What is payroll?
Payroll is a word with two possible meanings. It can mean the accounting process of paying your staff – including the amounts for each person and the overall total. It can also mean the list of your paid employees in some countries.
We'll look at both meanings in this guide, because understanding payroll is all about understanding the accounting regulations that cover how and when to pay your employees.
Payroll is an important part of business accounting, for two big reasons. First, because it's a legal requirement to get it right, especially for tax purposes. Second, if you don't pay your employees correctly then they probably won't be your employees for long!
So here's what you need to know in order to understand payroll for your small business.
Five areas of the law to understand about payroll
Detailed regulations about payroll will vary from one jurisdiction to another. However, there are some areas of the law that are likely to be in force wherever you run your business:
Any business with staff must withhold the proper payroll taxes from employees' pay and pay the appropriate government taxes. In short, you're acting as the tax collector for your employees.
2. Retirement plans and healthcare
You may also have to manage payments for things like social security and healthcare and this will vary from country to country. That means withholding the right amounts from your employees' pay and, usually, paying employer's contributions too. Sometimes these are fixed amounts, sometimes they're a percentage of each employee's salary.
3. Fines and penalties
If you don't pay the necessary taxes you could receive a heavy fine or other penalty, so it's important to calculate the amount of PAYG, payroll tax and Superannuation Guarantee Contributions (SGC) owed and pay them on time.
Employer obligations such as PAYG, payroll tax and SGC must be reported to the appropriate government agencies, and your employees, in writing. This might be done weekly, monthly or yearly, depending on local regulations.
5. Payroll is for employees
In certain countries you may have other obligations too, such as paying funds towards unemployment cover, or checking that each employee is legally allowed to work in your country.
How to choose payroll software
Some accounting software comes with payroll features built-in or as an add-on option. There are also stand-alone payroll applications available. Which one you choose will depend on the requirements of your specific business, but here are some points to bear in mind:
- Work with what you have: Does your business already use accounting software? See if it has in-built payroll or if you can add a payroll application to it. If not, it's time to upgrade.
- Find out if it is easy to use: Choose a payroll package or payroll accounting software add-on that your accountant or financial advisor can also use. Keep it simple to avoid swapping files in different formats.
- Go online and use the cloud: These days it makes sense to use cloud-based accounting and payroll software. You can access your payroll information anywhere and at any time, and share information with trusted partners. Plus there's less IT support work required.
- Make sure it can grow with you: You may only have one or two employees now, but no doubt you're aiming high. With scalable payroll software you won't have to change systems as your company grows.
- Ensure it can do real-time recording: Make sure the payroll application you choose keeps accurate, up-to-date, real-time records of payroll operations.
- Get recommendations: Ask your accountant or bookkeeper, financial advisor, bank, business partners and owners of similar companies to yours. See what they recommend.
- Check the reporting requirements: Check to see what types of reports are available with your chosen accounting or payroll package. Ask your accountant which ones might be useful for your business.
As well as these ideas, look into other useful features such as automated calculations of taxes, direct deposit management and timesheet handling. Think carefully about what you'll need and choose wisely, because if you get it wrong it can be hard to migrate from one payroll system to another.
A six-point checklist for great payroll
Having the right software is only part of the payroll solution. Now you need to use it properly! Setting up your payroll system properly at the start can save you a lot of time and headaches later. Here are some guidelines:
1. Register your business
Ensure your registered business number is included in all your payroll documentation and any forms you submit to the tax office or other entities you are required to register with or report to.
2. Record your employees' data
Enter all your employees' information in your payroll system, such as their name, address, welfare ID number and deductions (if taxes need to be taken out). Also include contact details, salary, days off, leave entitlements, overtime and any other compensation. Check local regulations to find out what data you must include.
3. Do the paperwork
Make sure your staff complete all necessary tax forms and return them. Do the same with your own forms.
4. Decide on payment periods
How often will you pay your employees? It might be weekly, monthly or fortnightly.
5. Keep up to date
Plan on having payroll information updated regularly. Do this yourself or get a bookkeeper or your accountant to do it.
6. Set up an archive
For records that need to be kept for several years, think about how you'll archive them. Good payroll accounting software will do some of this for you but you may still need some paper archives for documents like tax forms. Check what the requirements are.
Understand what to do when your payroll changes
Your payroll isn’t fixed – it will vary as you hire new employees. Whenever a new employee joins your business, make sure all the correct government tax documentation is completed and, if required, filed.
Payments to the people on your payroll will vary too and you'll need to include them in your system in different ways. Some examples include:
- Salaried worker: Someone who's paid a fixed salary for each pay period
- Regular hourly or casual employee: Paid an hourly rate for the hours worked each week
- Commission: Paid for services rendered, products or services sold, usually on a percentage basis
- Bonus: Paid for good performance over and above expected levels
- Supplemental wages: A catch-all term that includes commissions, overtime pay, terminations and back pay
Archive your payroll records
The government will want you to keep payroll records for seven years. These records should include the following information, for each employee:
- Name, address and tax file number (TFN)
- Date of hire
- Date of termination (if not still employed by you)
- Amounts and dates of all wage and pension payments
- Copies of all relevant forms supplied to (and by) the employee
- Details of sickness or injury payments, including dates, amounts and who made the payments
- Dates and amounts of tax deposits you made
- Copies of returns filed and confirmation numbers
- Records of fringe benefits and expense reimbursements provided to your employees
There may also be other information that you're legally obliged to keep. Check with the Australian Tax Office (ATO) to find out.
Payroll is your responsibility to get right
You might choose to handle payroll operations yourself in-house, or you might decide to outsource them to an accountant or payroll company. Either way, business owners are responsible for keeping accurate records and filing them with the tax office. So it's important to take the time to get it right.
You can make life easier for yourself by choosing the right payroll accounting software and setting it up properly. Get whatever help you need from your accountant, the ATO and Fair Work Australia to make sure this is done properly.
Putting in some effort now will save you tons of time and expenses as your business grows and you take on new employees.
Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.