How to Set Up Payroll for a Small Business

When running a small business, owners often must depend on their understanding of accounting and financial basics to avoid the risks of inaccurate accounting, including the concept of payroll. 

Payroll is about more than issuing a paycheck to an employee. Payroll involves paying employees timely and fairly, accounting for and reporting tax, superannuation, and any other deductions required by law.

Payroll can be considered an expansive part of accounting and is an important task for any small business that has hired employees. It can not be overlooked as it may eventually impact business operations through unsatisfied employees, as well as delayed payroll, tax and profit reporting.

This guide will teach you how to set up a small business payroll and can help small business owners like you in keeping track of their payroll process so that your company remains compliant.

What Factors Impact Payroll for Small Businesses? 

Every small business owner should have an answer to some key questions when setting up payroll for their business. These questions can impact how the small business approaches payroll. Taxes, employment laws, the employee and the scope of their job function can all impact payroll. 

It is important to consider:

• Whether the nature of employment is casual, part-time, temporary, contractual or permanent. 

• Whether the hired individuals are employees or independent contractors.

• What the pay schedule is like [daily, weekly, bi-weekly, monthly].

• How the record keeping and tracking of employee’s work and pay are ensured.

• Whether wage requirements and other entitlements as per employment law are being met.

• What the tax and superannuation obligations are.

The Federal Government collects the income tax from citizens and as employment income is the most common income in the world, governments have set up regulations & tax rates to collect income taxes timely and accurately. However, they cannot do this alone and require employers to manage this process through a process called payroll deduction.

Employment laws determine how small business owners can manage their employees, including how they are to be paid and the minimum wage they are paid. The Australian government requires a minimum wage under the Fair Work Act 2009. This act is always active and reviewed annually. Therefore, it is also essential that a small business owner remains educated on changes to current laws. 

The type of employee impacts how you manage payroll. An employee can be a permanent employee or a temporary employee. Their salary range also affects reporting requirements. 

Payroll also generates a lot of paperwork. Employees receive pay stubs from you. Payroll produces much supporting documentation that you’ll need to complete tax filings. It’s a good rule to hold onto payroll records for seven years or more. Not only does this help you, but it also helps your employees. You may need to reference hard files of payroll records such as the employee’s paychecks in the future. 

Payroll Compliance in Australia 

Australia has several compliance factors for payroll. These cover minimum wage, paid holidays, leave policies, and record keeping. Many of these regulations are common in most countries, and small business owners must abide by these to be compliant. 

National Employment Standards 

The National Employment Standards (NES) are a set of entitlements employers must make available to employees. There are currently eleven: 

• Maximum Weekly Hours

• Flexible Working Arrangements

• Ability to convert to permanent employment status

• Parental Leave

• Annual Leave

• Personal Care Leave/Family Leave

• Community Service Leave

• Long Service Leave

• Public Holidays

• Termination Notice/Severance Pay

• Fair Work Information/Casual Employment Information Statements

Small businesses must provide these rights to their employees or risk facing penalties. Four key aspects have been explained below:

1. Maximum Weekly Hours

Employers cannot unreasonably request that employees work more than thirty-eight hours a week.

2. Leave

There are five leave standards under the NES. Employees’ rights based on their tenure are parental, annual, and long service leaves. Community service, personal care, and family leaves must be provided regardless of the length of employment tenure. 

3. Public Holidays

Public holidays are awarded to employees based on the Australian territory they work in. The territory affects how much the employee is compensated for them.

4. Termination Notice/Severance Pay

Employers must provide written notice to an employee about termination or layoff. There are exceptions to consider. In addition, the notice period is based on the business industry. 

Accurate Record Keeping

Small business owners should always keep business records, and payroll & employee records are at the top of the list. Australia mandates employee records to be kept for seven years.

Examples of NES records that must be kept are:

• Pay, Leave, and Hours Worked

• Expense Reimbursements

• Workers’ Compensation Information

• Superannuation Contribution

In line with these requirements, small business should record the following employee information:

• General details [such as full name, bank account number, start date, employment type and status]

• Leave details [taken leaves vs accrued leaves]

• Pay and payroll schedule details [pay rate, gross pay, pay period, bonus or other allowances]

• Work hours [starting and finishing hours, work hour flexibility if any, over time]

• Super details [amount paid, dates paid on, fund name]

Payroll information should also include your payroll schedule and pay period records. Pay slips should be accurate and show deductions, gross pay, and the employee’s pay rate. If an electronic deposit is set up, keep records of bank account information, and any authorisation forms the employee signed for direct deposit.  

Recording leave details can prove as evidence in employee related disputes and also provide an audit trail that will safeguard you from liability or issues related tax deposits.

