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A guide to processing payroll
Payroll

A guide to processing payroll

Payroll is the process of paying employees. Running payroll consists of calculating employee earnings and factoring out federal and payroll related taxes. The term payroll can also refer to:

  • A business’s financial records of employees
  • The distribution of employee pay
  • Annual records of employee wages

Payroll can be a business’s greatest overhead expense as this process is complicated. Understanding each component of payroll may help you gain a better understanding of your business finances and it can help ensure you remain compliant with the relevant laws.

Steps for processing payroll

There are a number of steps you need to take before, during and after processing payroll.

1. Collect data

When you hire a new employee you need to collect their payroll information on a Tax File Number (TFN) declaration form. Employers must withhold amounts for taxes and may withhold money to pay for employee benefits and deductions.

2. Calculate net pay

The employee’s net pay is their gross pay minus tax withholdings and deductions. Unlike in some other countries, the medicare levy and student loan repayments are generally included in the PAYG withholding tax amount calculation.

3. Issue payments

You must pay the employee’s net pay via direct deposit within the relevant time frame as specified by the local law.

4. Report taxes

The regularity on which you report your PAYG withholdings is based on your classification as either a small, medium or large PAYG remitter. Therefore, you may be required to submit monthly, quarterly, or annually via Business Activity Statement (BAS) or Instalment Activity Statement (IAS). In addition to this, as part of the normal payroll process, you will be required to lodge Single Touch Payroll reports as you complete each pay run.

5. Withhold and pay taxes

You must forward all taxes and deductions to the relevant authorities, superannuation funds, and other benefits providers.

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Essential payroll components

There are many components in the payroll process. We’ve broken down each component into three categories: employee information, salaries and wages, and deductions.

1. Employee information

Before paying employees, they’ll need to give you some information. First, they need to complete a Tax File Number (TFN) declaration. All employees should complete this form as soon as they commence employment with you. This form provides information on an employee’s tax file number and whether or not they are claiming the tax-free threshold or have any debt repayments relating to HELP, VSL, FS, SSL or TSL. The form also includes the employee’s personal information, such as their name, address, date of birth and basis of employment. All of this information will help you process payroll and distribute employee pay.

2. Salaries and wages

The second category is an employee’s pay. It can be an annual salary or an hourly wage. Salaried employees earn a fixed amount per pay period, while wage-earners, or hourly employees, earn an hourly rate. An employee’s payslip may show their gross pay, time worked, overtime pay, benefits contributions and reimbursements, additional income, and net pay.

Gross Pay

Gross pay is the total dollar amount you pay to a worker before subtracting deductions. Gross pay is what a worker makes before taxes.

Employee Time

Refers to the number of hours an employee worked in a pay period. Most businesses require hourly employees to track time. However, some salaried employees may also track time if they earn overtime pay.

Overtime Pay

Employees may be entitled to overtime pay once they have worked in excess of their agreed ordinary hours, as outlined in the relevant award or agreement under which the employee may be paid. It is common for employment contracts to include a clause that an employee may be expected to work “reasonable overtime” at no extra cost to the employer and without overtime rates. The Award establishes what is considered “reasonable overtime”, the overtime rates, and when the rates are applied. 

Benefits contributions

Benefits are contributions you might provide to your employees. The most common types of benefits include health insurance, superannuation and paid leave. 

Reimbursements

Reimbursements are when the employee is reimbursed for an out-of-pocket work-related expense or expense which the employer has agreed to pay for.

Additional income (Backpay, commissions, and bonuses)

Additional income may apply to service workers, salespeople, and anyone eligible for bonuses. The most common types of additional income include tips, commissions earned on sales, and bonuses. When payment for back payments, commissions and bonuses are made, these payments are taxed using Schedule 5.

Net pay

After you subtract all deductions, the remaining amount is the employee’s net pay. It’s also called “take-home pay.” Net pay is the amount employees receive on payday.

3. Deductions

Deductions are any amount removed from an employee’s pay for tax or other purposes. Common deductions include payroll withholding taxes, salary sacrifice, union fees and child support garnishments.

Payroll withholdings

This type of deduction primarily refers to income taxes. The employee’s TFN details in conjunction with the income tax thresholds determine how much you should withhold for income taxes, Medicare levy and debt repayments. Generally, the Medicare levy and the debt repayments are incorporated with the income tax component and one figure is deducted from the Gross Wages as a PAYG withholding amount.

Wage garnishments - Wage garnishment is not a common deduction method but is applied in particular situations. Employees who have their wages garnished usually do so under a court order. This may include child support payments and Centrelink repayments. The amount to be withheld will depend on the court order and can only be applied once the Protected Earnings Amount has been reached.

Salary sacrifice deductions - Salary sacrifice is a pre-tax amount sacrificed from Gross Wages to reduce the taxable wages. This amount is withheld and remitted on behalf of the employee to the beneficiary – whether it be to the bank for a mortgage, superannuation fund for an employee’s additional contribution or the like.

Other deductions may include health insurance costs, post-tax superannuation contributions, life insurance, workplace giving or other fringe benefits. Unlike benefit contributions, these benefits have a cost for employees in exchange for a service or coverage.

Running payroll can be a complex and time-consuming task, but you don't have to handle it alone. QuickBooks Payroll makes managing payroll easier for everyone from small business owners to larger-scale organisations. Sign up today to see how you can get started managing employee payroll for your enterprise with much more efficiency. For tips on setting up QuickBooks Payroll, head to the Payroll Resource Hub for articles and guides to help you get started.

Disclaimer: Intuit does not provide professional advice. We may provide you with information that may be of use to you, however this is not to be considered as a substitute for getting your own professional advice. Intuit is not liable to you for your use or reliance on the information provided by it.


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