A complete guide to payroll for
small businesses

Running a business is no easy task, and hiring new employees can make things even harder

      On paper, pays are simple: they're made weekly, fortnightly or monthly by calculating employee wages, withholding the correct amount of taxes and paying into their nominated account. 

In reality, paying staff for the first time requires you to familiarise yourself with a host of new responsibilities. These include, among many other things:

  • Staying on top of legal requirements,
  • Proper record keeping
  • Tracking various superannuation accounts.

Even if you've been paying staff for a while, it's important to know your payroll obligations may change. Read on to learn more about payroll. 

Where to start with payroll

There are a few things you can do to prepare in the lead-up to paying an employee -- whether they're your first or thirtieth,

The following are 10 questions to consider to make the early stages of payroll less complicated:

  1. What kind of employment are you offering: permanent, casual or temporary?
  2. Is your worker an employee or a contractor?
  3. Can your employee legally work in Australia?
  4. What are your employee’s rights under anti-discrimination laws?
  5. What are your record-keeping requirements?
  6. Are you paying the correct wages and entitlements?
  7. What tax do you need to deduct from your employee’s pay?
  8. What are your superannuation obligations?
  9. What are your workplace health and safety obligations?
  10. Do you need workers’ compensation insurance?

Register for payroll withholding

There's a good chance you'll have to register for payroll withholding before you begin paying employees. This is referred to Pay As You Go (PAYG). These payments contribute to your income tax liability at the end of the financial year. 

According to Business.gov.au, you have (PAYG) withholding obligations if any of the following apply:

  • You have employees
  • You enter into voluntary agreements to withhold amounts from payments to other kinds of workers, such as contractors.
  • You make payments to businesses that don't quote their ABN.

If payments are made subject to withholding, business owners must then:

  • Register for PAYG withholding on the ATO website
  • Withhold amounts from wages and other payments
  • Lodge activity statements and make payments to the ATO
  • Provide payment summaries to employees and other payees
  • Provide the ATO with a PAYG withholding payment summary annual report.

Payroll checklist for new employers

For new employers, paying staff can be a hassle. To show you how simple it can be, we’ve put together a handy checklist.

1. Confirm your employee details

Before we get stuck into it – do you have everything you need to start paying people?

Ensure the below details are up-to-date for employees:

  • Tax file number
  • Full name and address
  • Start date or termination date of employee
  • Date of birth 
  • Bank details (you don't want to be depositing money into the wrong account!)
  • Pay details such as gross wage, allowances, hourly rate, employment period.

2. Reconcile your accounts

Reconciling your accounts takes a few steps, but shouldn't be overwhelming. Here it is broken down:

  • Reconcile total gross wages of the payment register YTD report to wages expense YTD
  • Reconcile outstanding PAYG liabilities to unpaid PAYG for the next Business Activity Statement
  • Reconcile outstanding super liability to unpaid superannuation for the month/quarter
  • Reconcile payroll tax for the month.

3. Save copies online or print your reports

Prepare your payroll payment register summary YTD report, along with your payroll entitlement balance summary and detail report.

4. Reconcile PAYG withholding

PAYG tax is an important part of the payroll process. Apply the following to make sure you don’t miss out on any important steps:

  • Reconcile unpaid PAYG to balance sheet and PAYG liability
  • Check PAYG paid for the year to payroll summary YTD tax
  • Check PAYG paid for the month or quarter to the relevant payroll summaries.

5. Prepare for Single Touch Payroll

Whereas payment summaries were previously prepared for the ATO once a year, the introduction of Single Touch Payroll (STP) has changed this process.

With STP, employers report their employees' payroll information every time they pay them. This includes salaries and wages, pay as you go (PAYG) withholding and super information.

Learn more about STP on the ATO's website

Understanding Payroll Tax

Payroll tax is - surprise, surprise! - the tax businesses are required to pay on payroll. Despite it being simple in concept, payroll tax can be very confusing. It's not uncommon for unsuspecting business owners to be hit with a payroll tax assessment or audit before they know it.

Businesses that are labour intensive, such as manufacturing or labour-for-hire services, should pay particularly close attention to their payroll tax obligations due to the potential for project-related wage fluctuations.

How is payroll tax applied?

Payroll tax is applied according to thresholds related to weekly payroll expenses. To put it simply, payroll tax scales with the number of staff you employ.

In Australia, payroll tax rates are entirely dependent on state requirements. You can find payroll tax rates and thresholds for your state on the Australian Government's Payroll Tax website

What types of wages is payroll tax applied to?

