How to Calculate PAYG Withholding in Australia

When to Register for PAYG Withholding

Before you can start to withhold tax from payments, you must register for PAYG withholding with the Australian Taxation Office. Understanding when and how to register is crucial for compliance with Australian tax laws.

You must register for PAYG withholding before you make your first payment that requires tax to be withheld. This includes payments to employees, directors, and other workers for which tax withholding is mandatory. The registration process ensures you have the necessary framework in place to correctly calculate, withhold, and remit tax to the ATO.

For businesses with an Australian Business Number and a myGovID, registration can be completed online through the Business Registration Service on the ATO website. If you don’t have an ABN, you can register by phone or by completing an “Application to register a PAYG withholding account” form (NAT 3377). Alternatively, your BAS agent or registered tax agent can assist with the registration process.

After registration, you’ll receive confirmation of your PAYG withholding status and information about your reporting and payment obligations based on the estimated amount of tax you’ll withhold annually.

Understanding Different Withholding Categories

The ATO classifies businesses into three categories based on their annual withholding amounts, which determines how frequently you need to report and pay the withheld amounts:

1. Small withholders (withholding $25,000 or less annually) report and pay quarterly

2. Medium withholders (withholding $25,001-$1 million annually) report and pay monthly

3. Large withholders (withholding more than $1 million in the previous financial year) report and pay twice weekly

Essential Information Needed for Accurate Calculations

Before you can calculate PAYG withholding correctly, you need to collect specific required information from your employees. This information forms the foundation for accurate tax calculations.

Tax File Number Declarations

When an employee starts working for you, they must complete a Tax File Number (TFN) declaration form. This form provides crucial information about the employee’s tax situation, including:

• Their Tax File Number (TFN)

• Whether they want to claim the tax-free threshold with you

• Their residency status for tax purposes

• Whether they have a study or training loan debt (such as student loan repayments)

The tax-free threshold information is particularly important as it significantly affects how much tax you need to withhold. If an employee claims the tax-free threshold (which they typically do with their main employer), you won’t withhold tax on the first part of their income up to the threshold amount. If they don’t claim it with you, you must withhold tax from the first dollar they earn.

Withholding Declarations

In addition to the TFN declaration, employees may provide a separate Withholding Declaration form to inform you about other factors that affect their withholding amount, such as:

• Student loan repayments (HELP, VSL, or other study and training support loans) that require extra withholding if their income exceeds the repayment threshold

• Eligibility for tax offsets that might reduce the amount of tax to be withheld

Having this information accurately recorded in your payroll system is essential for calculating the correct withholding amount for each employee.

Using the ATO’s Tax Withheld Calculator

The simplest and most accurate way to determine PAYG withholding amounts is by using the ATO’s online tax withheld calculator. This tool takes into account all relevant factors to provide precise withholding figures.

Benefits of the ATO Calculator

The ATO’s tax withheld calculator is specifically designed to help employers determine the correct amount of tax to withhold from payments to employees and other workers. It’s regularly updated with the latest tax rates and thresholds, ensuring your calculations remain accurate as tax laws change.

The calculator considers multiple factors that affect withholding amounts, including:

• Income tax rates

• Medicare levy

• Student loan repayments

• Worker’s residency status (resident, non-resident, or working holiday maker)

• Whether the tax-free threshold is claimed

• Tax offset entitlements

Using this calculator takes between 2 and 10 minutes and can save you from potentially costly calculation errors.

How to Access and Use the Calculator

The ATO provides two versions of the tax withheld calculator:

1. The comprehensive online “Tax withheld for individuals calculator” available on the ATO website

2. A simplified version in the ATO app for basic calculations related to the current tax year

To use either calculator, you’ll need information from your employee’s TFN declaration, Withholding Declaration, and Medicare levy variation declaration (if applicable).

The calculator will guide you through a series of questions about the employee and their payment details, then provide the exact amount of tax to withhold based on the information entered.

For most standard situations, the calculator is the recommended method for determining withholding amounts as it considers all relevant factors automatically.

Tax Tables and Manual Calculations

While the ATO calculator is the preferred method for calculating withholding amounts, you can also use tax tables for manual calculations in certain situations.

Understanding ATO Tax Tables

The ATO publishes comprehensive tax tables that you can use to manually determine withholding amounts. These tables consider various factors including:

• Weekly, fortnightly, or monthly pay periods

• Different tax rates based on residency status

• Medicare levy

• Tax-free threshold status

• Student loan repayments

Using tax tables requires you to identify the correct table for your employee’s circumstances and then find the appropriate withholding amount based on their gross payment amount.

Special Calculation Rules

Different types of withholding require specific calculation methods:

Standard PAYG Withholding

For standard PAYG withholding (such as for employees or contractors under a voluntary agreement), the formula is:
Withholding Amount = Round (Document Amount * Rate)

For example, with a payment of $531.90 and a rate of 20.0%:
Withholding Amount = Round ($531.90 * 20.0%)
Withholding Amount = Round ($106.38)
Withholding Amount = $106.00

No ABN PAYG Withholding

When making payments to suppliers who haven’t provided an ABN, a different formula applies:
Withholding Amount = Truncate (Truncate (Document Amount) * Rate)

For example, with a payment of $531.90 and the No ABN Rate of 48.5%:
Withholding Amount = Truncate (Truncate ($531.90) 48.5%)
Withholding Amount = Truncate ($531.00 48.5%)
Withholding Amount = Truncate ($257.535)
Withholding Amount = $257.00

Understanding these different calculation methods is essential for accurately determining withholding amounts across various payment types.

PAYG Withholding for Different Worker Types

Calculating PAYG withholding varies depending on the type of worker you’re paying. Different residency statuses and visa types have specific withholding requirements.

