Small business payroll made simple: Steps, compliance and tools

Published Wednesday 5 November 2025

Table of contents

• What does payroll mean for small business?
• What's involved in payroll compliance?
• How to do payroll for small business step-by-step
• What are payroll deductions?
• Reporting to the ATO
• How much does payroll cost for small businesses?
• Payroll options for small business
• Simplify payroll with the right tools
• FAQs on small business payroll

Key takeaways

• Implement Single Touch Payroll (STP) reporting to submit employee payment, tax withholding, and superannuation information to the ATO on or before each payday, as this has been mandatory for nearly all employers since July 2019.

• Calculate payroll systematically by gathering employee details (TFN, bank accounts, super fund), determining gross pay, handling mandatory deductions like PAYG tax and superannuation, then paying net amounts on time every pay period.

• Maintain comprehensive payroll records for at least seven years to meet compliance requirements, including detailed payslips showing all calculations and proper documentation of all payments and deductions.

• Choose payroll management tools that match your business complexity, from simple software for basic needs to outsourced services for multi-state operations or varied employee types, rather than relying on spreadsheets which may not meet tax office requirements.

What does payroll mean for small business?

Payroll involves two main responsibilities: paying employees correctly and managing deductions for taxes and other obligations.

Your core payroll duties include:

• Accurate payments: Pay employees the right amount on time, following their contract and employment law
• Proper deductions: Calculate and withhold taxes, No change needed, but check for consistency., and other required deductions

You must pay employees on time, calculate taxes correctly, and report to the government as required.

You can use Xero payroll software to simplify your payroll tasks and stay compliant.

What's involved in payroll compliance?

Payroll compliance protects your business from penalties and ensures employees receive correct pay and entitlements.

To stay compliant, you need to:

• pay employees the correct amount and make the right deductions every pay period
• give employees detailed payslips that show all calculations
• file and pay taxes to the Australian Taxation Office (Use "Australian Taxation Office (ATO)" on first mention, then "ATO" thereafter.) on time
• send deductions, such as superannuation, to the correct providers
• keep payroll records for at least seven years. The ATO generally requires five years, but other bodies, such as the Australian Securities & Investments Commission (ASIC), require companies to keep records for seven years.

This guide covers deductions and reporting. For more on pay calculations, see how to pay employees.

How to do payroll for small business step-by-step

Payroll can seem complex at first, but you can break it down into simple steps. Here’s how to do it.

1. Gather employee information: Before you can pay anyone, you need their details, including their Tax File Number (TFN), bank account details, and superannuation fund choice.
2. Calculate gross pay: Work out what each employee has earned for the pay period. This could be based on their annual salary, hourly rate, or overtime hours.
3. Handle deductions: Subtract any required amounts from their gross pay. This includes Pay As You Go (PAYG) withholding tax and any other deductions they've agreed to.
4. Pay your employees: Transfer the final net pay amount to your employees' bank accounts. Make sure you pay your employees on time, every pay period.
5. Report to the ATO: Using Single Touch Payroll (STP) enabled software, you'll report your employees' pay, tax, and super information to the ATO on or before each payday, which the ATO confirms is a mandatory obligation for employers.
6. Keep accurate records: You're required to keep all payroll records for at least seven years. Using software makes this simple, as everything is stored securely for you.

What are payroll deductions?

Payroll deductions are amounts you withhold from employee wages before paying them, covering mandatory and voluntary contributions.

Mandatory deductions:

• Income tax withholding
• Superannuation contributions
• Child support payments (when required)

Voluntary deductions:

• Additional health insurance premiums
• Extra superannuation contributions
• Charitable donations

You need to follow the correct order for deductions. Find out more about deduction priorities in the guide to hiring staff.

Reporting to the ATO

Australian Taxation Office (ATO) reporting means you must collect employee taxes and report payments regularly to show you meet the rules.

Your reporting obligations:

• withhold income tax from employee wages
• pay collected taxes to the Australian Taxation Office (ATO) on time
• file regular reports that show correct payments and taxes

Single Touch Payroll (STP) requirements:

• submit reports every payday
• include employee payments, tax withheld, and superannuation contributions. Since early 2022, you must also collect additional payroll information under STP Phase 2.
• use accounting software, payroll software, or registered agents to submit your reports

How much does payroll cost for small businesses?

Payroll costs depend on your approach. Payroll software usually charges a monthly fee, which may increase with more employees. Outsourcing to a payroll service, accountant, or bookkeeper has its own fees. Doing payroll yourself with spreadsheets may seem free, but it can take more time and lead to costly errors.

Payroll options for small business

Payroll complexity increases with business size and employee variety, requiring different management approaches.

Common complexity factors:

• Employee types: Mix of hourly, salary, and commission-based staff
• Variable payments: Overtime, allowances, and expense reimbursements
• Leave management: Annual leave, sick leave, and other entitlements
• Multi-state operations: Different regulations across state boundaries

Your payroll management options:

• use pen and paper or spreadsheets if you have only a few employees, but note that spreadsheets are often not accepted by the tax office
• use payroll apps to calculate pay and deductions and fill out tax forms, but you need to make the payments yourself
• outsource your payroll to payroll service providers. Some providers handle everything, while others help with specific tasks
• ask accountants and bookkeepers to manage your payroll. Many offer this service, and you can find one in the Xero advisor directory

Simplify payroll with the right tools

When you get payroll right, your team is happy and your business stays compliant. The right tools automate calculations and reporting, so you spend less time on admin and more time running your business. Ready to make payroll easier? Try Xero for free.

FAQs on small business payroll

Here are answers to common questions about small business payroll.

How much does a payroll system cost for a small business?

Payroll software usually charges a base monthly fee plus a fee per employee. Outsourcing can cost from $30 to over $100 per employee each month, depending on the service.

Do small businesses pay payroll tax?

You only pay payroll tax if your total wages in Australia exceed a set threshold. This threshold varies by state and territory. For example, in New South Wales, the annual threshold is $1.2 million. You pay payroll tax only on wages above that amount.

What is the best payroll solution for a small business?

Choose a payroll solution that fits your business. If you have a few employees, payroll software may suit you. For more complex needs, consider a payroll service provider or your accountant.