PAYG Withholding Australia 2026: Employer Guide & Payslip Calculator

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What Is PAYG Withholding?

PAYG stands for Pay As You Go. It is the system the Australian Taxation Office (ATO) uses to collect income tax from employees throughout the year, rather than requiring a single lump-sum payment at tax time. As an employer, you are legally required to withhold a portion of each employee's pay and send it to the ATO on their behalf.

Think of it this way: instead of your employee receiving their full gross salary and then owing a large tax bill at the end of the financial year, you withhold the estimated tax amount each pay period and remit it to the ATO. At tax time, the employee either gets a refund (if too much was withheld) or pays a small balance (if too little was withheld).

Who Needs to Withhold PAYG?

If you pay any of the following, you must register for PAYG withholding with the ATO:

• Salaries and wages to employees
• Payments to company directors
• Payments to workers under labour hire arrangements
• Payments where the payee has not quoted a Tax File Number (TFN)
• Payments to contractors who have a voluntary withholding agreement

Most small businesses that hire even a single employee need to register for PAYG withholding.

2025-26 PAYG Tax Brackets

Australia uses a progressive tax system. This means higher portions of income are taxed at higher rates. Importantly, Australia has NO state or territory income tax — these brackets apply equally whether your employee works in Sydney, Melbourne, Brisbane, Perth, or anywhere else in the country.

Resident Tax Rates (2025-26 Financial Year)

Medicare Levy

On top of income tax, most residents pay a 2% Medicare levy on their taxable income. This funds Australia's public healthcare system. Low-income earners may receive a reduction or exemption.

Medicare Levy Surcharge

High-income earners ($93,000+ for singles, $186,000+ for families) who do not hold appropriate private health insurance may be charged an additional Medicare Levy Surcharge of 1% to 1.5%.

How to Calculate PAYG Withholding

Method 1: Using ATO Tax Tables

The ATO publishes weekly, fortnightly, and monthly tax tables that show the exact amount to withhold based on gross earnings. These tables account for the tax-free threshold and Medicare levy.

For example, for a fortnightly pay period (2025-26):

• An employee earning $3,000 gross per fortnight (approx. $78,000 annually)
• PAYG withholding per fortnight: approximately $558

Method 2: Using the ATO Formula

The ATO also provides formulas for each pay period. The basic steps:

1. Calculate the employee's annual equivalent income (gross pay x number of pay periods)
2. Apply the tax brackets to determine annual tax
3. Add the Medicare levy (2%)
4. Divide by the number of pay periods to get the per-period withholding

Method 3: Using PayslipMate

The easiest approach: enter the employee's gross pay into PayslipMate, and we calculate the exact PAYG withholding automatically using current ATO rates. No tax tables or formulas needed.

Tax File Number (TFN) and Withholding

When an employee starts work, they must complete a TFN declaration form (NAT 3092). This tells you:

• Their TFN
• Whether they want to claim the tax-free threshold ($18,200)
• Whether they have a HECS-HELP or other study loan debt
• Any tax offsets they are entitled to

Critical: If an employee does not provide their TFN within 14 days of starting, you must withhold at the top marginal rate of 47% (45% + 2% Medicare levy). This is a strong incentive for employees to provide their TFN promptly.

PAYG for Different Employment Types

Full-Time and Part-Time Employees

Standard PAYG withholding applies based on gross earnings for the pay period. If the employee has claimed the tax-free threshold, the first $18,200 of annual income is tax-free.

Casual Employees

PAYG applies the same way as for permanent employees. However, remember that casual employees receive a 25% loading on their base rate, which increases gross pay and therefore increases the PAYG amount.

Working Holiday Makers (WHV)

Special tax rates apply:

• First $45,000: flat 15% (no tax-free threshold)
• Above $45,000: standard resident rates apply
• Employers must register with the ATO as WHM employers

Contractors

If a contractor provides their ABN and does not have a voluntary withholding agreement, you generally do not withhold PAYG. However, if they do not provide an ABN, you must withhold 47% from the payment.

Reporting and Payment to the ATO

Business Activity Statement (BAS)

You report PAYG withholding on your Business Activity Statement:

• Monthly BAS: If your annual PAYG withholding is $25,000 or more
• Quarterly BAS: If your annual PAYG withholding is less than $25,000

Single Touch Payroll (STP)

Since 1 July 2019, all employers must report payroll information to the ATO through Single Touch Payroll each time they run their payroll. This includes:

• Gross pay
• PAYG withholding
• Superannuation
• Other deductions

STP has effectively replaced the need for annual payment summaries (previously called group certificates).

Common PAYG Mistakes

1. Using outdated tax tables — The ATO updates tables each financial year. Always use the current year's rates.
2. Forgetting the Medicare levy — The 2% Medicare levy is in addition to income tax and must be included in withholding calculations.
3. Not withholding for TFN-less employees — If no TFN is provided within 14 days, you must withhold at 47%.
4. Ignoring HECS-HELP obligations — If an employee has declared a study loan debt, additional withholding is required.
5. Wrong pay period calculations — Ensure you are using the correct tax table for your pay frequency (weekly, fortnightly, or monthly).

How PayslipMate Simplifies PAYG

PayslipMate takes the complexity out of PAYG calculations:

• We use the current ATO tax tables for 2025-26
• Medicare levy is automatically included
• HECS-HELP thresholds are built in
• Working holiday maker rates are supported
• Casual loading is calculated before PAYG is applied

Simply enter your employee's details and gross pay, and PayslipMate does the rest. Your first payslip is free — try it now.

If you need a compliant document now, create an Australian payslip online. PayslipMate applies current PAYG rates, shows itemised deductions, and produces a professional PDF for employees and payroll records.