PAYG withholding is tax you take out of other people's money, employee wages, and send to the ATO; you must register for it before your first payday. PAYG instalments are prepayments of your own income tax on business or investment income. The ATO usually enters you automatically once your tax bill is big enough. Both are reported on the BAS, which is exactly why they get confused.
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Side by side.
| PAYG withholding | PAYG instalments | |
|---|---|---|
| Whose tax is it? | Your workers'. You're the collector | Yours: prepaying your own income tax |
| How you get in | You register, before the first payment | The ATO enters you automatically |
| Where it shows on the BAS | Labels W1 (wages) and W2 (withheld) | The PAYG instalment label (amount or rate) |
| At tax time | Workers get credit for the tax withheld | You get credit against your assessed tax |
Withholding: register before the first payday.
Hiring your first employee is the trigger. You need a PAYG withholding registration before you're first required to withhold (in practice, before the first pay run) and from there each BAS reports the wages paid and tax withheld. It also covers two situations people forget: directors' fees, and payments to suppliers who won't quote an ABN, from which you must withhold at the top rate (currently 47%). On our registration form, PAYG withholding is a tick-box add-on and goes in the same lodgement as your GST. Day-to-day reporting is electronic via Single Touch Payroll, and remember the STP finalisation by 14 July each year, which flips your employees' income statements to “tax ready” in myGov.
Instalments: the ATO opts you in.
You don't apply for PAYG instalments: once your income tax bill on business or investment income is large enough, the ATO writes to you and adds instalments to your activity statements. Each payment is a prepayment credited against your next assessment, so it's not extra tax, just earlier tax. You can vary the amount if income has dropped, but a serious under-estimate can attract interest, so vary with evidence.
Sole trader, no staff?
Then withholding isn't your system: as a sole trader you can't employ yourself, and drawings aren't wages. Your own tax arrives via instalments (once the ATO adds you) and the annual return. The day you put someone on the books, withholding starts mattering: before their first payslip, not after.
Quick answers.
I'm a sole trader with no employees: do I need PAYG withholding?
No. Sole traders can't pay themselves wages, so there's nothing to withhold from. Your own income tax is handled through PAYG instalments (if the ATO enters you) and your annual return. Withholding only starts when you pay workers: or a supplier who won't quote an ABN.
When exactly do I register for PAYG withholding?
Before the first payment you're required to withhold from: practically, before your first employee's first payday. It can be added to a GST registration in the same lodgement.
What is no-ABN withholding?
If a supplier won't quote an ABN for a business transaction, you generally must withhold the top rate (47%) from the payment and remit it to the ATO. Verifying a supplier's ABN up front is the easy way to never deal with it.
Can I reduce my PAYG instalments if income drops?
Yes. You can vary the instalment on the activity statement. Estimate honestly: significant under-estimates can attract interest charges when the real numbers land.
Related guides: What is a BAS? · BAS due dates · GST instalments · Do I need to register for GST?
Hiring staff? Add PAYG withholding at registration.
GST and PAYG withholding set up in one lodgement · Lodged by Registered BAS Agent 25972850 · tax deductible · free help on 1800 546 526.