Small Business Tax Dictionary
PAYG (Pay As You Go)
PAYG (Pay As You Go) is a system in Australia for paying amounts towards an individual's or business's expected annual income tax obligation. Tax is deducted from various payment sources throughout the year to distribute the tax burden over time rather than requiring a lump sum payment at year end.
The two components of PAYG
The PAYG system has two parts:
PAYG Withholding — Employers withhold tax from wages and salaries paid to employees, and from certain payments to contractors. The withheld amounts are sent to the Australian Tax Office (ATO) on behalf of the recipient.
PAYG Instalments — Businesses and individuals who earn income not subject to withholding (such as investment income or business profits) make regular prepayments of their expected income tax liability throughout the year.
Who it applies to
- Employees — PAYG withholding is deducted automatically from wages by employers
- Business owners and self-employed — may be required to pay PAYG instalments quarterly if their income exceeds certain thresholds
- Investors — those with investment income above certain thresholds are required to pay PAYG instalments
Why PAYG matters
PAYG helps spread the tax liability over time, reducing the burden of a large annual payment. Adherence to PAYG requirements is essential for Australian individuals and businesses to ensure timely and accurate tax payments, and to avoid interest charges for underpaying during the year.