A payroll system is a crucial component of any organisation.
It helps ensure employees are paid properly, so that your business runs smoothly. It is also essential so that you can ensure all necessary payroll taxes are paid to the Australian Tax Office.
Establishing and maintaining a payroll system requires attention to detail, good organisational skills, and a deep understanding of the laws and regulations governing payroll - including the Fair Work Act 2009(FW Act)and any modern award that applies to your business.
In this article, we will cover the key steps involved in establishing and maintaining a payroll system.
Why establish a payroll system?
A robust payroll system is essential for any organisation for several reasons.
- Ensure your employees are paid accurately and on time.
This is critical for maintaining employee morale and motivation. Inaccurate or late payments can result in a loss of trust in the organisation, which can ultimately lead to a higher turnover rate.
- Stay compliant with the law.
Secondly, a robust payroll system helps organisations stay compliant with various laws and regulations related to payroll.
This includes tax laws, minimum wage laws, and overtime regulations, among others. Staying compliant with these laws is not only necessary to avoid fines and legal issues, but it also helps organisations build a reputation as a responsible and trustworthy employer.
- Save time and reduce risk of error.
Automating payroll processes and using software to manage payroll can help reduce the time and resources required to process payroll, as well as the risk of human error.
This can help organisations focus on other important aspects of their business while ensuring that payroll is handled efficiently and accurately.
How to Start when Establishing a Payroll System
You can’t start a functioning payroll system without doing some homework first. To pay your staff properly and correctly, you need to know some critical information about the people you will be paying.
Therefore, you’ll need answers to a few fundamental questions.
Is your worker a contractor or an employee?
This is a basic, yet often overlooked, question. You’ll need to determine whether your worker is an employee of your company, or an independent contractor engaged (but not employed) by you.
Just because your staff member has signed a “contractor engagement”, that does not necessarily the person is a contractor. It will often come down to the words of the contract they’ve signed, what the person is doing and how they are doing it.
You can use the ATO tool to satisfy yourself whether a staff member is an employee or a contractor.
Is your employee full-time, part-time or something else?
The type of employee they are will significantly affect their pay and entitlements. Your employee might be permanent full-time, permanent-part time, casual or temporary.
For example, many casuals will be paid a casual loading instead of being paid leave entitlements such as annual or personal leave.
Please note, however, that casuals in some businesses must be offered a permanent position if they’ve been with their employer for more than 12 months, entitling them to leave and other entitlements. This does not apply to small business employers (as that term is defined in the FW Act).
Can your employee legally work in Australia?
Imagine employing someone, only to realise they aren’t actually entitled to work in Australia! This is important not just for payroll, but for legal compliance more generally.
Ensure your employee has full legal rights to work in Australia. This involves looking at things like if they are an Australian citizen, permanent resident, or a New Zealand citizen, or if they hold a visa with permission to work.
Are you paying the correct wages and entitlements?
Do not underestimate the importance of paying your employee in accordance with whatever they are actually legally entitled to.
Your employee may be entitled to minimum wages and entitlements in:
- a modern award,
- an enterprise agreement,
- other industrial instruments.
Rates in a modern award or enterprise agreement are generally the minimum amount of wages (before tax) that a person must be paid by law. The rate may depend on the industry, the employee’s role, employment type, age, the time they work and so on.
How to Pay Staff Properly using a Payroll System
Paying staff can be a daunting, especially if you’re new at it.
But it’s a formula - and once you’ve got the hang of it, you won’t even have to think about it.
We’ll outline a step-by-step guide on properly paying your staff.
- Accurately confirm employee details
Triple check that your employee’s details are accurate and that you have all the paperwork organised before you start paying them.
This includes having employees’ basic details correct, such as their:
- Full name
- Address
- Date of birth
- Tax file number
- Start date
- Bank details
- Pay details such as their hourly rate, gross wage, allowances and so on.
We recommend automating the information collection where possible to help with staff onboarding.
- Purchase a robust payroll software
Once you have the employee details triple checked, it’s time to upload those details into the payroll software your organisation uses.
Making an investment in a high-quality payroll software like Xero, MYOB or Quickbooks can help ensure that your employee details are kept confidential.
This software can everything you need a good payroll system to do, such as:
- perform calculations,
- generate pay reports,
- keep on track of your tax.
In the age of modern commerce, payroll software is essential, especially due to single touch payroll requirements (discussed below).
- Reconcile all bank accounts
The next step is to reconcile your bank accounts to ensure that the money leaving the bank account matches the actual money that you’ve spent. This is done to make sure every dollar is accounted for.
The exact method of doing this will depend on the payroll software your organization uses.
- Set up Single Touch Payroll if you haven’t already
Single Touch Payroll (STP) is a newer way of reporting your tax and superannuation information to the Australian Tax Office.
It was an initiative introduced by the Federal Government to reduce business burden when reporting to government agencies through STP-enabled software.
You can now report to the Tax Office using this software - which automatically tells them everything they need to know about your employees’ payroll. This includes specifications such as their wages, salaries, PAYG withholding and superannuation.
