April 1, 2026 | Payroll & Tax

What is PAYG Withholding?

Key Takeaways

PAYG (Pay As You Go) withholding is the system where businesses collect tax from employees on behalf of the ATO.
In 2026, the amount of PAYG withheld is reported to the ATO instantly via **Single Touch Payroll (STP).**
The money belongs to the ATO—using it for business cash flow is a major compliance risk.

In 2026, the Australian tax system is built on one core concept: **pay as you earn.** Instead of waiting until the end of the financial year for everyone to pay a massive tax bill, the ATO requires businesses to "withhold" a portion of every employee’s salary and pay it to the government throughout the year. This is PAYG Withholding. Here's what you need to know as a business owner.

Who Do You Withhold For?

As a business, you're generally required to withhold PAYG from payments you make to:

Employees:** Full-time, part-time, and casual staff.

Contractors:** Only those with a voluntary agreement to withhold or if they don't provide an ABN.

Other Businesses:** If they don't quote an ABN on their invoice.

Reporting and Payment Cycle

The money you withhold from your staff isn't an expense for your business—it's a liability. In 2026, you report this amount to the ATO in two ways:

Each Pay Run (STP):** Every time you pay staff, Xero sends the PAYG withholding data to the ATO instantly.

Quarterly/Monthly BAS:** You summarize the total withheld for the period and pay it to the ATO.

⚠️ Note: The amount withheld is based on the **Tax File Number (TFN) Declaration** that your employee signs when they start. If they don't provide a TFN, you must withhold at the **top tax bracket (45%).**

Summary: Better Data, Better Compliance

Managing your PAYG withholding correctly ensures your staff are compliant and your business stays out of trouble with the ATO. At PrepMyBook, we recommend setting up a **separate tax savings account** to hold your GST and PAYG collections throughout the month so that you're never "caught short" at BAS time. Let's make 2026 your most financially secure year yet.

Automate Your Payroll Tax

Our payroll specialists can set up and manage your PAYG withholding in Xero, ensuring every filing is correct and every deadline is met. Let's simplify your compliance.
Talk to a Payroll Specialist