Australian Residents

For workers who are Australian residents for tax purposes, you’ll apply the standard resident tax rates, which include a tax-free threshold (if claimed) and the standard Medicare levy. Resident workers typically have lower tax rates compared to non-residents because they’re entitled to the tax-free threshold and progressive tax rates.

When an employee claims the tax-free threshold with you, you won’t withhold tax on the first part of their income (up to the threshold amount for the current financial year). This significantly reduces the amount of tax withheld from their regular payments.

Non-Residents

Workers who are non-residents for tax purposes face different withholding arrangements:

• They are not entitled to the tax-free threshold

• They pay tax from the first dollar earned

• They pay higher tax rates than residents

• They don’t pay the Medicare levy

When calculating withholding for non-residents, you must use the specific tax tables or calculator settings designed for non-resident workers to ensure the correct higher rates are applied.

Working Holiday Makers

Working Holiday Makers (WHMs) holding specific visas (417 or 462) are subject to special tax arrangements:

• They have specific tax rates that differ from both residents and non-residents

• Employers must be registered as employers of working holiday makers

• The tax withheld calculator has specific settings for calculating WHM tax

It’s essential to correctly identify and classify your workers’ residency status to apply the appropriate withholding rates and avoid potential underpayment or overpayment of tax.

Handling Special Withholding Scenarios

Beyond basic salary and wage payments, several special scenarios require specific consideration when calculating PAYG withholding.

Student Loan Repayments

If an employee has indicated on their TFN declaration that they have a student loan (such as HELP, SSL, TSL, or SFSS), you need to withhold additional amounts to cover these loan repayments.

The amount of additional withholding depends on the employee’s taxable income and the repayment thresholds set by the ATO for the current financial year. The tax withheld calculator automatically factors in these additional withholding requirements when you indicate that the employee has a student loan.

Medicare Levy Adjustments

Some employees may be eligible for Medicare levy exemptions or reductions based on their circumstances. These adjustments affect the amount of tax you need to withhold.

Employees can notify you of their Medicare levy status using a Medicare levy variation declaration form, which specifies whether they are:

• Fully exempt from the Medicare levy

• Half exempt from the Medicare levy

• Eligible for a reduction in the Medicare levy

• Eligible for a reduction plus half exemption

When you enter these details into the tax withheld calculator, it automatically adjusts the withholding amount accordingly.

Varying the Withholding Amount

In some cases, employees may request to have additional tax withheld from their payments to avoid having a tax bill at the end of the financial year, or the ATO may instruct you to vary the withholding amount for specific employees.

If an employee wants additional tax withheld, they can request this through a withholding variation, which you’ll need to implement in your payroll system. Similarly, if the ATO issues a PAYG withholding variation notice, you must adjust your withholding according to the instructions provided.

Reporting and Paying PAYG Withholding

After calculating and withholding the correct amount of tax, you need to report and pay these amounts to the ATO according to your reporting category.

Reporting Frequencies

Your reporting and payment frequency depends on the total amount you withhold annually:

1. Small withholders (withholding $25,000 or less annually):

   • Report and pay quarterly through your Business Activity Statement (BAS)

   • Due dates align with your quarterly BAS lodgment deadlines

2. Medium withholders (withholding $25,001 to $1 million annually):

   • Report and pay monthly through your BAS

   • Due by the 21st day of the following month

3. Large withholders (withholding more than $1 million in the previous financial year):

   • Report and pay twice weekly

   • Special arrangements may apply

Single Touch Payroll (STP) Reporting

Most employers are now required to report payroll information, including PAYG withholding, through Single Touch Payroll (STP). STP reporting sends your payroll information directly to the ATO each time you run your payroll and pay your employees.

With STP, you no longer need to provide annual payment summaries to employees as they can access their income statements through their myGov accounts. This system streamlines reporting and ensures the ATO has up-to-date information about your withholding obligations.

Read our article How to Avoid Penalites for Non-Compliance with STP Phase 2 Reporting in 2025

Correcting PAYG Withholding Errors

Even with careful calculation, errors in PAYG withholding can occur. Knowing how to correct these errors is important for maintaining compliance with ATO requirements.

If You Withhold Too Much

If you discover early that you’ve withheld more tax than you should have, you must refund the extra amount to your employee, even if you’ve already paid it to the ATO. You can then offset this amount against future withholding payments to the ATO.

However, if you discover the error after June 30 following the end of the financial year in which the withholding occurred, do not refund the amount to the employee. Instead:

• Issue an amended payment summary to the employee

• Complete and forward an amended PAYG payment summary statement to the ATO

• The employee will need to request an income tax amendment if they’ve already lodged their tax return for that year

If You Withhold Too Little

If you discover you’ve withheld too little tax, you’ll need to:

1. Withhold the additional amount from future payments to the employee where possible

2. Pay the shortfall to the ATO

3. Keep accurate records of the adjustments made

For significant errors, you may need to lodge a revised activity statement using Online services for business or by contacting the ATO directly.

Conclusion

Accurately calculating PAYG withholding is a fundamental responsibility for Australian employers that requires attention to detail and an understanding of various tax rules and rates. By using the ATO’s tax withheld calculator, collecting the right information from your employees, and staying informed about changes to tax rates and thresholds, you can ensure you’re withholding the correct amount of tax from each payment.

Remember that correct PAYG withholding benefits both your business and your employees—it helps your business meet its tax obligations and helps your employees manage their tax liabilities throughout the year rather than facing a large tax bill at the end of the financial year.

Have you reviewed your PAYG withholding processes recently? With tax rates and thresholds changing annually, it might be time to ensure your calculations remain accurate and compliant with current ATO requirements.