Run payroll for your employees
Getting payroll right is essential. Paying your employees on time and at the agreed rate is important to maintaining a productive relationship. It’s also a legal requirement. Let’s take a look at the payroll process.
First, what is payroll?
Payroll is a list of your employees and the total amount of money you pay them. It includes salaries or wages, bonuses, allowances, and benefits. Deductions such as tax are also part of payroll.
Four ways to run payroll for employees
Running payroll for employees can take on different forms, with each having its pros and cons. Here are four ways to run payroll for employees:
- Spreadsheets or pen and paper
A lot of small businesses with less than five employees run payroll on a simple spreadsheet or pen and paper. It’s free, but it will start to cost a lot of your time as you hire more people. You’ll also have to stay on top of tax laws to avoid making mistakes or getting in trouble with the tax office. It can also be inconvenient when it comes to filing payroll reports with tax offices that require electronic filing.
Under Single Touch Payroll (STP), you’ll report to the ATO every payday how much your employees were paid, how much tax was withheld and what contributions were made to superannuation. This report needs to be lodged through accounting or payroll software, or through a registered agent or payroll service provider. If you use spreadsheets or pen and paper, you need to find a service to convert the data into a compliant digital report format and submit it on your behalf.
- Outsource to a specialist
You can get a payroll expert to do the work. They know the ins and outs of tax and will help you stay compliant. Using a consultant will cost you money, and you’ll need to communicate regularly about staff changes, but a lot of employers are happy to pay for peace of mind.
- DIY software
Many software packages can do the maths and some of the admin work for you. For example, they’ll work out the pay you owe and the deductions needed, create payslips, and fill out tax forms automatically. But it’s up to you to make the actual payments.
- Full-service software
You can sign up to systems that do everything DIY software does – plus make payments and file reports. You’ll still have to set up employees in the system and update their details if circumstances change, but most of the rest is taken care of.
A good payroll system simplifies the complexities, helps you avoid mistakes that may lead to costly penalties, and does all the heavy lifting for you so you can focus on other parts of your business. Choose a payroll method that’s best for you and suits your business needs.
Check out our guides How payroll accounting software benefits your office and Small business payroll: To outsource or not?
When to run payroll
There are a lot of conventions around the timing of pay day. In Australia, it most commonly falls on a Wednesday or Thursday. And employees are generally paid weekly, fortnightly, or monthly.
How often employers pay*
A quarter of employees say the pay cycle makes it hard for them to budget or save. It’s an area where small businesses can stand out by helping employees achieve their financial goals.
How often workers want to be paid*
* Xero Australian workforce survey, 2019
How to run payroll – from start to finish
With quite a few steps along the way, the payroll process can get complicated. We’ll take you through it step by step so you can process payroll properly.
1. Prepare for payroll
You may want to set up a payroll bank account to keep your business transactions separate from your payroll transactions. Your payroll bank account will be used to pay your employees and hold funds for taxes, deductions, and other payroll-related items. You might need to set up a direct deposit with your bank for paying employees into their bank accounts (if this is the method of payment you agreed on).
You’ll also need to lodge some paperwork before paying a new employee. See the chapter on employee onboarding for more information on this. And check out our guide on setting up online payroll with your bank.
2. Calculate employee pay
You’ll need to calculate the gross pay for each of your employees. Gross pay is the total amount you owe an employee for the pay period based on the terms of their contract. It also includes overtime pay and pay for work done during public holidays. Employees don’t take home their gross pay – you’ll make deductions before they’re paid. Good payroll software can do this automatically. It will even handle leave requests and timesheets if you have wage workers.
3. Calculate pre-tax deductions
Payroll deductions are amounts taken from an employee’s pay. Some are legally required, while others are voluntary. If you make a deduction, you’re responsible for sending that money to the right place – be it a government agency or a retirement fund. Some deductions are made before tax is taken out of your employee’s pay, while others come after.
Pre-tax deductions include:
Paying super for employees is an important responsibility. It’s compulsory and provides for their retirement. Your contributions will come out of your business expense account and not from your employee’s salary or wages.
You have to start contributing super when an employee’s pay passes a certain amount.
The contribution rate is around 9.5% of employee earnings.
If your employee doesn’t nominate a super fund, you’ll pay into a default fund.
4. Calculate employee-related taxes
Each payday, you need to deduct taxes from your employees’ earnings and work out what payroll taxes you owe as an employer. You may need to hold on to these withheld taxes for a while before passing them on to the government. It’s a good idea to set up a special bank account for them.
PAYG (pay-as-you-go income tax)
This is what your employee is taxed on earnings. This includes a Medicare levy and takes into account the tax-free limit, tax offsets, and student loan repayments. Check out the ATO page on PAYG withholding. The ATO also has an online tax withholding calculator and some tax tables you can use to work out how much PAYG tax to deduct.
Taxes on benefits
Your employees are expected to pay tax on allowances, bonuses, and fringe benefits such as housing or private use of a company car. Check out the ATO pages on allowances, withholding for allowances, and fringe benefits tax, as well as the ATO tax table for back payments, commissions, bonuses, and similar payments.
5. Calculate post-tax deductions
Your employee may have extra deductions to come out after tax. Child support is one of the most common. Check out this Department of Human Services page on child support information for employers.
6. Make payments to employees
Take out all taxes and deductions from your employees’ gross pay to get their net pay. Once you’ve calculated net pay, it’s time to pay them. Make payments based on the method of payment you’ve agreed on. Make sure to issue payslips to your employees. Their payslip will show their gross pay, along with all the deductions taken from it and the net pay they receive.
Good payroll software automatically looks after all the calculations for you, processes payments on time, and makes it easy for employees to view their payslips. If you don’t use payroll software, a payslip template can be useful.
7. File and pay taxes, deductions, and contributions
Now that you’ve calculated all taxes, deductions, and contributions, it’s time to file and pay them. You need to do it on time to avoid paying any penalties or interest.
Most businesses will need to submit a report to the ATO each payday reporting what employees were paid, how much tax was withheld, and what super was contributed. You can learn more on this reporting system from our page on Single Touch Payroll.
8. Keep payroll records
You’ve finally reached the last step of the payroll process: record-keeping. You need to keep payroll records in case any questions come up. You’ll need to keep records in paper or electronic form for:
- salary or wages and time worked
- holidays and leave
- taxes and other deductions
- employer contributions
- when money was paid and where to for employee pay
You must keep these records for at least seven years, even if your employee has left.
For more information, visit the Fair Work Ombudsman page on record-keeping.
Chapter 8: Manage employee evaluations
Employees help you grow your business but they need your support too. Here’s how to do employee evaluations so you can get the best out of your team.Read chapter 8