withholdings within 2 weeks of the end of the 30 June tax year. This includes payments made for superannuation lump sums or income stream payments (if you are a super fund), employee termination payments
- You need to supply your employees (who do not have reportable fringe benefits tax amounts), with part year payment summaries (i.e. from 1 July onwards) within 2 weeks of the request should they ask for one.
- You need to provide payments summaries as soon as practical where you have withheld on supplier payments when they did not quote on ABN to you.
Step 7. Lodge an annual report after the end of each income year.
Your PAYG annual report, showing the payments and amounts withheld, is due annually by the following dates:
- 14 August - work related payments made.
- 31 October - withholding s from businesses that did not quote an ABN
submissions can be in an approved electronic format or by completing the formal tax office's PAYG payment summary statement in paper form.
Step 8. Keep proper records
As with all other areas of the tax legislation, you do need to maintain proper records for a minimum of 5 years, that are understandable and easily converted into English. Some of the specific records that need to be maintained are:
- wages records, including payment records
- voluntary agreements
- employment declarations (for employees working for you before 1 July 2000), tax file number declarations and withholding declarations
- copies of payment summaries and payment summary statements, or electronic annual reports if applicable
- employment termination payment records
- records of personal services income you have attributed
- statements by a supplier where no ABN was quoted
- records of amounts you withheld where no ABN was quoted
- annual reports of PAYG withholding where no ABN was quoted.
- each of your workers a payment summary by 14 July each year
- an ETP payment summary to any employee to whom you have made an employment termination payment within 14 days of making the payment.
