PAYG Withholding Explained for Australian Employers (2025/26)

• PAYG withholding means you deduct tax from each pay and send it to the ATO — so employees never owe a large bill at lodgement time.
• You must withhold, report via STP, and remit — three separate obligations, all mandatory.
• ATO tax tables (NAT 1006, 1007, 1008) tell you exactly how much to deduct based on pay frequency.
• Every payslip must show tax withheld as its own line — Fair Work requires it.
• No TFN on file? Withhold at 47%. No exceptions.

Employer Obligations: Withhold, Report, Remit

There are three distinct duties sitting on your desk as an employer. Miss any one of them and you're exposed to ATO penalties, interest, and — in serious cases — personal liability through director penalty notices.

1. 1
   Withhold the correct amount. Use the ATO's current tax tables to calculate how much to deduct from each employee's gross pay. The right table depends on pay frequency and the employee's tax status. Employees must submit a Tax File Number (TFN) Declaration — this tells you which withholding scale (Scale 1 through 6) applies to them.
2. 2
   Report via Single Touch Payroll (STP). Every pay event must be reported to the ATO on or before the payment date through your STP-enabled payroll software. STP Phase 2 is now mandatory for all employers — if you haven't completed your Phase 2 upgrade yet, that guide walks through exactly what's changed. There's no paper alternative.
3. 3
   Remit withheld amounts to the ATO. Most small employers (those withholding less than $25,000 per year) remit quarterly via their Business Activity Statement (BAS). Medium withholders remit monthly. The ATO assigns your payment frequency — you don't choose it. Missing a BAS payment attracts a general interest charge that compounds daily.

Honestly, the STP obligation catches more small employers off-guard than any other. If you're still processing payroll in a spreadsheet and emailing payslips, you're almost certainly non-compliant from a reporting standpoint. The ATO has been actively following up employers not connected to STP.

Using the ATO Tax Tables for 2025/26

The ATO publishes separate withholding tables for each pay frequency. You look up the gross pay amount in the relevant table and read off the withholding figure. It's mechanical once you know which table applies.

Scale selection depends on what your employee declared on their TFN Declaration form. Scale 1 applies to most Australian residents claiming the tax-free threshold. Scale 2 applies to residents not claiming the threshold (perhaps because they have a second job). Scale 6 applies to working holiday makers — a common situation in hospitality and agriculture. Non-residents use a separate schedule entirely and are never entitled to the tax-free threshold.

Real talk: a landscaping business owner in Townsville once paid a casual worker for three months without collecting a TFN Declaration, assuming the worker would "sort it later." When the ATO audited, the employer owed the difference between what was withheld and what the no-TFN rate would have required. The worker had already moved on. The business owner paid out of pocket.

PAYG Withholding on Payslips: What Must Be Shown

The Fair Work Act 2009 requires employers to issue a payslip to every employee within one working day of each payment. But a payslip isn't just a receipt — it has mandatory content requirements, and missing any of them is a civil breach.

Every compliant Australian payslip must include: employer name and ABN, employee name, pay period dates, gross pay, each deduction individually itemised (including PAYG tax withheld as its own line), net pay, and superannuation entitlement for the period. That last point about super is often missed — if you're unsure what the current SG rate requires you to show, that guide covers employer super obligations in full.

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"Tax withheld" must appear as a separate, named line item on every payslip — bundling it inside a generic "deductions" total is non-compliant and exposes you to Fair Work penalties of up to $16,500 per contravention.

The good news is that compliant payslip generation doesn't require a full payroll system. Tools like PayslipMate produce ATO-aligned payslips that show tax withheld correctly, every time — no accounting degree required.

Frequently Asked Questions

When do I have to pay PAYG withholding to the ATO?

Most small employers (withholding under $25,000 annually) remit quarterly via their Business Activity Statement (BAS). Medium and large withholders remit monthly or even weekly. The ATO assigns your payment frequency based on your annual withholding total — check your ATO correspondence or myGov account if you're unsure which category applies to you.

What happens if I forget to withhold PAYG tax from an employee's pay?

You remain personally liable to the ATO for the amount that should have been withheld, plus potential penalties and interest. You cannot recover the shortfall from the employee after the fact — the legislation doesn't allow it.

Does PAYG withholding apply to contractors?

Generally no — contractors manage their own tax obligations. However, if a contractor does not provide an ABN, you must withhold 47% from their payment under the no-ABN rules. Always collect a valid ABN before paying any contractor invoice.

What is the tax-free threshold for 2025/26?

The tax-free threshold is $18,200 for Australian resident individuals. Employees who claim it on their TFN Declaration are taxed on Scale 1; those who don't — because they have multiple jobs, for instance — are withheld on Scale 2 from the first dollar earned.

PAYG withholding doesn't need to be complicated — but it does need to be done correctly and documented on every payslip you issue. The ATO's expectations are clear, and Fair Work's payslip requirements are non-negotiable.