Learning how to set up payroll is a critical step for businesses of all sizes in Australia, especially small businesses. Payroll refers to the process of managing employee wages, taxes, and entitlements.
Beyond paying your team, payroll is also important for maintaining compliance with Australian laws and regulations.
Non-compliance with payroll rules and regulations in Australia can end in fines, legal action, and reputational damage. By understanding the steps involved and adhering to best practices, businesses can streamline payroll management and steer clear of costly mistakes.
Legal Requirements for Payroll in Australia
Setting up a payroll system for a small business in Australia requires complying with several legal obligations. Here’s our key breakdown of the requirements and their implications.
Minimum Wage and Awards
The Fair Work Commission annually reviews and sets the National Minimum Wage. For the 2024-2025 financial year, the rate is $23.23 per hour for full-time adult employees, unless covered by a specific award or enterprise agreement.
Awards outline additional pay entitlements, such as overtime, penalty rates, and allowances, based on industries or occupations. Employers must ensure they’re up-to-date with the latest award rates to avoid underpayment.
Tools like the Fair Work Pay Calculator can help confirm the correct pay rates for employees.
PAYG Withholding
Employers are legally required to withhold a portion of employee wages for income tax under the PAYG system. This amount is reported and paid to the ATO regularly (monthly or quarterly, depending on your business size).
Employers need to provide employees with a payment summary or an income statement through myGov at the end of the financial year.
Superannuation Guarantee
Employers must pay a minimum of 11% of an employee’s ordinary time earnings into their nominated superannuation fund. Payments are due quarterly, and missing deadlines can result in penalties and a superannuation guarantee charge.
Use the ATO Super Guarantee Eligibility Tool to confirm superannuation requirements for different employees, including contractors.
Single Touch Payroll (STP)
STP is mandatory for all Australian businesses. It requires employers to report employee salaries, PAYG withholding, and superannuation directly to the ATO after each pay run. Make sure your payroll software is STP-compliant and verify submissions before lodgement to avoid errors.
Preparing Your Business for Payroll
Setting up payroll starts with proper preparation to make sure your business operations stay compliant and efficient. Follow these steps to get started:
- Register for an ABN (Australian Business Number) — You need an ABN to legally operate a business in Australia. You can register for free through the Australian Business Register.
- Apply for PAYG Withholding Registration — Registering for PAYG withholding with the ATO allows you to deduct taxes from employee wages. This can be done when applying for an ABN or later through the ATO Business Portal.
- Determine Your Business Structure — The business structure you choose (e.g., sole trader, partnership, company, or trust) affects payroll obligations. For instance, sole traders cannot hire themselves as employees, whereas companies must register for PAYG withholding and ensure director superannuation payments. Seek advice from a professional if you’re unsure about your structure.
- Set Up a Dedicated Business Bank Account — Separate your personal and business finances. It’s important for transparency and compliance. A dedicated account streamlines payroll transactions, superannuation payments, and tax lodgements.
- Understand Your Payroll Tax Obligations (if applicable) — In some states, businesses that exceed a certain payroll threshold are required to pay payroll tax. For example, in NSW, the payroll tax threshold is $1.2 million annually. Check with your local state revenue office to confirm if payroll tax applies to your business.
Step-by-step Guide on How to Set Up Payroll for Your Small Business in Australia
Step 1: Choose the Right Australian Payroll Software
The right payroll software is the cornerstone of a smooth payroll process. Look for Australian payroll solutions that are Single Touch Payroll (STP)-compliant and suited to your business size and needs. Popular options include:
- MYOB: Ideal for small to medium-sized businesses with a focus on local compliance.
- Xero: Great for businesses who want an all-in-one accounting and payroll platform.
- QuickBooks: Offers user-friendly payroll features alongside robust financial reporting.
Advanced software can handle tasks like wage calculations, tax deductions, and automatic STP lodgement with the ATO, which can save you time and reduce errors.
Step 2: Gather Employee Details
Before running payroll, make sure you’ve collected essential details from your employees. Get their Tax File Number (TFN), which is required for PAYG withholding, and verify the employee’s chosen superannuation fund details or provide them with a default fund.
Clearly outline pay rates, entitlements, work hours, and other conditions in employment contracts. Include bank account details, start date, and emergency contact information.
Step 3: Define Payroll Policies
Set up clear payroll policies for consistency and compliance, and be sure to document each one in your employee handbook or contracts to provide transparency. You need to consider:
- Pay frequency. Decide whether employees will be paid weekly, fortnightly, or monthly. Fortnightly is a common choice in Australia.
- Leave policies. Set guidelines for annual leave, personal leave, and long service leave entitlements. Refer to the National Employment Standards (NES) or applicable awards for compliance.
