The moment you hire your first employee, you become responsible for Pay As You Go (PAYG) withholding. You must withhold tax from your employee's wages and send it to the ATO — and if you get it wrong, you wear the consequences, not your employee.

For most tradies hiring for the first time, PAYG withholding is one of the most confusing obligations to navigate. This guide explains exactly what it is, how to calculate it, when to pay it, and how to stay compliant without it taking over your life.

What Is PAYG Withholding?

PAYG withholding (sometimes written PAYGW) is the system where you deduct income tax from your employees' wages before paying them. Rather than employees managing their own income tax obligations, the government collects it progressively throughout the year through employers.

As an employer, you act as a collection agent for the ATO. When your sparky or plumber earns $1,500 for the week, you don't pay them the full $1,500. You calculate how much tax should be withheld, deduct that amount, pay the employee the net amount, and then send the withheld tax to the ATO.

This is separate from:

  • Superannuation (which is paid on top of wages, not deducted from them)
  • Workers' compensation (a separate insurance premium)
  • GST (a completely different tax on your business transactions)

Who Needs to Register for PAYG Withholding?

You must register for PAYG withholding if:

  • You hire employees (full-time, part-time, casual)
  • You hire certain contractors who don't provide an ABN
  • You make payments to directors of your company

Registration is free and done through the ATO's Business Portal or by calling the ATO. If you're setting up payroll for the first time, your accountant can also handle this for you.

Note: If you engage genuine subcontractors who have an ABN and are providing services through their own business, you don't withhold tax from their payments. But if a contractor fails to provide an ABN, you must withhold 47% of the payment under the "no ABN withholding" rules.

How to Calculate PAYG Withholding

The ATO provides tax withholding tables based on an employee's weekly or fortnightly pay and their tax file number (TFN) declaration form. You must have a completed TFN declaration from every employee before you pay them.

Step 1: Get the TFN Declaration

Before an employee starts, they complete a Tax File Number Declaration (NAT 3092 from the ATO website). This tells you:

  • Their TFN (so the ATO can match withholding to the right person)
  • Whether they're claiming the tax-free threshold ($18,200 for 2025–26)
  • Any study or training loan obligations (HECS-HELP)

An employee can only claim the tax-free threshold from one employer — usually their main job. If an apprentice has a second job, they shouldn't claim the threshold with you.

Step 2: Use the ATO's Tax Withholding Calculator

The ATO provides a Tax Withheld Calculator at ato.gov.au. Enter the employee's earnings period (weekly, fortnightly, monthly), gross payment, and threshold status. The calculator tells you exactly how much to withhold.

Most payroll software (Xero, MYOB, QuickBooks) calculates this automatically once you enter the employee's TFN declaration details.

Step 3: Withhold and Record

Each pay period, withhold the calculated amount. Your payroll records must show:

  • Gross wages paid
  • Tax withheld
  • Net amount paid
  • Superannuation calculated

Single Touch Payroll (STP) — What Tradies Need to Know

Since 2019, all Australian employers must use Single Touch Payroll (STP). This means your payroll information — wages, PAYG withholding, and superannuation — is reported to the ATO automatically every time you run payroll, in real time.

You can only do STP through ATO-compliant payroll software. The main options for tradies:

  • Xero Payroll — most popular in Australia, excellent for tradies
  • MYOB Payroll — strong for businesses with multiple employees
  • QuickBooks Payroll — solid mid-range option
  • Keypay — standalone payroll platform, integrates with multiple accounting systems

Free or low-cost STP options exist for employers with 4 or fewer employees — the ATO maintains a list at ato.gov.au.

STP Phase 2 (now mandatory) includes additional reporting requirements: disaggregated income types, country codes for certain payments, and expanded leave categories. All compliant payroll software handles this automatically.

When to Pay PAYG Withholding to the ATO

How often you pay depends on how much you withhold per year:

  • Less than $25,000 — Monthly (by 21st of following month)
  • $25,000–$1 million — Monthly (by 21st of following month)
  • Over $1 million — Weekly or fortnightly

Most small tradie businesses with 1–5 employees will withhold under $25,000 annually and pay monthly. The payment is due by the 21st of the month following the pay period.

For example, if you pay employees weekly throughout June, the June PAYG withholding is due to the ATO by 21 July.

Payment is made through the ATO's Online Services for Business, your BAS agent, or via your accounting software.

PAYG Withholding and Your BAS

Your Business Activity Statement (BAS) includes a section for PAYG withholding (Label W2). If you're a quarterly BAS lodger, you still need to pay PAYG withholding monthly — but you report the total on your quarterly BAS.

The BAS labels:

  • W1 – Total salary, wages and other payments made to employees
  • W2 – Total amount withheld from salary and wages
  • W3 – Total tax withheld (including W2)
  • W4 – Tax withheld where no ABN is quoted

Your payroll software should populate these figures automatically when you run payroll. Never manually estimate these — use your payroll records.

Annual PAYG Withholding Obligations

At the end of each financial year (30 June), you have additional obligations:

Payment Summaries — Now Replaced by STP

Under STP, you no longer need to issue paper payment summaries (group certificates) to employees. Instead, employees access their income statement through myGov, where it's auto-populated from your STP reports.

Your obligation is to "finalise" your STP reports for the year — pressing a finalise button in your payroll software that confirms the year's figures are complete. This must be done by 14 July for most employers.

