If you hire employees as a small business owner, you will need to have a payroll system. Typically, this includes a list of employees and information about their hours worked, wages, deductions, and all records of payment made to them for each pay period.
Businesses can manage their payroll process either manually, through software, or by outsourcing to a third party.
Here are some key topics you need to know about payroll:
What is payroll?
By definition, payroll is a list of a company’s employees and the amount of money they need to be paid.
How does payroll work?
As a small business owner, you will be responsible for adding new employees to the payroll. Once hired, you will need to collect their personal information and ensure you have their correct payment details. Having a payroll system enables you to better keep track of your employees’ number of hours worked, and their pay.
According to payroll regulations, all employees should be paid on a regular basis. However, pay frequency will depend on your preference as the employer. Typically this happens on a weekly, fortnightly or monthly basis.
If you have any questions as a new employer, The Fair Work Commission offers extensive resources to help employers run and manage their payroll lawfully and effectively. The Fair Work Commission is a national organisation that works with businesses and the government to regulate legislation and make payroll administration more efficient.
Setting up your payroll process
Some corporations choose to outsource their payroll, but small businesses can cover this responsibility in-house with the use of accounting software. There are many benefits of using payroll software such as keeping accurate and organised records of your employees in one place.
You can easily run payroll when you set up your online payroll account in Australia and connect it to the Australian Tax Office (ATO).
To begin the process, you will need to action the following:
- Sign up for PAYG withholding. This can be done at the same time as registering your business with the Australian Business Register (ABR).
- Get the employee's tax file number (TFN). The payroll software can then electronically submit this form to the ATO.
- Ask for the employee's superannuation and provide them with a Superannuation Standard Choice form. This form informs the employee of your default superannuation fund and gives them the option to change it.
- Get the employee's bank account information so you can electronically pay their salaries.
- Set up your company payroll in QuickBooks Online and sign up for Employment Hero under the employees' section of QuickBooks Online.
Learn more about QuickBooks Payroll powered by Employment Hero.
What are the components of payroll?
Payroll management covers multiple aspects of wage transactions to ensure that the business is compliant with the law and meets employees’ working conditions. The following four components make up payroll:
- Gross income
- Employee benefits
- Superannuation
- Taxes
Gross income
Gross income, or gross pay, is the total amount of money an employee earns in a pay period before deductions or taxes are taken out. Calculating gross income will depend on whether the employee is paid hourly or is a salaried worker.
To find the gross income of hourly employees, all you need to do is multiply their hourly pay rate by the total number of regular hours worked. If the employee works overtime, then the overtime hours worked must be multiplied by the overtime pay rate. The two figures are then added together for the total gross wages per employee.
For salaried employees, the gross pay is a set amount for every payroll period. Any bonuses given within a pay period must be added to hourly and salaried employees’ total gross income.
Employee benefits
Employee benefits are any benefits provided to employees in addition to their base salary and wages. Depending on the nature of your business, you may provide some employee benefits such as health insurance, life insurance, paid time off (PTO), or profit sharing. Some employee benefits may be required by law such as superannuation and PTO (including holiday pay), and some others are up to each business, such as education advancement, or flexible working arrangements.
Providing employee benefits to your salaried employees is one way of showing them that you are invested in them and is a great way of attracting and retaining employees for your business.
Superannuation guarantee (SG)
Superannuation is a retirement savings program that provides an income for retirees, based on contributions that were made throughout their working life. As an employer, you are required by SG law to make contributions to your employees’ designated superannuation account.
To date, 10% of an employee's "ordinary time wages" must be contributed by the employer. Overtime rates are exempt, while bonuses and commissions are subject to this pay tax as well.
Payroll tax
There are two types of taxes you may see on a payroll. To simplify, the payroll tax is for employers and the income tax is for employees.
Payroll tax is a tax obligation that an employer has to pay to the state or territory based on the total wages paid to its employees. However, payroll tax only applies when the total monthly wages of an employer (or group of employers) are above a particular threshold level. Each state and territory has a different threshold as set out below:
