PAYG withholding vs payroll tax
Australian employers deal with two different "payroll taxes"—PAYG withholding and state payroll tax. Understanding the difference is essential for correct payroll processing and compliance.
PAYG withholding
- Federal income tax
- Deducted from employee pay
- Based on individual earnings
- Remitted to ATO
Payroll tax
- State/territory tax
- Paid by employer (not deducted)
- Based on total wages bill
- Paid to state revenue office
PAYG withholding applies to all employers with employees, while payroll tax only applies when the total wages exceed the state threshold (which varies by state).
How PAYG withholding works
Each pay cycle, employers calculate the PAYG withholding amount based on the employee's gross pay and tax status. This amount is then deducted from gross pay before the employee receives their net pay.
PAYG withholding process
Most payroll software handles these calculations automatically using the ATO's published tax tables. The software also generates the STP report required with each pay run.
TFN declarations and tax-free threshold
New employees must complete a Tax File Number (TFN) declaration form before their first pay. This form determines how much PAYG is withheld:
- Claiming tax-free threshold: Lower withholding rate (employee should only claim this from one employer)
- Not claiming threshold: Higher withholding rate for second jobs or by choice
- No TFN provided: Maximum rate (47% + Medicare levy) until TFN is received
- HELP/HECS debt: Additional withholding for student loan repayments when income exceeds threshold
TFN declaration deadline
Employers must obtain a TFN declaration from new employees within 14 days of starting. If not received, you must withhold at the highest rate. TFN declarations must be sent to the ATO within 14 days of receipt. Keeping a copy of each declaration is required for record-keeping purposes.
Employer PAYG obligations
Registration requirements
- ABN: Australian Business Number required
- PAYG registration: Register with ATO before first pay
- STP enabled: Software must support Single Touch Payroll
Ongoing obligations
- Calculate correctly: Use current ATO tax tables
- Report via STP: Submit with each pay run
- Remit on time: Pay ATO per your lodgement cycle
Common PAYG mistakes
Using outdated tax tables
Tax tables change each financial year (1 July). Using last year's tables results in incorrect withholding. Ensure your payroll software is updated annually.
Not collecting TFN declarations
Missing TFN declarations mean withholding at the top rate, but the employer is also non-compliant if they don't follow up within 14 days.
Late STP reporting
STP reports should be submitted on or before each pay day. Repeated late lodgements can result in penalties from the ATO.
Confusing PAYG with payroll tax
Treating these as the same tax leads to compliance issues. PAYG is withheld from employees; payroll tax is paid by employers to state revenue.
Key takeaways
PAYG withholding is the federal income tax that employers must deduct from employee wages and remit to the ATO. It's calculated using ATO tax tables based on gross pay and the employee's TFN declaration status. All employers must register for PAYG and report through Single Touch Payroll.
Accurate PAYG withholding starts with accurate gross pay calculations. RosterElf's payroll integration ensures hours are tracked correctly and exported to your payroll software, which then handles PAYG calculations and STP reporting automatically.
