PAYG withholding stands for Pay-As-You-Go withholding, which is a system of withholding income tax from an employee or contractors salary or wages. The payer of the income, usually the employer, pays the tax directly to the government on behalf of the employee or contractor. This system is used in Australia and other countries to help workers and businesses meet their end-of-year tax liabilities.

Under PAYG withholding, employers are required to withhold tax from certain payments made to others, including employees, company directors, and office holders/pay-as-you-go-(payg)-withholding/). The withheld taxes are then paid by the employer to the government body that requires payment and applied to the account of the employee, if applicable. Employers must report any withheld amounts in the PAYG tax withheld section of their business activity statement (BAS) and pay all withheld amounts to the government/pay-as-you-go-(payg)-withholding/).

The most common payments that employers need to withhold amounts from are the ones made to employees, directors, workers with a voluntary agreement, and contractors or businesses that dont quote their Australian Business Number (ABN). The ATO has calculators to help employers work out how much they need to withhold from payments. Employers are also required to provide PAYG withholding payment summaries to all employees and other payees and lodge a PAYG withholding annual report.

The PAYG tax system allows employers to vary the amount of tax that is withheld from employees on each payment installment, withholding some of this to anticipate the end-of-year tax liability. This helps employers and employees manage their cash flow and meet their taxation obligations.