Setting up a robust and efficient payroll process is crucial for the smooth functioning of any Australian small business. It ensures accurate and timely payment to employees, compliance with legal requirements, and the overall financial well-being your organisation.
Below, you will find the steps needed to understand how to set up payroll for small business owners. Some steps will take longer to complete than others, but all are necessary to get to the final point of processing your first payroll.
Step 1: Choose the Right Payroll Software
Start by researching and selecting a reliable payroll software that suits the needs of your business. Look for features such as automated calculations, Single Touch Payroll compliance, and reporting capabilities. Also take into consideration the size of your business and how much it will grow in the next few years. As your business starts to grow, you may need support with award interpretation, timesheets or rostering.
Step 2: Gather Business Details
Collect all relevant business information, including your Australian Business Number (ABN), Tax File Number (TFN), and any applicable business registrations. Ensure you have the necessary documentation and comply with legal requirements, as these will need to be entered into your payroll software, and will be reported to the ATO with submissions such as employee tax file declarations and Single Touch Payroll.
Step 3: Collect Employee Details
Compile essential employee information such as full names, addresses, Tax File Numbers (TFNs), employment start dates, and bank account details. Ensure you have completed the necessary employee onboarding paperwork, including Tax File Number Declarations and Superannuation Standard Choice forms.
Step 4: Understand Awards and Rule Sets
Familiarise yourself with the relevant industry awards or enterprise agreements that apply to your business. Identify the applicable pay rates, penalty rates, and any other allowances or entitlements your employees may be entitled to under their award or EA classification. These details should be assigned to your employees in your payroll software for automated payroll calculations.
Step 5: Set Up Pay Categories
Create pay categories that align with your employees’ job roles, such as base wages, overtime, bonuses, commissions, and allowances. Specify the corresponding pay rates and tax treatments for each category. You will also need to classify these as per the ATO guidelines in line with STP phase 2 reporting compliance.
Step 6: Determine Deduction Calculations
Consider any deductions that need to be withheld from employee wages, such as child support, salary packaging or salary sacrifice arrangements. You will need to determine the classification of the deduction categories for STP like your pay categories and establish whether the deduction will be pre or post tax.
Step 7: Set Up Single Touch Payroll (STP)
Ensure your business is compliant with Single Touch Payroll requirements, which involve reporting employee payroll information to the Australian Taxation Office each pay period. You’ll need to connect your payroll software to the ATO’s online services and configure STP reporting.
Step 8: Understand PAYG Obligations
Familiarize yourself with the PAYG withholding requirements, which involve deducting income tax from employee wages and remitting it to the ATO. Leading payroll software will calculate this automatically based on the employee’s selections in their TFN Declaration, the set up of pay and deduction categories, and the pre-installed tax tables in the software. Some payroll software can include the payment to the ATO in your ABA file, or you may have to make the payment manually.
Step 10: Process Payroll and Pay Employees
After generating your pay run, and applying leave requests and timesheets, review all payroll details for accuracy, including hours worked, pay rates, deductions, and superannuation contributions. Ensure any ad-hoc items have been applied in the pay run, such as bonuses or employee terminations. Once your pay run is finalized, you can generate payslips for employees and make them available to employees for viewing. Process payments to employees through an ABA file or direct transfer from your business bank account. You must also submit the pay run through STP to the ATO.
We have developed a detailed step-by-step guide to help you with the tasks and checks you need to complete each pay run once you’ve set up payroll.
Establishing an efficient payroll process is vital for the success of any small business in Australia. By following the steps outlined in this guide, you can set up a streamlined payroll system that ensures accurate and timely payments and complies with Australian payroll legislation. Choose a reliable payroll software that has functions unique to your business needs. Ensuring that your payroll set up is correct from the start will give you the best foundation to maintain an efficient and compliant payroll process.
About Employment Innovations
Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management and HR software.
The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.