Taxable wages include:

  • Wages
  • Employer super contribution
  • Salary sacrifice
  • Annual leave, sick leave and long service leave
  • Allowances, commissions and bonuses
  • Director fees 
  • Bookkeeping fees
  • Fringe benefits
  • Gifts
  • Low-interest or interest-free loans

Taxable wages do not include:

  • Military leave
  • Dividends (company share)
  • GST

Minimising payroll tax

It's possible to manage the financials if your business to minimise the tax pain on payroll. The following four tips are an excellent place to start. 

1. Make the most of dividends

Dividend payments are excluded from the definition of taxable wages under the payroll tax provisions. This makes them a much better source of remuneration than bonuses and salary and wage packages. Make the most of it. 

2. Don’t rely on financial advisors

In the face of an audit, being confused about your payroll obligations cannot be used as a defence.

Rather than solely relying on your accountant, it's a good idea to have a firm grasp of your obligations. It's also wise to closely monitor your weekly payroll to ensure you know when taxable wages are involved.

3. Plan and monitor labour costs

Keeping labour costs under control can be made much simpler with:

  • Effective planning
  • Budgeting
  • Monitoring of business expenses.

Staff wages are often a business's largest cost, so these in particular should be monitored.

This should help you determine if you have excess staff capacity or see areas where you can utilise existing levels rather than increasing your staff headcount. 

4. Reinvent your business

If your business is fast approaching the payroll tax threshold, it may represent a good opportunity to rethink your business model. The following are a few ways to reduce a rising wages bill:

  • Increase independent contracting rather than full-time staff
  • Promote job-sharing and flexible, reduced work hours
  • Replace manual labour with technological equivalents (e.g. accounting software). 

10 ways payroll can shed light on your business

Payroll isn't just about paying employees - it can also be a rich source of useful business information. Knowing what to look for can help provide insight into how well your business is performing now and into the future.

With so many businesses ignoring the useful information payroll can offer, we've got 10 easy ways you can better harness the full potential of payroll.

1. Payroll coverage

Payroll is unique in that it's where operations, finance and HR meet. Learning from your payroll staff and the data they manage can be key to running a successful business.

2. Pay attention to payroll

To achieve a more complete financial picture of your business, think of a member of your payroll as an advisor - allow them to contribute to your payroll-related decision-making process and let them offer their unique insights. 

3. Understand business drivers

Determine the financial drivers in your business and align this with the information your payroll team provides. This way, you'll be able to learn how to best improve your bottom line. 

4. Enable collaboration

Each team should have the capability to add value to your business. To achieve this, focus on collaborative business processes to ensure HR, finance, operations and payroll teams can work together seamlessly.

5. Identify key data

Knowing the right information to look at prevents staff wasting time on data that has little business impact. Identifying and isolating key payroll data will help you analyse relevant employee demographic data.

6. Analyse the right things

Understanding the impact of business decisions on your payroll will help you analyse the right things. For example, downsizing staff may affect your bottom line through increased overtime and contracting payments.

7. Slow and steady wins the race

Invest time - slowly at first - into helping staff understand the need for payroll data analysis. Gradual education and training will help everybody understand and embrace changes while becoming more familiar with the data.

8. Plan and review

With payroll data in mind, develop a clear goal. Use this goal to develop and execute a plan while making sure to stick to a strict time frame. Make sure you review your progress regularly and reorganise yourself where you need to, as even the best plans will require modification.

9. Make it stick

Found success by paying closer attention to payroll? Great! Now's the time to connect new behaviours to corporate success by weaving positive changes into your work culture. Your business will not only look healthier, but your employees will be happier too. 

10. Make payroll strategic

Ensure your payroll manager has a good understanding of how people, processes and systems work together. In having a better understanding of this, there's more room for  strategic initiatives and better future decision-making. 

Using online accounting software for your payroll

Sole traders and smaller businesses just starting out may not require an advanced payroll solution, but employee growth eventually demands more streamlined solutions.

Good online accounting software allows you to set up payroll in minutes, a far cry from  the manual inputting of employee data into a growing collection of spreadsheets. This in itself will save you hours – even days – of bookwork every month.

It's also useful to look for payroll-specific features that allow you to pay your staff, pay their superannuation, organise timesheets and calculate leave automatically.

The benefits of online accounting software

An online payroll solution has the added benefit of allowing you to store information in the cloud. The cloud allows you to access your payroll information wherever you are, unlike traditional desktop-based software or spreadsheets, with the added bonus of bulletproof security.

Online functionality also means regular updates. Regular updates mean you'll be kept up to date with tax and payroll legislation changes so you won't have to worry about awkward conversations with the ATO or Fair Work Australia. 

MYOB Essentials is an example of a solution designed specifically for small business that can do all this and more.

Want to learn more about STP?

If you're unsure about how STP will affect your business?
Check out the range of resources available on our site.

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