Modern Awards

Modern awards are a part of the NES. They set standards for how employers are to pay employees and manage how and when they work. The list of modern award entitlements are:

• Pay

• Hours of Work

• Rosters

• Breaks

• Allowances

• Penalty Rates

• Overtime Pay

The national workplace relations system accounts for employees covered under modern awards. Some awards are unavailable for specific pay ranges and industries. 

Small business owners must follow Australia’s standard for modern awards. Some circumstances affect how a business complies with modern awards, such as if the company is covered by a registered agreement, which is similar to an employment contract. In the absence of a registered agreement, Modern Awards rules are followed.  

Payroll Tax & Other Deductions

Payroll tax and other deductions are a primary reason for payroll management. Proper payroll management protects the business from a compliance failure. Since tax and deductions reporting is time sensitive, and the Australian government requires them to be reported and paid in the correct period, it is necessary to manage payroll records. 

This is where Single Touch Payroll (STP) plays a role. STP is a government-led payroll tool that makes it simpler for small business owners in Australia to manage their payroll deductions and meet deadlines. STP is now mandatory for all businesses in Australia. 

With STP, businesses can report required information about employees to multiple government agencies through one portal. 

In addition to the STP registration, businesses in Australia must register for Pay as You Go (PAYG). PAYG is a system that facilitates tax payments to the ATO. Small businesses in Australia are required to register for PAYG tax withholding before they make a payment subject to withholding. 

The benefit of the PAYG for business is that it allows the end-of-year anticipated tax bill to be paid in installments throughout the year. The ATO will notify all companies that are required to issue tax payments periodically. It is important to register your employer identification number [the Australian Business Number] which can help you avoid PAYG on payments you receive.

PAYG also has a withholding system for employee or contractor wages. This system helps businesses collect and pay taxes to the ATO on behalf of the employee. 

Payroll tax is different from PAYG and is classified as a state tax calculated on the total wages paid each month. Your eligibility to pay this tax depends on whether your total wages paid are over the tax free threshold for your respective state, which you can easily check through the State’s Revenue Office website.

Payroll Solutions for Small Business

Payroll management and reporting has evolved over the years, along with the accounting process. Manual reporting and spreadsheets are an age-old, tried-and-true method for managing payroll, but most businesses now use accounting software and apps. Even though small businesses can manage payroll through these manual recording methods with spreadsheets for calculations and filing cabinets for hard copies of records, this may require much oversight since errors are more likely to occur. 

The key benefits of using payroll software or running online payroll are access to automation tools and integration with bank accounts and other stakeholders involved in the process. Some softwares also make it easier to collect information from employees electronically, while also supporting filing of taxes and tax returns.

As businesses grow, they eventually turn accounting management over to a dedicated bookkeeper or bookkeeping service. Bookkeepers are specially trained to work on accounting transactions which include payroll. However, because a bookkeeper manages end-to-end accounting, they will need to be up to date with the changes in Australian payroll and labor laws.

An effective way a small business can ensure its payroll is managed correctly is to outsource it to a payroll provider. Payroll providers specialize in processing payroll and will remain current on changes to the payroll requirements in Australia. 

Set Up Payroll for New Employee

As a small business with in-house payroll, once you are comfortable with payroll basics, you can refer to this payroll checklist for onboarding a new hire:

1. Collect and verify employee personal information: Full name, date of birth, and taxpayer number. This can be collected from the employee application, identification verification, and any applicable tax forms the employee submits. 

2. Set up qualifying entitlements and awards and ensure they meet the NES. Review the employment contract, job description, and working hours to determine what entitlements and awards the employee should receive. 

3. Determine the employee’s tax liability and super requirements. Use the super tool and tax form as a guide.

4. Set up STP. This can be done through the ATO website. 

5. Track hours and issue pay slips on time to the employee. Pay slips should be recorded and stored for future reference. 

6. Conduct monthly accounting processes to reconcile payroll with the business bank account. Use an accounting system, bookkeeper, or payroll administrator to help facilitate the reconciliation. 

7. Use PAYG to verify payroll records of employee withholdings reconciled with PAYG payments.

8. Any discrepancies should be updated in your payroll system. Keep track of records and changes for seven years.

Final Word

As a small business grows, the owner may need help to handle all payroll tasks. With so many requirements to be met with payroll in Australia, a company can easily make mistakes and miss regulatory actions. 

Small businesses must create a straightforward process to set up and run payroll. Given how time-consuming payroll can get, it may be a better solution to hire a payroll service to do the work and ensure you maintain compliance. A payroll service provider can work with employees directly and help the small business owner focus on other aspects of business continuity.