What is PAYG tax?

Pay As You Go (PAYG) tax is the system under which employers withhold an estimated amount of income tax from each pay and send it to the Australian Taxation Office on the employee's behalf. The withheld amount is intended to cover the employee's expected income tax liability for the year, including the Medicare levy, and is reconciled against actual tax owed when the employee lodges their tax return after 30 June.

There are two main PAYG components. PAYG withholding applies to wages, salaries, superannuation pensions, and certain payments to contractors, and is the focus for most employees. PAYG instalments apply to people with substantial business or investment income, who pay quarterly instalments calculated by the ATO based on their previous year's return. Sole traders and small businesses can use either system depending on their structure.

The amount withheld each pay is calculated using ATO tax tables based on the employee's gross pay for the period, the frequency of pay (weekly, fortnightly, monthly), and any tax offsets the employee has claimed on their TFN Declaration. The Medicare levy of 2 per cent and, for some, the Medicare Levy Surcharge are usually included. From 1 July 2024, withholding rates reflect the Stage 3 income tax cuts that lowered the rate on income from 18,201 to 45,000 dollars from 19 to 16 per cent.

Single Touch Payroll (STP) is the modern reporting system. From 1 July 2018 (large employers) and 1 July 2019 (small employers), every Australian employer must report each pay event electronically to the ATO at the time of payment. The reported data includes gross wages, withheld tax, superannuation, and salary sacrifice. Employees can see their year-to-date PAYG totals through myGov in near real time. STP has replaced the old paper PAYG payment summary system, and employees no longer receive a group certificate at the end of the financial year.