A complete guide to payroll for
small businesses
Running a business isn't easy, and managing employees can make things even harder. Often the most time-consuming and complicated part is paying employees.
But don't worry, we're here to shed some light on making sure you're doing payroll right. This guide will cover:
- Where to start with payroll
- Registering for payroll withholding
- Payroll checklist for new employers
- Understanding payroll tax
- 4 ways payroll helps your business
Where to start with payroll
There are a few things you can do to make paying your employees a smoother process. Before you start ask yourself these 10 questions for every employee you have.
- What kind of employment are you offering: permanent, casual or temporary?
- Is your worker an employee or a contractor?
- Can your employee legally work in Australia?
- What are your employee’s rights under anti-discrimination laws?
- What are your record-keeping requirements?
- Are you paying the correct wages and entitlements?
- What tax do you need to deduct from your employee’s pay?
- What are your superannuation obligations?
- What are your workplace health and safety obligations?
- Do you need workers’ compensation insurance?
Registering for payroll witholding
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 at the end of the financial year.
You have to register for PAYG withholding if you:
- have employees
- have voluntary agreements to withhold amounts from payments to other kinds of workers, such as contractors
- make payments to businesses that don't quote their ABN.
How to register:
If you have to withhold payments from employees you need to register for PAYG withholding first before you make any payments.
- Register for PAYG withholding on the Australian Taxation Office (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 daunting. To show you how simple it can be, we’ve put together a handy checklist.
1. Confirm your employee's details
Before you get started make sure you have up-to-date details for all your employees including their:
- full name and address
- date of birth
- tax file number (here's the form your employees need to fill out)
- start date and termination date of each employee
- bank details of the account they want their wages paid into
- and any pay details such as gross wage, allowances, hourly rate.
2. Reconcile your bank accounts
It's important to reconcile your bank accounts to make sure that the money leaving an account matches the actual money spent. Here are the four steps you need to take:
- Reconcile the total gross wages of the payment register Year to Date (YTD) report to wages expense YTD.
- Reconcile outstanding PAYG liabilities to unpaid PAYG for the next Business Activity Statement (BAS).
- Reconcile outstanding superannuation liability to unpaid superannuation for the month or quarter (depending on how you are reporting to ATO).
- Reconcile payroll tax for the month.
3. Set up Single Touch Payroll
Single Touch Payroll (STP) is a new way of reporting your employees' tax and superannuation information to the ATO.
You can report to the ATO using STP-enabled software that will automatically tell them about your employees payroll information - such as salaries and wages, pay as you go (PAYG) withholding and super - each time you pay them.
Your pay cycle doesn't need to change. You can continue to pay your employees weekly, fortnightly or monthly.
For information about Single Touch Payroll visit our STP Hub.
4. Reconcile PAYG withholding
It's important to make sure that you reconcile the PAYG you are withholding from your employees with the PAYG you have paid or will be paying in the future. Follow these 3 steps to make sure your books match up.
- 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. Keep and organise your reports
Every time you do a pay run make sure you prepare your payroll payment register summary YTD report, along with your payroll entitlement balance summary and detail report.
You will also need to send payslips to your employees with all their wage, tax and super information on it. You can do by email or post.
We'd recommend using payroll or accounting software (surprise surprise) to help you.
Because it's important to stay organise, keep your payroll data safe and meet your payroll obligations. Other ways payroll software can help include:
- You can set up payroll in minutes, saving you hours - even days - every month.
- You can pay your staff wages and superannuation, organise timesheets and calculate leave automatically.
- You can store information in the cloud, so you can access it securely from anywhere.
- You can stay up to date with ATO's tax and payroll legislation with regular software updates.
Understanding payroll tax
- Payroll tax is the tax businesses are required to pay on payroll to ATO.
- Despite it being a straightforward idea, payroll tax can be confusing.
- If you fail to meet your payroll tax obligations, your business could be audited.
- 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 possibility 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 shares)
- Goods and services tax
Minimising payroll tax
It is possible to manage minimise the tax impact on your payroll. These four tips are a great place to start.
1. Make the most of dividends
Dividend payments are excluded from taxable wages under the payroll tax provisions. This makes them a much better source of remuneration than bonuses and salary and wage packages.
2. Don’t rely on financial advisors
Rather than solely relying on your accountant, it's a good idea to have a firm grasp of your payroll tax obligations, and to monitor your weekly payroll to make sure 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 the largest cost to small businesses. So we'd recommend regularly monitoring the salaries you offer to make sure they are competitive with other businesses like yours, while also being worthwhile for the labour you get.
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).
4 ways payroll helps your business
Payroll isn't just about paying employees - it can also be a rich source of useful business information that can help connect other areas of your business and give you insight into how you're performing.
1. It can uncover employee insights
Payroll is unique in that it's where operations, finance and HR meet. It can help you learn about your staff, their demographic, how they work best and the workplace benefits they need to thrive.
2. It can drive business performance
Payroll analysis can also give you a more complete financial picture of your business. Ask yourself: How does your business create revenue? What drives the sales, costs and cashflow of your business?
And then align the answers with the data provided by your payroll to help you discover how to best improve your bottom line.
3. It can fuel strategic thinking
Beyond simply paying people, payroll can help you set goals for the future. Whether you want to grow your workforce, your sales or your services. By tracking how you're paying your people and how those people are working you can spot areas for change and improvement.
That could means changing work hours so staff can be flexible and work smarter, or changing individual roles so people are free to build on new skills that will benefit your business.
4. It can keep you organised
Managing payroll is a big job. But staying organised with secure files for employee information, payroll data and tax reports can make it easier. And that well-ordered approach to payroll can influence other areas of your business too.
It can help fuel clearer processes and ways of working in your cash flow, marketing and sales and invoices and bills – so your business is always running smoothly.
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