Payroll processing is a vital task for Australian businesses as it ensures employees are paid accurately and on time while meeting legal obligations. Australian payroll calculations include gross wages, superannuation contributions, PAYG withholding tax, Payroll Tax, Workers Compensation and other entitlements like overtime or allowances.
However, before establishing a payroll system, you need to complete several foundational steps. These include registering your business for an ABN, ensuring GST filing (if required), and setting up PAYG withholding with the ATO. Completing these steps is crucial to ensure your business is financially compliant and can operate smoothly.
Once these essential foundations are in place, the next step is to focus on setting up and managing payroll processing effectively. This blog outlines the 11 key steps every Australian business owner should follow to streamline payroll management and maintain compliance.
Setting Up an Australian Payroll System: A Step-By-Step Process
Understanding payroll can feel overwhelming, but breaking it into manageable steps simplifies the process. Here’s what you need to know:
1. Choose the Right Payroll System
You must choose the software that supports the Single Touch Payroll(STP) system, which reports each payment to the ATO and is authorised by the same. There are three major payroll management categories that businesses can choose from:
- Manual Payroll or in-house: Managed on paper or spreadsheets, this approach works for very small teams but is time-consuming and prone to errors. For example, small retail shops or family-run businesses with less than five employees often use spreadsheets. However, this method becomes unmanageable as the team grows.
Managed Payroll Services: In this type of payroll, businesses outsource their payroll processing department to third-party vendors that provide financial services, including payroll management.
This option is especially useful for businesses with limited internal resources or those prioritising compliance with complex regulations. At Business Avengers, we offer expert payroll services that ensure accuracy, compliance, and efficiency, freeing up your time to focus on growing your business.
Payroll Software: Using payroll software simplifies the entire employee payment process as it includes diverse categories that serve business needs, such as managing employee benefits, understanding your state’s payroll taxes and leave policy, etc.
Popular payroll software in Australia includes tools like Xero and MYOB, which integrate directly with STP and automate reporting to the ATO.
2. Gather Necessary Employee Information
You must gather the essential details from your employees so that your payroll process complies with the ATO’s rules and regulations. To ensure this, you can ask for:
Tax File Number(TFN) Declaration Form: Ask your employees to fill out the form so that you can decide which tax criteria suit them well. This helps you withhold tax deductions to provide future benefits to your employees.
This form also helps you determine the correct tax rates for each employee, ensuring accurate withholding and preventing over- or under-payment.
- Superannuation Form Details: The Superannuation Standard Choice Form ensures employees can choose their preferred fund while employers meet the mandated contribution obligations under Australia’s superannuation guarantee.
- Collecting W-4s and I-9s: Along with the state withholdings, you can easily establish your employee’s social security details, personal information, and tax filing status using these documents. For example, these forms provide critical details, such as whether the employee qualifies for tax-free thresholds or specific deductions.
The other benefits that your employee receives, such as health and pension, can be added as extra documents to showcase that your employee has agreed to make these deductions. Lastly, always maintain direct transactions with your employees for which you will require bank details.
3. Define & Communicate Your Payroll Policies
Before establishing your payroll practices, building clear policies and acknowledging them effectively to your employees is essential. These policies should present what employees are provided with, including the National Employment Standards (NES), award rates, and minimum wage compliance. Ensuring transparency here helps clear misunderstandings and prevents your business from potential legal issues.
For example, adhering to the NES ensures your employees receive entitlements like paid leave, public holidays, and notice periods. Moreover, you need to ensure compliance with awards or agreements that apply to your business industry, as these outline specific pay rates, penalties, and allowances.
Failing to meet these requirements can lead to legal consequences, such as violations under the Fair Labor Standards Act (FLSA) or federal labour laws. To mitigate risks, document these policies clearly and make them accessible to all employees, whether through an employee handbook, onboarding process, or regular training sessions.
4. Register for Single Touch Payroll (STP)
Single Touch Payroll (STP) is mandatory for Australian businesses to streamline payroll reporting. Businesses can automatically report employee tax, PAYG withholding, and superannuation contributions to the Australian Taxation Office (ATO) every time a payment is processed using STP-powered payroll processing software.
