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Glossary

PAYG (Pay As You Go)

The system through which Australian businesses withhold income tax from employees' wages (PAYG withholding) and pre-pay their own income tax (PAYG instalments).

Pay As You Go (PAYG) is the umbrella term for two separate ATO mechanisms that keep tax collections current throughout the year rather than as a lump sum at tax time.

PAYG withholding

PAYG withholding requires employers to deduct income tax from employees' wages and from certain payments to contractors (where no ABN is quoted), then remit those amounts to the ATO. Amounts are determined by ATO tax tables or employees' Tax File Number declarations. Reporting now flows through Single Touch Payroll (STP) at each pay run, with totals also reported on the BAS at label W2.

PAYG instalments

PAYG instalments are quarterly pre-payments of a business's expected income tax liability. The ATO calculates a GDP-adjusted instalment rate or amount from the most recent income tax return. Businesses can vary the instalment if their income has materially changed — for example, if revenue has dropped significantly in the current year.

Common instalment options

  • Option 1: Pay the ATO's calculated instalment amount (simplest).
  • Option 2: Calculate your own instalment using your current income multiplied by your instalment rate.
  • Option 3 (quarterly reporters): Pay a GDP-adjusted instalment for the whole year in Q4.

Both withholding and instalment components are reconciled against the actual tax liability at year-end via the individual or company income tax return.