What is payroll tax?

Payroll tax: an overview

This tax revenue is used by the government to fund public services, such as health care and education, as well as infrastructure. 

Employers are responsible for assessing payroll tax obligations, withholding the correct amounts, paying it to the ATO and accounting for it by lodging returns. Non‑compliance can lead to penalties, interest charges or audit activity.

Income tax thresholds

Income tax is a progressive tax – individual income is divided into bands, with a higher rate of tax applying to each successive band. For the year 2025/26, the thresholds and rates for each band of income are:

• $0 – $18,200: tax-free
• $18,201 – $45,000: 16 cents for each $1 over $18,200
• $45,001 – $135,000: $4,288 plus 30 cents for each $1 over $45,000
• $135,001 – $190,000: $31,288 plus 37 cents for each $1 over $135,000
• $190,001 and over: $50,398 plus 45 cents for each $1 over $190,000

The ATO provides tax tables and calculators to simplify the process of calculating payroll tax for employers. 

Payroll tax registration and lodgement

While payroll tax is withheld from an employee’s pay every time they are paid, the employer pays and accounts for the tax at periodic intervals, which depend on the size of the payroll. Here’s how the system works.

Situations where PAYG withholding generally applies

PAYG withholding is generally associated with payments such as:

• wages and salaries
• bonuses, commissions and incentive payments
• allowances and leave payments
• payments to company directors
• certain contractor payments.

Whether PAYG withholding applies depends on the nature of the payment and the arrangement between the employer and the payee.

Registering for PAYG withholding

Businesses that make payments subject to PAYG withholding are typically registered for PAYG withholding with the ATO. Registration is often completed:

• when applying for an Australian Business Number (ABN)

• separately through ATO online services or with assistance from a registered tax or BAS agent.

The ATO provides confirmation of PAYG withholding registration and related reporting arrangements.

Calculating amounts withheld

Amounts withheld under PAYG are calculated based on information such as:

• the payment amount
• details provided by the payee (for example, a tax file number declaration)
• applicable tax rates and thresholds
• any additional withholding amounts nominated by the payee.

Reporting and paying PAYG withholding

PAYG withholding amounts are reported to the ATO through a Business Activity Statement (BAS). Reporting and payment timeframes vary depending on the business’s reporting cycle and withholding levels.

Common characteristics include:

• BAS lodgement on a quarterly or monthly basis
• payment of PAYG withholding at the time BAS is lodged
• use of online payment methods or registered agents.

Payroll reporting and recordkeeping

Employers commonly report payroll information using Single Touch Payroll (STP), which shares payroll data with the ATO throughout the year. Businesses generally retain payroll and tax records to support reporting and reconciliation activities.

Compliance considerations

PAYG withholding forms part of a broader tax and payroll framework administered by the ATO. Businesses often monitor their PAYG processes to help reduce the risk of errors, late reporting or payment issues, and may seek professional advice where clarification is required.

Payroll tax FAQs

What if I only employ for part of the year?

PAYG withholding is generally linked to periods when payments are made to employees or other payees. Businesses that employ staff for only part of the year typically interact with PAYG withholding during those periods of employment. Reporting and payment activity usually aligns with the timing and number of payments made, rather than the length of the business year itself.

Are there any exemptions or deductions?

Whether PAYG withholding applies can vary depending on the type of payment, the nature of the working arrangement, and information provided by the payee. In some cases, no withholding may occur, or reduced amounts may be withheld, based on factors such as tax-free thresholds, income levels or specific payment categories. The ATO publishes guidance outlining how different payments are treated for withholding purposes.

When is it due?

PAYG withholding amounts are reported and paid in line with a business’s BAS lodgement cycle, which may be monthly or quarterly. Due dates are set by the ATO and generally correspond with the relevant BAS period. Lodgement and payment timing can vary depending on reporting arrangements and whether a registered agent is involved.

What happens if I don’t pay the taxes on time?

If PAYG withholding amounts are not paid by the relevant due date, the ATO may apply interest charges or administrative penalties. The specific outcome can depend on factors such as the amount involved, how late the payment is and the business’s compliance history. The ATO also provides information on options that may be available where payment difficulties arise.

Tips to help you avoid payroll tax mistakes

• Create and use checklists: Having checklists and/or standardised procedures for every payroll cycle helps to ensure you don’t miss any steps and that your payroll is done accurately and on time.
• Conduct regular audits and reviews: By regularly auditing and reviewing your payroll processes, records and compliance, you can identify any issues or inconsistencies early before they become a major problem.
• Outsource your payroll: If your budget allows it, outsourcing your payroll to an external service could be a good option. This would enable you to focus on other areas of your business, take the burden off your internal resources and reduce the risk of errors.