PAYG Withholding Annual Report

If you pay any amounts subject to PAYG withholding that aren't reported through STP (for example, director fees or some contractor payments), you may need to lodge a separate annual report with the ATO.

Penalties for Getting It Wrong

PAYG withholding is one area where the ATO takes non-compliance seriously. Penalties include:

  • Failure to register: Financial penalty per period
  • Failure to withhold: If you under-withhold and the employee ends up owing tax they can't pay, the ATO can pursue you for the unpaid amount
  • Late payment: General Interest Charge applies (currently around 11% per annum)
  • Failure to lodge STP: Fines apply per failure to report payroll events

The ATO runs data-matching programs that cross-reference what employees report on their tax returns with what employers report through STP. Discrepancies generate reviews. The system is increasingly automated, and getting caught is increasingly likely.

PAYG Withholding for Contractors Without an ABN

If you engage a contractor who doesn't provide an ABN, you must withhold 47% of the payment and send it to the ATO. This is the "no ABN withholding" rule.

The only exceptions:

  • The payment is under $75 (GST-exclusive)
  • The contractor is a resident of Australia and hasn't started a new business, OR
  • Specific industry-based exemptions apply

In practice, if you're engaging subbies and they don't have an ABN, either don't engage them or withhold 47%. The administrative burden of the latter usually incentivises subcontractors to sort their ABN quickly.

Important: Subcontractors with an ABN are not subject to PAYG withholding, even if they work exclusively for you. The ATO has a "Personal Services Income" test that sometimes reclassifies subcontractors as employees — if this applies, you must withhold from their payments. Speak to your accountant if you're unsure about your arrangements.

Practical Payroll Setup for Tradie Businesses

Here's a straightforward setup sequence for a tradie hiring their first employee:

Step 1: Register for PAYG withholding — Through ATO's online business portal. Takes 5 minutes.

Step 2: Choose payroll software — Xero Payroll is the most common for Australian tradies. Integrate it with your accounting software for streamlined BAS lodgement.

Step 3: Collect the TFN Declaration — Employee completes this on day one. You submit it to the ATO within 14 days.

Step 4: Set up the employee in your payroll software — Enter their details, pay rate, TFN declaration answers, and super fund.

Step 5: Run payroll — Software calculates wages, PAYG withholding, and super automatically and reports to ATO via STP.

Step 6: Pay the employee — Net amount (gross minus withholding).

Step 7: Pay PAYG to ATO monthly — Transfer the withheld amounts by the 21st of the following month.

Step 8: Pay super quarterly — Superannuation payments are separate from PAYG withholding. Super goes to the employee's super fund, not the ATO, but must be paid quarterly by the due dates.

Tax Withholding Rates — Quick Reference (2025–26)

For a weekly paid employee:

  • $500 — $0 — $88
  • $800 — $48 — $154
  • $1,000 — $92 — $208
  • $1,200 — $152 — $272
  • $1,500 — $254 — $380
  • $2,000 — $426 — $556

These are approximate figures. Always use the ATO's tax tables or payroll software for exact calculations.

Difference Between PAYG Withholding and PAYG Instalments

These sound similar but are completely different:

PAYG Withholding (PAYGW): Tax withheld from employees' wages by the employer. You collect it and forward to the ATO.

PAYG Instalments (PAYGI): Pre-payments of your own income tax (as a business owner) made throughout the year, rather than one lump sum at tax time. This applies to you as a sole trader or company — not to your employees.

Both appear on the BAS, which is why confusion is common. Make sure you understand which labels on your BAS relate to which obligation.

Using Your Accountant for Payroll

For most small tradie businesses with 1–4 employees, outsourcing payroll to a bookkeeper or accountant can be cost-effective. The risks of PAYG errors (penalties, ATO attention, employee disputes) often outweigh the cost of professional support — typically $50–$200 per month for basic payroll processing.

For larger teams, payroll software like Xero or MYOB with an integrated payroll module is the most efficient approach. STP reporting is automated, BAS figures are pre-populated, and the ATO receives accurate information in real time.

Frequently Asked Questions

Q: My employee wants to be paid cash — can I still withhold tax?
You must withhold tax regardless of payment method. Paying in cash doesn't exempt you from PAYG withholding obligations. Your employee's tax is determined by their earnings, not how you pay them.

Q: What if I accidentally withhold too much?
Your employee will get a refund when they lodge their tax return. The ATO reconciles what was withheld against their actual liability. Don't try to adjust future payroll to compensate — this creates records inconsistencies.

Q: Do I need to withhold from an employee who earns below the tax-free threshold?
If they've claimed the tax-free threshold on their TFN declaration and earn less than $18,200 for the year, withholding may be nil. The payroll software will calculate correctly. However, you must still run STP.

Q: Can I use a spreadsheet instead of payroll software?
Technically, if you can correctly calculate withholding and manually submit STP reports via the ATO portal, yes. In practice, this is cumbersome. The ATO offers a free STP solution for employers with 1–4 employees through registered third-party providers — check ato.gov.au for the current list.

Q: My employee asked for extra tax to be withheld — can I do that?
Yes. An employee can request additional withholding by completing a "Withholding Declaration" (NAT 3093). Common reasons include having multiple jobs or wanting to avoid a tax debt at year-end.