By Joshua Occhino, Co-founder, Ezyiah
Short answer: PAYG withholding is tax you take from certain payments to other people and send to the ATO. It usually applies when you pay employees, directors, labour-hire workers, people under a voluntary agreement, or suppliers who have not quoted an ABN. You must register before the first payment that is subject to withholding, even if you withhold nothing.
What is PAYG withholding?
Pay as you go (PAYG) withholding is how tax is collected during the year from payments you make to others, according to the ATO.
You withhold an amount from the payment, report it, and send it to the ATO. The person you paid uses that amount as a credit in their own income tax. It is not a tax on your profit: you are collecting it on someone else's behalf.
PAYG withholding is different from PAYG instalments, which are amounts toward your own income tax. Both can appear on a business activity statement (BAS), but they are separate obligations.
Who do you have to withhold from?
The ATO says you need to withhold tax from certain payments, including:
- payments to employees, company directors and office holders
- payments to workers under labour-hire agreements
- payments under voluntary agreements
- payments where an Australian business number (ABN) has not been quoted in relation to a supply
The same registration page also lists other cases, such as some household employees, self-managed NDIS funds that employ staff directly, and certain interest, dividend or royalty payments to non-residents.
If you are not sure whether a worker is an employee or a contractor, that distinction matters for withholding and for super. Check with a registered tax agent before you treat someone as a contractor.
When do you need to register?
You must register for PAYG withholding before you are first required to make a payment that is subject to withholding. The ATO says this applies even if you do not withhold any amount from a payment you make.
If you have an ABN, you can register through the Australian Business Register, Online services for business, your registered tax or BAS agent, or SBR-compatible software. If you need to withhold tax but you do not need an ABN, the ATO still requires you to register for a PAYG withholding account.
How much do you withhold?
The amount depends on the type of payment and on the information the payee has given you, such as a tax file number (TFN) declaration. For employees, that usually means using the ATO's withholding schedules or approved payroll software, not estimating a round figure.
Two rules are easy to get wrong:
- You may have to report a payment even when you withhold $0. The ATO's example is an employee paid $80 a week who claims the tax-free threshold and has provided a TFN: there is generally no obligation to withhold, but you still report the total payment at label W1 on your BAS.
- If a supplier does not quote an ABN, you must withhold 47% of the invoice amount (the rate the ATO has applied from 1 July 2017) and send that amount to the ATO. "Not quoting" means there was no ABN on the invoice and the supplier did not give it to you in any other way.
For employee wages, use the ATO withholding schedules or payroll software that reports through Single Touch Payroll (STP) — not a rounded guess.
How do you report PAYG withholding on a BAS?
You report withheld amounts in the PAYG tax withheld section of your BAS and pay them to the ATO. The labels are:
| Label | What you report |
|---|---|
| W1 | Total salary, wages and other payments you are usually required to withhold from — including payments where you withheld $0 |
| W2 | Amounts withheld from the payments shown at W1 |
| W4 | Amounts withheld where no ABN was quoted |
| W3 | Other amounts withheld (not already shown at W2 or W4), such as certain investment or foreign-resident withholdings |
| W5 | Total of W2 + W4 + W3. Do not include W1 in this total |
The ATO's label instructions also list what not to put at W1, including salary-sacrificed amounts, super contributions, and no-ABN payments you already report at W4. Copy W5 to label 4 in the summary, unless your form only asks you to report withholding.
Two extra reporting rules are easy to miss:
- If you report through Single Touch Payroll, the ATO says you no longer need to report amounts at W1 on your activity statements.
- If you are a large withholder, you only need to complete W1 on your activity statement, and you must pay withheld amounts electronically. Large withholders are those who withheld more than $1 million in a previous income year, or who are part of a company group that did.
Follow the instructions on your own activity statement. For lodgement dates, see BAS due dates 2026-27.
How often do you pay the withheld amounts?