- Reconcile PAYG withholding
Pay-As-You-Go (PAYG) withholding is the amount of tax you can withhold from your employees when you pay them their wages.
It’s critical that you reconcile PAYG from your employees with the PAYG you’ve paid or will be paying in the future.
We discuss PAYG in more detail later on in this article.
- Generate accurate payslips
When you pay your employees, you’ll need to generate accurate payslips. Payslips must be issued to your employees within one working day of pay day (even if your employee is absent on leave).
Payslips need to contain a range of basic pieces of information such:
- employer name,
- ABN of the employer
- employee name,
- he pay period,
- date of payment,
- gross and net pay,
- any allowances and loadings.
Payslips can be generated through the payroll software. It is best practice to allow staff to access their payslips through their own portal logins.
- Review payment & check balance sheet
Once payments to employees have been made, the next step is to review and check the organisation’s balance sheet - just to make sure all payments have indeed been made
This is critical. There have been some very recent cases of fraud where, due to inefficient reconciliation processes, PAYG was not being paid. It was instead being paid to a personal bank account.
The best to prevent situations like this are as follows:
- Set up a monthly or minimum quarterly balance sheet reconciliation of all accounts. Each period, you should only have your unreported PAYG only sitting in your account.
- Place a snippet of the ATO portal outstanding into your month end file to check payments are going to the ATO. That way, you will have an up-to-date position of your ATO obligations on a regular basis. You should also ideally enter any transactions monthly into your accounting software system.
- Ensure your Business Activity Statement (BAS) entry into the system is supported by the original BAS document. With both documents the same, you can be sure you are entering in the correct information.
- Change your operations so that two people must authorise payments where possible (not always practical, but ideal) - and review the BAS document prior to making payments.
- Keep and organise your reports
Every time you pay your employees, keep all documents together and organised. This includes important records such as:
- Payslips
- Pay period summary report
- An exception report (if using one).
Overview of Pay-As-You-Go (PAYG)
Employers in Australia can collect Pay-As-You-Go (PAYG) withholding amounts from the employees they pay.
What is PAYG?
Every single time you pay an employee, you’ll need to withhold a specific amount to ensure the employees meet their taxation obligations.
PAYG withholding is enough to cover an employees’ tax and Medicare levy based on their employment income.
Take important note that you are holding this money on behalf of employees. It is not company money.
The law requires this because your employees could potentially face considerable financial turmoil if they were required to pay a colossal tax bill at the end of the year. It makes much easier for them if they ‘pay as they go’.
How to comply with your PAYG obligations
- You have to register for PAYG
You have to register for PAYG before withholding the amount.
You have the option to normally register for PAYG at the same time as applying for your business name.
If you have an Australian Business Number (ABN)
If you have an active ABN (as businesses operating in Australia must have), you can register for PAYG through your myGov account, your BAS or tax agent, or applying via the Australian Government Business Registration Service.
If youdon’thave an ABN
Sometimes you’ll be required to register for PAYG even if you don’t have an ABN. That may be for a variety of reasons, such as:
- You self-manage funds under the National Disability Insurance Scheme (NDIS) and directly employ people
- Your supplier hasn’t quoted their ABN
- You employ (or intend to employ) a person such as a nanny or a gardener
- You pay royalties, dividends or interest to non-residents, or you withhold from or report investment income to Australian residents.
You can register for PAYG in these circumstances by calling the ATO, or by directing your registered BAS or tax agent or to do it.
How much PAYG do you withhold each pay?
The simplest way to answer this question is to use the ATO’s online tax withheld calculator.
You can find the ATO’s calculators here, but I personally like the usability of the calculator accessible at the following link:
If you would like to calculate PAYG yourself, you can use the following table on the ATO’s website:
https://www.ato.gov.au/rates/individual-income-tax-rates/
- Lodge activity statements and pay the ATO
Once you’re registered for PAYG withholding, you’ll need to lodge income activity statements every period as per ATO requirements. These statements will contain how much PAYG you’ve been withholding.
You can apply to the ATO for the reporting period, monthly or quarterly.
Large payers do not get a choice. There is no PAYG withholding paperwork, however they must pay the ATO a couple days after payments are made to employees.
The ATO’s lodgment program due dates can be found on the ATO’s website here.
- Provide payment summaries to your staff
Under PAYG withholding, you’re required to provide each of your employees, payees and workers a payment summary.
This is now done via straight through processing into MyGov and the ATO.
This summary will show the gross payments you’ve made to them and how much you’ve withheld from those payments during a financial year and any other entitlements and allowances where applicable.
- Provide the ATO with a PAYG withholding payment summary annual report.
If you aren’t registered for Single Touch Payroll, or can’t report your payments through STP, then you’ll need to lodge a PAYG withholding payment summary annual report with the ATO.
You can find the due dates on the ATO’s website.
What if I’ve withheld too much PAYG?
If you’ve discovered the mistake early
You’ll need to refund the employee the amount you mistakenly withheld. Even if you’ve already paid the withholding amount to the ATO.
You can then offset the amount paid to the ATO against another PAYG withholding amount you have to pay.
If you’ve discovered the mistake after 30 June (i.e. once the financial year is over).
