Talking Cents

Understanding PAYG Withholding for Small Businesses

PAYG withholding for small businesses involves knowing when to register, how often to report to the ATO, and how recent rule changes like lump sum tax thresholds affect your payroll. If you're running a small business in Australia, chances are PAYG withholding is something you’ve had to wrap your head around. But how well do you actually understand it?

In this article, we’ll break down PAYG withholding and help to ease your admin load while avoiding unexpected penalties.

What is PAYG Withholding?

PAYG stands for Pay As You Go. It’s a system where businesses withhold income tax from payments they make to employees, certain contractors and company directors, and pass it on to the ATO.

This allows individuals to pay their income tax bit by bit throughout the year rather than all at once at tax time. Simple, right? But there’s more going on beneath the surface, especially for business owners trying to keep up with reporting requirements.

Who Needs to Register for PAYG?

If your business makes any payments that attract tax withholding, then you need to register for PAYG withholding before the first payment is made. This includes:

• Salaries and wages
• Director payments
• Payments to contractors without an ABN
• Payments under a voluntary agreement

Even if you only have one casual staff member or are paying yourself as a company director, PAYG rules still apply.

Are You Withholding the Right Amount?

The ATO provides regularly updated tax tables to help you get it right, but things can easily go wrong when:

• You pay a contractor who hasn’t supplied an ABN—this requires a 47% withholding rate.
• You’ve missed updates to withholding rates or payroll categories.
• You’ve made back payments (like bonuses or award corrections) but haven’t applied the correct tax treatment.

How Often Do You Need to Report?

Your reporting frequency is based on how much PAYG you withhold annually:

• Less than $25,000/year: Lodge and pay quarterly with your BAS.
• More than $25,000/year: You’ll need to report and pay monthly.
• More than $1 million/year: You’re a large withholder and must report weekly.

Most small businesses in Sydney fall into the quarterly bracket, but that can change if your team grows or your payroll increases.

STP Has Changed the Game

If you're not using Single Touch Payroll (STP) yet, it's time to get onboard. STP means your payroll system reports wages, PAYG withholding and super info directly to the ATO every time you pay staff. It's streamlined, secure and, frankly, now the standard.

But remember—STP doesn’t do the maths for you. You still need to make sure the right amount is being withheld. That’s where your accountant or bookkeeper comes in.

Here’s Something Most Business Owners Don’t Know

From 1 July 2025, the ATO scrapped the $1,200 tax-free threshold for Lump Sum E payments (these are back payments made more than 12 months after they were due).

This means every dollar of delayed pay is now taxed at the full marginal rate, even if it’s a small amount. If you’re negotiating pay rises, promotions or settling entitlements from previous years, this change could significantly affect your payroll tax withholding.

Tips to Keep PAYG Withholding on Track

Here’s a quick checklist to help you stay on top of things:

• Register for PAYG before hiring staff or paying contractors
• Withhold 47% from payees who don’t provide an ABN (unless exempt)
• Use ATO tax tables or STP-compliant payroll software
• Reconcile PAYG in your BAS each quarter (or monthly if required)
• Keep an eye on changes to lump sum and bonus payment rules
• Seek help from a trusted small business accountant if unsure

Don't Let PAYG Catch You Off Guard

At M.A.S. Partners, we help businesses across Sydney and Zetland manage PAYG withholding with clarity and confidence. We specialise in small business accounting in Sydney, offering ongoing support with PAYG, BAS, payroll processing and more.

Whether you’re a sole trader just getting started or a growing team ready to scale, our dedicated team of small business accountants is here to support you every step of the way. Talk with our experts right away.

Our expertise ensures you're always one step ahead.