What is Pay As You Go (PAYG) Tax?

Pay As You Go (PAYG) tax is a system of withholding taxes from employee wages, contractor invoices, and business payments in installments throughout the financial year. It’s primarily used in Australia although you can find similar systems in other countries.

What is the aim of PAYG tax?

The aim of PAYG tax is to streamline tax collection by requiring individuals and businesses to pay their income tax progressively instead of a lump sum. It reduces the likelihood of having a large, unmanageable debt at tax time.

This system also helps the Australian government maintain a steady cash flow for public programs and reserve resources for essential services instead of debt collection.

Who pays PAYG tax?

All individuals and businesses that earn over a certain threshold must make PAYG installments to the Australian Taxation Office (ATO), including:

• Salaried employees
• Sole traders and independent contractors
• Businesses
• Investors

In 2025, the threshold for PAYG tax eligibility is $4000 (AUD) per month for individuals and $2 million for businesses. That’s not to be confused with the tax-free threshold for individuals, which is $18,200 per year.

How does PAYG tax work?

The way the PAYG tax typically works depends on your employment status.

Salaried employees are not responsible for their own PAYG installments. The employer must calculate what they owe, deduct this portion from their wages, and remit the withheld tax directly to the ATO.

Self-employed workers usually handle their own PAYG installments including calculations, remittance, and reporting. However, businesses may be required to withhold tax from payments if these workers don’t have an Australian Business Number (ABN) or volunteer for the program.

Additionally, individuals must pay PAYG installments on business and investment income when it exceeds the annual threshold. This amount of tax is based on their expected income and adjusted as necessary throughout the financial year.

What are the benefits of the PAYG system for businesses?

While it involves navigating extra requirements, the PAYG system allows companies to benefit from:

• Simplified tax compliance
• Improved financial planning
• Lower administrative burden on HR and accounting
• No shock of a large tax bill at year-end
• Reduced cost of running Australian payroll

What are the employer’s legal compliance requirements related to PAYG tax?

Employers under the PAYG system are required to handle the following responsibilities:

• Registering for PAYG withholding
• Calculating each worker’s withholding tax
• Sending monthly or quarterly payments
• Remitting the outstanding balance at year-end
• Reporting on PAYG in their Business Activity Statement (BAS)

Under the Australian PAYG system, taxpayers aren’t required to determine their eligibility for the program. The ATO calculates you’re income based on your latest income tax return and automatically adds or removes you depending on whether you’ve met the threshold.

Additionally, since the introduction of Single Touch Payroll (STP), most employers are no longer required to issue PAYG summaries separately. Employees now access this info through myGov.

What are the consequences of incorrect PAYG tax withholding?

Incorrect PAYG tax withholding can have significant and long-term consequences:

• Penalties and legal action
• Extra administrative burden to correct mistakes
• Employee dissatisfaction if they are under or overtaxed
• Reputational harm if non-compliance becomes public knowledge

What are the key metrics for measuring PAYG compliance?

Businesses can measure PAYG compliance through several metrics:

• On-time remittance rates: The percentage of PAYG contributions paid to the tax authorities by the deadlines
• Error rates: The frequency of payroll errors related to PAYG withholding
• Time taken: The hours HR and payroll spend amending errors in PAYG withholding
• Penalties received: The total amount paid in fines
• Employee complaints: The number of complaints received in a given withholding period

Global payroll software like Deel automatically tracks many of these metrics and lets you view them via the data and analytics dashboard.

What role does payroll software play in PAYG tax?

STP compliant platforms like Deel Global Payroll can help businesses manage their PAYG tax by automatically calculating tax withholdings, scheduling payments to the ATO, and generating reports. This reduces the risk of errors like under and overpayments or missed deadlines which can lead to compliance penalties.

Payroll software also enables companies to collect and maintain accurate employee records. They provide a centralized solution where administrators can store information like tax file numbers (TFNs) and declarations of tax-free thresholds. They also make it possible for employees to log into the system and update their details so businesses can ensure all paperwork is accurate and up to date.

How does PAYG tax impact global hiring?

PAYG tax adds extra complexity to global hiring. International businesses may find themselves subject to its requirements if they or their workers establish a tax presence in Australia.

Workers must make PAYG contributions if they stay in the country for a particular length of time and meet the specified threshold. If they’re salaried employees, your company must arrange to withhold their contributions.

Likewise, international businesses operating in the country may trigger tax liabilities. You might need to deduct PAYG tax from your income and report financial activities.

However, it’s possible to mitigate these issues by hiring workers through an Employer of Record (EOR) service like Deel. The service provider acts as the legal employer on paper, so you don’t have to navigate extra requirements or risk double taxation.

What trends are shaping PAYG tax systems globally?

The Australian government is moving many aspects of the PAYG system online and automating how they collect payments, check reports, and audit businesses. For example, the ATO has an online portal where businesses can take care of most withholding tasks.

As the government adds more online resources, it’s increasingly encouraging companies to digitize their own payroll processes and automate calculations and filings.

Additionally, the government is introducing tighter controls and harsher penalties to ensure businesses meet their PAYG obligations. This helps them deter tax evasion and ensure a steady flow of revenue for public programs.

How can HR teams keep themselves and workers updated about PAYG tax?

HR teams can keep everyone updated about PAYG tax through a variety of strategies:

• Receiving regulatory updates through software like Deel’s continuous compliance hub
• Sharing resources from the tax authority, such as guides and calculators
• Offering workshops or Q&A sessions to address common questions
• Providing a dedicated Slack channel for any on-the-spot queries or urgent issues
• Notifying employees when requirements change and requesting additional information or paperwork through a centralized system

Manage PAYG tax compliance effortlessly with Deel

PAYG tax can make hiring and expanding into Australia more complicated. However, you can simplify the process by partnering with Deel and benefitting from our advanced payroll software.

Deel offers your global team:

• Automated PAYG tax calculations and payments
• Fast and accurate reporting
• Customizable workflows
• Compliance updates
• A centralized employee information system
• Native integrations with our HR software

Plus, you have the option to outsource payroll, HR, and compliance completely through Deel EOR.

Thinking of hiring in Australia? Book a demo with our customer service team to learn more about how we support PAYG tax compliance.