Your withholding cycle depends on how much you withhold in a year:
| Status | Annual withholding | When you notify and pay |
|---|---|---|
| Small | $25,000 or less | Quarterly |
| Medium | More than $25,000 and up to $1 million | Monthly |
| Large | More than $1 million | Electronically, within 6 to 8 days of a withholding event such as a payday |
For amounts you report and finalise through STP, the ATO says you do not also need to give payment summaries or lodge a separate annual withholding report for those amounts.
A worked example: reporting W1 and a no-ABN invoice
These are illustrative figures that follow ATO rules, not a customer story.
Example 1 — a small wage with $0 withheld. You pay an employee $80 a week. They have given you a TFN and claimed the tax-free threshold, so you withhold nothing. You still include the $80 (and every other similar payment in the period) at W1. W2 stays blank if you withheld nothing from any W1 payments.
Example 2 — a supplier with no ABN. A contractor invoices you $1,000 and does not quote an ABN. You withhold 47%, which is $470, and pay the contractor $530. You report $470 at W4, and it forms part of W5. You do not include that $1,000 at W1.
The ATO says that if you fail to comply with PAYG withholding obligations for a payment to a worker, you may not be entitled to a deduction for that payment. Penalties may also apply.
What software can and cannot do
Payroll and STP software calculate employee withholding and report each pay run to the ATO. Bookkeeping software does not replace that.
Ezyiah is an AI bookkeeper with its own ledger. It connects to your bank, codes transactions and GST, matches receipts and invoices, and prepares a cash-basis BAS, including Extended BAS, from reconciled data. It does not run payroll, calculate wage withholding, or lodge STP. Your registered tax or BAS agent still reviews the BAS before anything is lodged.
For the GST labels on the same form, see What is GST in Australia?. Employers who also pay super each payday should read Payday Super from July 2026.
FAQ
Is PAYG withholding the same as PAYG instalments?
No. Withholding is tax you take from payments to employees and other payees. Instalments are amounts toward your own income tax. They can both appear on a BAS.
Do I need to register if I won't withhold any tax from a worker?
Yes, if the payment is one the ATO treats as subject to withholding. You must register before the first such payment, even if the amount you withhold is $0.
What do I do if a supplier doesn't quote an ABN?
Withhold 47% of the invoice amount (the rate from 1 July 2017) and report that amount at W4 on your BAS, unless an ATO exception applies to that payment. Check the invoice and any other way the supplier may have quoted the ABN before you withhold.
If I use Single Touch Payroll, do I still fill in W1?
The ATO says that if you report through STP, you no longer need to report amounts at W1 on your activity statements. Follow the instructions on your own BAS.
Can bookkeeping software lodge my PAYG withholding for me?
Software can help you prepare figures from your records. Lodging activity statements, and providing BAS services for a fee, is a separate step that may need a registered tax or BAS agent. Ezyiah prepares BAS figures from reconciled books; it does not run payroll or lodge for you.
Get the BAS figures ready from your books
Ezyiah connects to your bank, codes each transaction and its GST treatment, matches receipts and invoices, and prepares your BAS from the reconciled data. Your accountant then reviews and approves it before lodgement. Plans for businesses start from $79 a month billed yearly, and from $299 a month billed yearly for accounting firms. Prices are in Australian dollars and include GST. See how the AI bookkeeper for business owners works, or start your free trial.
This article is general information, not tax advice. Check your own situation with a registered tax or BAS agent.
Sources
- ATO, Pay as you go (PAYG) withholding (BAS labels W1-W5), accessed 7 November 2026 (last updated 1 May 2025)
- ATO, Pay as you go withholding (when to register), accessed 7 November 2026 (last updated 24 December 2025)
- ATO, Paying and reporting PAYG withholding amounts to us, accessed 7 November 2026 (last updated 21 November 2025)
- ATO, PAYG withholding hub, accessed 7 November 2026
- Ezyiah, Changelog, accessed 7 November 2026
- Ezyiah, Pricing and pricing for businesses, accessed 7 November 2026
