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Chapter 7 of 10

Run payroll for your employees


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Small business guides > A complete guide to hiring staff > Run payroll for your employees

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:

  1. 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.
  2. 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.
  3. 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.
  4. Full-service software
    You can sign up to systems that do everything DIY software does – plus make payments. 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, Payroll software that makes things simple, and Small business payroll: To outsource or not?

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.

Flowchart of payroll

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 12-step checklist for setting up small business payroll and 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.

4. Calculate employee-related taxes

Each payday, you need to deduct taxes from your employees’ earnings. 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.

5. Calculate post-tax deductions

Your employee may have extra deductions to come out after tax. Child support is one of the most common.

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.

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.

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 even if your employee has left.


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