Changes to new employee onboarding

Learn about the new employee setup in Xero payroll, ready for Single Touch Payroll (STP) Phase 2.

Illustration of person using laptop, surrounded by devices

Once you have transitioned to STP Phase 2, you will no longer need to file TFN declarations to the ATO or provide employment separation certificates when an employee ceases employment, unless specifically requested. This is because the information will now be submitted through STP instead. . Instead, some additional information will be required within Xero Payroll.

This includes:

1. Defining the employment type

You will need to define the payee as either an Employee or Contractor.

2. Defining what type of income the payee earns

Employee income types can be defined as: Salary and wages, Closely Held Payee, or Working Holiday Maker.

Contractor income types can be defined as: Non-employee or Labour Hire.

  • The ‘Non-employee’ income type is for a contractor that directly invoices you for services provided to your business through their own ABN.
  • The income type of ‘Labour Hire’ is only to be used by labour hire firms for the employees they place at a client organisation.

3. Defining a tax scale

Defining a tax scale for your employee will inform the ATO of their appropriate tax conditions:

  • Regular
  • Actors, variety artists and other entertainers
  • Horticulturists and shearers
  • Seniors and pensioners

Xero Payroll supports calculation of PAYG withholding for the regular tax scale only. You will need to manually calculate and apply PAYG withholding for employees with a tax scale other than regular.

4. Country codes

Country codes will be required if your employee is a Working Holiday Maker, to indicate the country of tax residence.

5. Contractors

There are no changes to how contractors are treated as part of STP 2. If you're paying contractors through accounts payable, you should continue to do so. The benefits of setting up a contractor in Xero Payroll is to typically make superannuation payments using Auto Super, or to facilitate payments based on agreed hourly rates tracked through a Xero timesheet.

Payments to contractors are a direct debit from the nominated account and no tax treatment is applied.

6. Tax treatment and reporting (Tax file declaration)

With the additional information defined for your new or existing employee, Xero will automatically generate a six-character tax treatment code. The tax treatment code is an abbreviated way of telling the ATO about the factors that can influence the amount withheld from payments to employees.

The six-character tax treatment code is made up of a combination of:

  • Residency status
  • Income type
  • Tax scale
  • Options within each category
  • Study and Training Support Loan (STSL) status

Reporting the tax treatment for each employee through STP means that when employees provide their TFN declaration (either online or hard copy), employers no longer need to send a copy of the declaration to the ATO. It will also allow the ATO to notify employees if they have provided their employer with incorrect information that may result in a higher tax bill for the employee at the end of the financial year.

Learn more about STP Phase 2 reporting at the ATO website