All About PAYG For Small Business Employment
New small business owners! If you are trying to go about doing your small business bookkeeping yourself, you may be wondering the difference between PAYG withholding and PAYGI instalments? Put simply:
- PAYG Withholding (or PAYG-W) which is a pre-payment on behalf of your employees for their personal income tax obligations
- PAYG Instalment (or PAYG-I) which is a pre-payment for the business for it’s own corporate income tax obligations.
What Is Small Business PAYG (Pay as you go)
As a small business owner, whether you outsource your bookkeeping or do your bookkeeping yourself, you need to withhold tax from certain payments made to others in order to carry out your business. These payments include:
- payments to employees, company directors and office holders
- payments to workers under a labour-hire agreements
- payments under voluntary agreements
- payments where an Australian business number (ABN) has not been quoted in relation to a supply.
For example if you have employees, you need to withhold tax from their payments and report the withheld amounts in the PAYG tax withheld section of your business activity statement (BAS), and pay all withheld amounts to the ATO.
If you fail to comply with the 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 Is Small Business PAYGI (Pay as you go instalment)
Pay As You Go (PAYG) instalments help you budget for your income tax and keep a healthy cash flow. By making regular payments during the year (through your activity statements) you won’t have to pay a large tax bill when you lodge your tax return.
You’ll pay PAYG instalments if you earn business or investment income (which is also known as instalment income) over a certain threshold.
When you lodge your tax return, all the amounts you’ve paid during the year will be offset against any tax you owe for the year.
To make sure your tax assessment takes into account the instalments you’ve paid throughout the year, you need to lodge your activity statements and pay all your PAYG instalments before you lodge your tax return.
How to pay PAYG Instalments
Okay so now you know you need to withhold this money, how do you know how much and how do you pay it to the ATO?
You can generally choose between two options for calculating and paying your PAYG instalments. The option you choose will apply for the whole income year.
Option 1: Instalment amount
Paying by instalment amount is the simplest option for small businesses as you don’t need to make any calculations. You pay the amount that the ATO have worked out for you based on information you reported in your most recent tax return.
Option 2: Instalment rate
When you pay using the instalment rate, you work out your instalment amount yourself using:
- the instalment rate provided by the ATO.
- your instalment income.
The benefit of this method is that your instalments are based on your income as you earn it, instead of an estimate based on your most recent tax return. You may prefer this method if your income changes throughout the year.
How to get started
If you are new to having employees in your Australian small business and don’t know where to start with employment contracts and taxes, schedule a call to take the first step in going from hot mess to flamin’ success.