When it comes to taxes, it’s normal to have questions and concerns. Though most people are familiar with basic tax laws and rules, the process can still be confusing and even intimidating. Depending on your employment situation, you might need to take a closer look at your tax plan, and consequently learn more about pay as you go taxes.
Pay as You Go (PAYG) taxes allows tax payments to be spread over the year, making it easier to meet tax goals. Payments are made regularly, whether monthly, quarterly, or more. They can be paid by companies, individuals, trusts, and so much more. In this guide, we’ll explain all you need to know about Pay as You Go taxes.
What Is PAYG Tax?
First, what exactly is Pay as You Go taxes in Australia? This is a tax system created to make things easier for both businesses and individuals. In simple terms, it’s when you (or your employer) makes regular payments towards your yearly income tax liability.
Because withholdings are taken regularly, often with each paycheque, it reduces the overall tax burden. PAYG taxes are generally estimated, and when you do your yearly tax filing, you’ll determine whether you owe more or less. If there’s a negative difference, you’ll owe these funds at the time of tax filing.
Why use PAYG vs. one lump-sum payment during tax season? When you make regular payments (weekly, monthly, bi-annually, etc.), you don’t have to worry about paying a large tax bill when you lodge your tax return. Though taxes can be intimidating, PAYG makes it a little bit easier.
Who Should Pay PAYG Instalments?
With the definition in mind, who should pay PAYG instalments to the ATO? When businesses reach a certain amount of income, they’re required to pay for instalments. They’ll be notified by the government, so there should be no confusion about this.
If you’re a contractor or solo business owner, you will need to pay for PAYG if you report over $4,000 of gross investment or business income in your previous tax return. There are some exceptions to this, but this is typically the case.
Companies typically choose to pay PAYG instalments as a way to collect tax for employees. This is normally known as PAYG withholding. This applies to any of the following employees:
- Full-time employees
- Part-time employees
- Independent contractors
- Payments made to other businesses who don’t quote their ABN
Any business with a myGov account linked to the Tax Office will automatically enter the system for PAYG once their income reaches the threshold. However, you can also choose to enter the system early and pay voluntary instalments to limit the amount you pay at the end of the tax year.
How Much Do You Have to Pay?
Another common concern is how much you have to pay under the PAYG system. There are two main options, and each might be a good fit depending on your situation. These options are:
- Specific amount: You can choose to pay a specific instalment amount. This is available to most individual business owners, contractors, and businesses. However, super funds and companies with investments or business income over $2 million usually can’t choose this option. These instalment amounts are determined by the Tax Office.
- Rate: Another alternative is to choose an instalment rate which is when you PAYG on a calculated rate based on the Tax Office calculations. This is obligatory for super funds and companies with investment or business income over $2 million. Regardless, all taxpayers can choose this option if they wish.
The specific amount or rate is based on how much you owed in previous years. This can be a tricky calculation to come up with, especially if your business income is always growing or changing. This is why many argue the instalment rate is the best choice since the amount you owe is based on how much you earn.
Before your PAYG instalment due date, you will get an activity statement or notice from the ATO. This lets you know when your due date is as well as how much is owed. In order to get these notices, you need to register with the PAYG instalment system through myGov. Even if you haven’t met the threshold yet, using the PAYG system is a great way to budget. Not sure how much you will owe? Use the PAYG instalment calculator.
Prepare for Tax Season
Ultimately, preparing for tax season isn’t just a once a year process. Though lodging your taxes can be intimidating, you can take steps earlier to get ready. The PAYG system was created to make the financial burden more manageable for both big businesses and solo individuals.
Are you worried about taxes? Talk with our professionals on 1300 368 322. At Debt Busters, we work with you to determine the right plan for the future based on your specific financial goals. Taxes can be tricky, but they don’t have to be scary.