If your Australian retail shop employs staff (including casuals, family members, or even yourself as a director), you must understand Pay As You Go (PAYG) withholding.
This system requires you to deduct tax from employee wages and send it to the ATO.
Failure to comply leads to penalties, director liability, and potential prosecution. This guide covers who is an 'employee', how to calculate withholding, reporting via Single Touch Payroll (STP), and what happens if you miss a payment.
1. Do You Have a PAYG Withholding Obligation?
You must register for PAYG withholding if you pay any of the following:
- Employees (full-time, part-time, or casual).
- Company directors (including yourself, if your shop is a Pty Ltd company).
- Contractors who work primarily for you (if they don't have their own ABN or if they perform 'labour-only' services).
- Workers under a 'labour hire' arrangement.
- Payments to foreign residents for work performed in Australia.
Key exception: You do NOT need to withhold from payments to contractors who have their own ABN, provide their own tools/equipment, and can delegate work. But if you are unsure, the ATO's 'Employee/Contractor decision tool' can help.
2. How to Register for PAYG Withholding
Before your first payday, you must register. The process takes 1-2 business days online:
- Log into myGov (linked to ATO) or your business portal.
- Select 'Register a new tax role' or 'Update registration details'.
- Choose 'PAYG withholding' and provide the date you will start paying wages.
- The ATO will issue a withholding payer number (WPN) — you don't need to wait for this to start withholding, but you must have registered.
If you use accounting software like Xero, QuickBooks, or MYOB, they will prompt you to register during setup.
3. How to Calculate How Much Tax to Withhold
You cannot guess or use a flat percentage. The ATO provides weekly, fortnightly, and monthly tax tables (based on the employee's TFN declaration).
Steps:
- Step 1 — Ask every employee to complete a Tax file number declaration form (NAT 3092) and a Withholding declaration form (NAT 3093) if they have a HELP debt, Medicare levy variation, or tax-free threshold claim.
- Step 2 — Determine the employee's gross pay (before tax) for the pay period.
- Step 3 — Use the ATO's online PAYG withholding calculator or the printed tax tables to find the exact withholding amount.
Example: A casual retail employee earns $800 gross for a weekly pay period, claims the tax-free threshold, and has no HELP debt. According to the weekly tax table (2025-2026), you withhold approximately $72.
4. Single Touch Payroll (STP) — Your Mandatory Reporting System
Since 2019, almost all Australian employers must report PAYG withholding, superannuation, and payroll information to the ATO every payday via STP.
You cannot file quarterly or annually anymore.
- Micro-employers (1-4 employees): Can use a free ATO STP app or low-cost software.
- All other shops: Must use STP-enabled payroll software (Xero, MYOB, QuickBooks, etc.).
- Penalties for STP non-compliance: Up to $222 per employee per pay period (plus late payment interest).
STP reports tell the ATO: employee wages, PAYG withheld, superannuation owed, and any allowances or overtime.
5. When and How to Pay Withheld Amounts to the ATO
The money you withhold from employees is not yours — it is a trust fund.
You must pay it to the ATO according to your withholding cycle (determined by your business size):
- Small withholders (under $25,000 PAYG withheld per year): Report and pay quarterly via your Business Activity Statement (BAS). Due 28 days after end of quarter.
- Medium withholders ($25,000 - $1 million): Report quarterly but pay monthly (due on 21st of following month).
- Large withholders (over $1 million): Report and pay monthly.
Critical warning: The ATO has 'Director Penalty Notice' powers. If your company fails to pay PAYG withholding, the ATO can make you personally liable (even if your company is insolvent).
6. Common PAYG Mistakes Retail Shop Owners Make
- Paying employees 'cash in hand' without withholding: Illegal and leads to heavy penalties (up to 100% of the unpaid tax).
- Withholding incorrectly using an old tax table: Tax rates change annually. Always download the latest tables from ato.gov.au.
- Failing to report STP for family members: Your spouse or teenage child working in the shop is an employee — they need a TFN declaration and PAYG withholding.
- Not paying withheld amounts on time: The ATO charges General Interest Charge (currently ~11% per annum) on late payments.
In summary, PAYG withholding is non-negotiable. Register before your first employee starts, use STP software, and pay withheld amounts on time.
If you are unsure, hire a BAS agent for the first few months until you are confident.