What Are Payroll Withholding Taxes?
Automatically deducting income tax from payroll helps streamline tax collection. This is why governments around the world make withholding tax a requirement, and Australia is no different. Heres what every business owner needs to know. Withholding tax is deducted from salaries, wages, and dividends  in short, any income received. The amount deducted is paid to the government, and then credited against the individuals income tax liability. What makes withholding tax different from any other type of income tax you might pay is that the tax is deducted at the point of fund disbursement. For payroll, this means a certain percentage of income is withheld from each cheque to cover the employees tax liability. The deduction is forwarded to the government entity, in this case the Australian Tax Office (ATO). PAYG withholding tax requirements  If your business has employees, youre required to register with the ATO for pay as you go (PAYG) withholding. You might also need to register if you make payments to contractors or other businesses. The purpose of PAYG withholding is to prevent your workers from owing a large amount of income tax at the end of the financial year. Here are the requirements to follow:  Register for PAYG withholding with the ATO Pay the withheld amounts to the ATO Report the withheld amounts on your business statements Provide employees or other payees with PAYG summaries Submit a PAYG withholding annual report  Withholding taxes are applicable to any employees on your normal payroll, including salaried employees and workers paid an hourly wage. However, you might also have to register for PAYG if you make payments to:  Contractors that dont provide an Australian Business Number  Workers with a voluntary agreement  Directors  If you operate as a sole trader and take money from your business accounts for personal expenses, this doesnt qualify as a wage and thus no withholding tax is needed. However, you will need to still report this income on your end-of-year return. Withholding tax rates  Your payroll withholding tax rates will depend on the state or territory as well as the level of income. To help calculate the correct rates, you can use one of the ATOs tax withholding calculators. Individual withholding calculator: This applies to employee payments  Voluntary agreement calculator: This applies to any payments made under a voluntary agreement  Another option is to use one of the governments tax tables to determine what should be withheld from payroll. How to calculate withholding tax  Weve just outlined which calculators to use when working out how to calculate withholding tax. Theres some information that youll need to have ready in order to use these calculators and calculate the right tax rates. Before you get started, its important to pull together the following documents:  Tax file number declaration  Medicare levy variation declaration  Withholding declaration  Youll need these for reference as you plug information into the calculator. Details like the following will ultimately determine withholding tax rates:  Medicare levy  Worker status  Income tax rates  Student loan contributions  Tax-free threshold amount  Additional tax entitlements  Once youve calculated the amount of withholding tax owed, you must take this from the employees pay and forward it to the ATO. Payment deadlines will depend on the size of your business. Small withholders: If you withhold less than $25,000 per year, you must make quarterly payments. Medium withholders: If you withhold between $25,000 and $1 million per year, you must make monthly payments. Large withholders: Those that withhold over $1 million per year must make their payments within six to eight days. Reporting withheld tax  Another factor to consider with payroll withholding taxes are the ATOs reporting requirements. You must report all PAYG withholding on your Business Activity Statement (BAS) at the end of the financial year. Youll also need to submit a summary to each payee for their own records. All records need to be kept on file for at least five years. Its a good idea to use accounting software to keep track of all aspects of payroll for tax purposes, so that you can easily refer back to your reports as needed. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.