STP simplifies compliance with tax regulations, reduces manual paperwork, and ensures transparency between your business and the ATO. For example, if you manage payroll for a growing team, STP ensures that all employee payments are recorded instantly, reducing the risk of errors or late submissions.
You must ensure that your payroll system is STP-compliant and registered with the ATO to avoid any regulatory issues. Moreover, using STP to report payroll is mandatory for all Australian businesses after the 2019/2020 financial year.
5. Record Payroll Issued
Maintaining accurate payroll records is a legal requirement for businesses in Australia. These records should include details such as payment cycles, employee wages, superannuation contributions, and any deductions made.
Regardless of whether you pay employees weekly, fortnightly, or monthly, each payroll transaction must be documented and retained for future reference. Accurate records help businesses:
- Prepare for audits,
- Resolve disputes quickly and
- Meet reporting obligations with the (ATO)
Well-maintained payroll records also simplify account reconciliation at the end of each financial period. Various businesses consider payroll applications to automatically create and keep these records, ensuring accuracy and safety.
6. Calculate Pay and Deductions
You can calculate your employees’s pay by starting with their gross income based on the hourly rate or salary. Next, PAYG withholding tax will be deducted based on the employee’s tax scale using the PAYG tables or payroll software.
You can also provide other deductions like health insurance, union fees, or voluntary contributions. Employers must also contribute superannuation, currently 11.5% of the employee’s ordinary time earnings. This “super pay” must be reported to the ATO via Single Touch Payroll.
Moreover, salary-based benefits, such as car leases or phone bills, should be factored into the calculation. Finally, after all deductions, the remaining amount is the employee’s net pay.
7. Process Employee Payments
Once you compute employee pay and deductions, you must know how to generate employee salaries. There are several methods for paying employees, but direct deposit stands out as the most efficient and secure option.
Employees can simply give their bank details, and their salary is transferred directly into their accounts. In Australia, there are three main payment cycles businesses typically use:
- Weekly Payments: Paid every week, this cycle is ideal for casual or hourly workers who prefer frequent payments.
- Bi-weekly Payments: Paid every two weeks, this is the most common payment method for Australian businesses, offering a balance between frequency and convenience.
- Monthly Payments: Paid once a month, this method is often used for salaried employees who prefer a consistent, larger payment.
Selecting the right payment method and cycle is crucial for streamlining payroll. This process ensures timely and accurate payments and maintains employee satisfaction, which in turn supports smooth business operations.
8. Pay Superannuation Contributions
In Australia, the current Superannuation Guarantee (SG) rate stands at 11.5%, meaning employers must contribute a percentage of an employee’s salary to their superannuation fund. Employees have the right to choose their super fund, but if they don’t, contributions are made to their default fund. This process is known as the “choice of fund” option.
Superannuation contributions must be made using the SuperStream method, which mandates the electronic transmission of both funds and data. Businesses can submit contributions through accounting software like Xero or via the ATO’s Small Business Superannuation Clearing House.
It’s crucial to understand eligibility rules, as most employees, including full-time, part-time, casual, and even temporary residents, are eligible for super contributions. Some additional rules apply to specific groups, such as employees under 18, contractors, and high-income earners opting out.
9. Ensure Tax Compliance
Accurately calculating PAYG (Pay As You Go) withholding taxes is essential for businesses to meet their tax obligations and avoid penalties. Employers are responsible for withholding the correct amount of tax from employees’ wages and submitting it to the ATO.
A reliable payroll system or outsourcing payroll management ensures accurate calculations and timely filings. Businesses can reduce the risk of errors, stay up to date with tax regulations, and maintain a smooth payroll process by integrating tax compliance features.
10. Manage Leave Entitlements
You must track leave entitlements, including annual, sick, and parental leave, which is vital for payroll accuracy. Properly managing these leave balances ensures employees receive the correct pay and benefits.
You can also use payroll systems or leave management tools to track and update leave taken by an employee. This process helps prevent overpayments or underpayments and ensures compliance with Australian employment laws.
11. Regularly Audit Payroll Processes
Regular payroll processing audits are essential to establish discrepancies, errors, and compliance issues within payroll records. These audits help you know that the payroll processes are functioning correctly and avoid costly penalties for non-compliance.
You must review your payroll data consistently so that you can catch mistakes early, maintain accurate records, and strengthen overall payroll integrity.
