{"id":283125,"date":"2024-09-19T13:11:00","date_gmt":"2024-09-19T01:11:00","guid":{"rendered":"https:\/\/www.reckon.com\/au\/?post_type=sbh&p=283125"},"modified":"2026-08-21T13:25:21","modified_gmt":"2026-08-21T01:25:21","slug":"withholding-tax","status":"publish","type":"sbh","link":"https:\/\/www.reckon.com\/au\/small-business-resources\/tax\/withholding-tax\/","title":{"rendered":"Understanding Withholding Tax For Small Business"},"content":{"rendered":"

[et_pb_section fb_built=”1″ custom_padding_last_edited=”on|phone” _builder_version=”4.23″ custom_padding_tablet=”” custom_padding_phone=”0px||||false|false” locked=”off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on” da_disable_devices=”off|off|off”][et_pb_row column_structure=”1_3,2_3″ _builder_version=”4.23″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” custom_padding=”||0px||false|false” global_colors_info=”{}”][et_pb_column type=”1_3″ module_class=”table-contents” _builder_version=”4.23″ background_color=”#f3f2f6″ custom_padding=”25px||25px||true|false” sticky_position=”top” sticky_limit_bottom=”section” sticky_position_tablet=”top” sticky_position_phone=”none” sticky_position_last_edited=”on|desktop” border_radii=”on|24px|24px|24px|24px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.23″ text_font=”||||||||” global_colors_info=”{}” background__hover_enabled=”on|desktop”][\/et_pb_text][\/et_pb_column][et_pb_column type=”2_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Copy paste body text here” _builder_version=”4.27.0″ header_2_font_size=”32px” hover_enabled=”0″ header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” global_colors_info=”{}” sticky_enabled=”0″]<\/p>\n

As part of our country’s tax system, Australian businesses must withhold a portion of payments made to employees or other entities and remit it to the Australian Taxation Office (ATO).<\/p>\n

But how exactly do withholding tax obligations work, and does every small business owner need to do it? Let’s take a closer look at withholding tax for Australian residents and why you need to stay on top of it to protect your business.<\/p>\n

What does it mean to withhold tax?<\/h2>\n

Withholding tax, or tax withheld, is the act of withholding a portion of income payments (e.g. wages or dividends) and paying that amount directly to the ATO on behalf of the recipient. The purpose of withholding tax is to ensure individuals and businesses pay their\u00a0tax contributions throughout the financial year<\/a>, avoiding a large tax bill at the end of the\u00a0financial year.<\/p>\n

For Australian business owners, the withholding tax system works under the Pay As You Go (PAYG)<\/strong> withholding framework. In short, businesses must withhold a portion of each employee’s salary or wages based on the employee’s tax file number (TFN) declaration, gross pay, and other relevant inclusions, such as the Medicare levy and any tax offsets.<\/p>\n

PAYG is reported either monthly or quarterly on a business’s Business Activity Statement (BAS) or Instalment Activity Statement (IAS). The withheld amount is then credited to the employee when they lodge their tax return.<\/p>\n

How does withholding tax work for small businesses?<\/h2>\n

For small business owners, withholding tax applies to the wages you pay your employees and other payments made to contractors (those deemed employees by the ATO). If you pay an employee or contractor, you are responsible for calculating the correct withholding amount using the taxable income tables<\/a> provided by the ATO website. Withholding tax rates start above the tax-free threshold of $18,200 per year and increase for higher-income earners.<\/p>\n

There are also rules for employees with student loans and non-residents. Students with HECS debt have additional amounts of tax withheld to cover their loan. For non-residents, withholding tax applies, while a different tax table is used, where 30% is withheld for every dollar earned up to $135,000.<\/p>\n

Failure to withhold or remit payments, regardless of intent, will most likely result in penalties and extra charges.<\/p>\n

Important note: As of 1 July, employers must pay superannuation contributions at the same time as salary and wages under the new Payday Super rules. Another change on 1 July 2026 is that the lowest income tax rate drops from 16% to 15%.<\/em><\/p>\n

Is the Medicare levy part of PAYG tax withheld?<\/h3>\n

When running a business, the Medicare levy is also included in your PAYG. The Medicare levy is a 2% tax on top of withholding rates, used to fund Australia’s public health system, Medicare.<\/p>\n

Keep all your documents and data in one place<\/h3>\n

Before calculating the withholding tax, you should collect and verify things like:<\/p>\n