Payroll can become messy and stressful when you have several employees, but getting it 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!
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.
Different Ways to run payroll
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.
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 ATO. 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 like East Coast Bookkeeping and Business Solutions. 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 like East Coast Bookkeeping and Business Solutions 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.
Payroll software Many software packages can do some or all of the admin work for you. They can work out the pay you owe and the deductions needed, create payslips, and fill out tax forms automatically. Full service options can also make payments and file reports. You will still be responsible for setting up employees in the system and updating their details if circumstances change, but most of the rest is taken care of.
When to run payroll
In Australia, payday most commonly falls on a Wednesday or Thursday. And employees are generally paid weekly (28%), fortnightly (52%), or monthly (5%).
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 to run payroll
The payroll process can get complicated so we have simplified it into 8 steps to help you to 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).
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.
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 Superannuation (super). 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. For more information, visit the ATO page on super for employers. The ATO also has a handy super contributions calculator to help you work out your employer super contributions.
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 payment
Payroll taxes Your business may face extra state or territory taxes if you pay a lot in salary and wages. Check out the ATO page on paying payroll tax and the Payroll Tax Australia website.
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.
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.
8. Keep payroll records You must keep records of payroll for at least seven years, even if your employee has left. For more information, visit the Fair Work Ombudsman page on record-keeping.. 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
. Deciding how to manage payroll will come down to what’s most efficient and cost-effective for your business. It pays to do your homework and assess your business needs before making a decision. The right solution will help you to spend less time thinking about payroll and more time doing what you do best – running and growing your business.
East Coast BBS understands that payroll is a critical part of your business. We offer a range of payroll services which can be designed to suit your business needs. We also help you to identify the best cloud-accounting software for your business, set it up and provide training.
If you think we can be of assistance, please call the office on 02 4402 8913 or email info@eastcoastbbs.com.au and see how we can help.
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