- Overtime and allowances. Define how overtime will be calculated and any allowances your employees are entitled to.
Step 4: Calculate Wages and Deductions
After you’ve set up your payroll system, it’s time to calculate employee payments. Make sure that all components are accurate. Most of the time, automated payroll software can handle these calculations and deliver precision and compliance, but here are the terms you should know and understand:
- Gross Wages: Total earnings based on hours worked and agreed rates.
- PAYG Withholding: Use your payroll software to calculate the correct tax amount to deduct. Refer to the ATO’s withholding tables for accuracy.
- Superannuation Contributions: Calculate the mandatory 11% contribution based on ordinary time earnings.
- Adjustments: Include bonuses, overtime, allowances, or deductions like salary sacrifice arrangements.
Step 5: Process Payments
Make payments directly from your business bank account to employees’ nominated accounts. It’s best to set up a direct debit system to streamline payroll processing. Double-check payment details and amounts to avoid errors, and align payment schedules with your chosen pay frequency to maintain consistency.
Step 6: Lodge Reports via STP
After every pay cycle, employee earnings, PAYG withholding amounts, and superannuation contributions are reported to the ATO using STP. Double-check all data before submission and make sure that your payroll software is STP-enabled. Timely and accurate reporting helps businesses comply with ATO regulations and avoid penalties.
Step 7: Record-keeping and Documentation
Maintaining proper records is important for compliance and operational efficiency. According to the ATO, payroll records must be kept for at least five years. Store these digitally for easy access during audits or disputes. Key records to retain include:
- Employee pay slips (detailing gross pay, deductions, and net pay).
- PAYG payment summaries or income statements.
- Superannuation contribution details.
- ATO correspondence related to payroll and tax.
Common Payroll Mistakes and How to Avoid Them
No matter how well-organised your system is, payroll mistakes can still happen. Errors can lead to penalties, strained employee relationships, or compliance breaches. Here are three of the most common payroll mistakes and how to prevent them:
1. Missing STP Deadlines
The Single Touch Payroll (STP) system requires businesses to report payroll information to the ATO after every pay cycle. Missing these deadlines can result in fines and administrative headaches.
You can avoid this by:
- Using digital calendars or payroll software to set automatic reminders for submission deadlines.
- Allowing Australian payroll software to do direct STP reporting and minimise the risk of late submissions.
- Assigning payroll duties to a reliable team member or outsource payroll services to make sure that deadlines are never missed.
Timely reporting keeps your business compliant and makes sure that employees can access accurate income statements through myGov.
2. Incorrect Tax Deductions
Accurate tax deductions build trust with employees. For this reason, errors in calculating PAYG withholding can lead to underpayment or overpayment of taxes. This creates frustration for employees and potentially draws attention from the ATO.
Make sure to:
- Stay up to date with the latest PAYG tax rates and thresholds as the ATO updates them annually.
- Verify employee details. Make sure all Tax File Numbers (TFNs) are recorded and employee classifications (full-time, part-time, casual) are correct.
- Use modern payroll software to automate tax calculations based on the latest ATO guidelines.
3. Failing to Update Pay Rates
Australia’s Fair Work Commission regularly reviews and updates minimum wages and award rates. Failing to apply these changes can result in employee underpayment claims and penalties for non-compliance.
Keeping pay rates up to date protects your business from potential legal action and demonstrates a commitment to fair and transparent employee practices.
Avoid it by:
- Subscribing to updates and notifications from the Fair Work Ombudsman to receive updates on changes to pay rates and awards.
- Periodically reviewing and updating employment contracts to reflect current rates and entitlements.
- Performing a yearly check of your payroll system to keep all rates aligned with legal requirements.
Our Pro Tip:
Implement robust payroll processes, supported by Australian payroll software, to minimise the chances of errors. These tools automate calculations, provide reminders, and ensure compliance with the latest regulations to give business owners like you peace of mind.
Scalable Payroll Solutions for Growing Businesses
As your business expands, payroll management becomes more complex. Investing in advanced payroll tools or partnering with a payroll provider like Verus can simplify the process. Scalable solutions allow you to:
- Automate repetitive tasks.
- Handle multi-location payrolls.
- Integrate payroll with other business systems.
If you need help with payroll and reporting and bookkeeping, contact us to receive payroll solutions that are designed to meet the unique needs of your growing business.
The Value of Getting Payroll Right
Payroll compliance is about fostering trust with your employees and making sure that your business operates efficiently. By following this guide, you’ll be equipped to set up and manage payroll effectively.
If you’re looking for expert assistance with payroll, Verus Accounting and Advisory is here to help. Explore our business advisory services or learn more about our business accounting solutions.
Take the first step towards streamlined payroll today, and learn about our services for more details.