Do not refund the employee. Otherwise, you won’t get that amount back from the ATO.
Instead, issue your payee with an amended payment summary, and complete an amended PAYG payment summary statement (your agent can do this for you).
Your payee will also need to request an income tax amendment if they’ve already lodged their tax return.
Unfortunately, if you’ve already paid the amount to the ATO and there are no more withholding amounts to pay, you’ll also need to lodge a revised activity statement. Your tax agent can do this.
The employee will however, get the amount refunded via their personal tax return.
Overview of Fringe Benefits Tax
If you provide your eemployees certain benefits they might not get anywhere else, you may be able to liable to pay a fringe benefits tax.
What is a fringe benefits tax?
A ‘fringe benefits tax’ (FBT) is tax on the payment of a so-called ‘fringe’ benefit to an employee that is not wages or salary.
What is a ‘fringe’ benefit?
Some examples of a ‘fringe’ benefit include:
- paying for an employee’s gym membership;
- paying for tickets to a concert;
- permitting an employee to use a work phone for personal purposes;
- reimbursing an employee’s personal expense, like school tuition; and
- paying for employees’ food, drink or fun.
‘Fringe’ benefits don’t include thinks like wages, salary, superannuation contributions, termination payments or shares bought under employee share acquisition schemes.
How does an organisation pay a ‘fringe’ benefit tax?
If you determine that you are liability to pay fringe benefits, you have to register to pay FBT.
You must pay tax on ‘fringe’ benefits you provide to employees and their families in an FBT year (being 1 April to 31 March). It also must be paid if a third party is providing a fringe benefit.
Fringe benefit tax is not income tax. It is an entirely separate concept, calculated on the taxable value of the fringe benefit.
Businesses who pay fringe benefits to their staff must assess their liability to pay FBT in an FBT year.
How do you register for FBT?
You can register for FBT:
- online via the Business Registration Service
- through completing the ATO’s approved form
- over the phone
- through your registered tax agent
- by lodging an annual FBT return
Overview of Paying Leave
Leave is when your employees are permitted, and even paid, to be absent from work. There are various forms of leave that employees can take in Australia that all businesses must be across.
Annual leave
All employees (other than casuals) are entitled to four weeks of paid annual leave per year under the National Employment Standards, on a pro rata basis (in other words, if they only work half a year, they’ll be entitled to half their annual leave). Certain shiftworkers are also entitled to five weeks’ annual leave per year.
Annual leave is also known as holiday pay.
You and your employees can agree when your employee has time off on annual leave. But you can’t unreasonably refuse an employee’s request to take this leave.
Annual leave accrues according to an employees’ ordinary hours, and accumulates from year to year, meaning that employees can ‘build up’ their annual leave as they work.
Employees who are part-time will get a pro rata proportion of annual leave, depending on how much they work.
Untaken leave is paid out on termination or resignation. It is recommended to actively monitor and encourage staff to take annual leave.
Personal/carers’ leave (ak..a sick leave) and compassionate leave
Under the National Employment Standards, employees (other than casuals) are entitled to 10 days of personal/carers’ leave each year, pro rata.
Employees can take paid personal/carer’s leave if:
- They aren’t fit for work because of their personal illness or injury; or
- They need to provide care or support to a member of the employee’s immediate family or a member of their household (due to a personal illness, injury or unexpected emergency affecting that person).
Employees are also allowed two days of compassionate leave if a member of their immediate family or household sustains a serious illness or injury - or passes away.
Parental leave
Employees are also entitled to 12 months of unpaid parental leave if they’ve completed at least 12 months of continuous service. This also includes casual employees, but only in certain circumstances.
Employees might be entitled to paid parental leave under the Australian Government’s Paid Parental Leave Scheme as well as their unpaid leave entitlements.
The employer can facilitate the parental leave payment or it can go directly to the employee.
Community service leave
Employees are entitled to take community service leave when they take part in particular activities, such as jury service or dealing with a natural disaster or emergency.
Long service leave
Long service leave is regulated on a state-by-state basis. Most of the time, you can take long service leave after having worked for 10 years however each state does vary.
Family and domestic violence leave
From 1 February 2023, employees of non-small business employers(employers with 15 employees or more) can access 10 days of paid family domestic violence leave. This includes part-time and casual employees.
From 1 August 2023, employees of small business employers(employers with less than 15 employees) can access 10 days of paid family domestic violence leave.
Other forms of leave - normally outlined in employment contract or award
Study leave -You may grant your employees certain paid time off to study for examinations or to take examinations. This may even be a requirement under a modern award in some industries, so ensure you are aware of your obligations.
Ceremonial leave -Some employees may wish to take certain time off to celebrate religious or cultural holidays that may not necessarily be recognised in Australia. You can agree with you staff to use leave entitlements (like annual leave) to take time off or create a new form of ‘ceremonial leave’ altogether.
Military leave -If your employee is a Defence Reservist, they’ll likely need time off to go on training or deployment. You can’t require your employees to take annual leave to undergo Defence service, but you can reach an agreement for them to do so.
Unpaid leave -Employees can agree with you to take time off without pay - what is often called ‘leave without pay’.
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