Payroll expenses are the costs associated with hiring employees and independent contractors for your business. To pay workers, start with gross pay and deduct withholdings to calculate net pay. Processing payroll requires you to collect and manage data, and your payroll expenses may change frequently.
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Payroll expenses are what employers pay to hire workers. Amounts withheld from a worker’s pay and submitted to a third party are not payroll expenses. To understand these differences, review each payroll component and determine if it is a business expense.
Gross wages are calculated from an annual salary or hourly rate of pay and hours worked. The gross wages paid to employees may be the largest payroll expense of employers. Gross wages may comprise of different payroll categories such as ordinary hours, bonus, commissions, allowances and the like.
Superannuation is a payroll related expense incurred by a business. Currently it is levied at 10% of Ordinary Times Earnings with a scheduled progression to 12% by 2025.
The deductions which must be taken from wages include Income tax, the Medicare levy and sometimes also loan repayment amounts. The employee’s details on the Tax File Number (TFN) declaration form in conjunction with the income tax thresholds determine how much should be withheld. Generally, the Medicare levy and the debt repayments are incorporated with the income tax component and the one combined amount is deducted from the Gross Wages as a PAYG withholding amount and remitted to the Australian Taxation Office (ATO).
These amounts aren’t employer expenses, these are liabilities until they are paid in full.
If your company offers benefits, you may withhold a portion of the costs from a worker’s pay. You may withhold amounts for the employee’s share of insurance premiums for example. Your share of the costs is a payroll expense, but the employee’s contribution will not be a payroll expense.
Additionally, employers often consider a Christmas bonus as part of payroll expenses, providing an extra incentive or reward for employees during the holiday season.
A worker’s classification determines how they should be treated for tax purposes. If the worker is an employee, as an employer you’ll incur the payroll expenses discussed above. Independent contractors, on the other hand, are generally responsible for their own taxes. The company’s only expense is the gross amount you pay for services. Having said that, bear in mind that some contractors may request a voluntary withholding of PAYG to be remitted on their behalf to the ATO.
The ATO has set out guidelines to determine whether you are hiring an employee or contractor. Some contractors, those paid mostly for their labour, may also be deemed to be employees for superannuation purposes.
Every business should use the accrual method of accounting, which matches the revenue it earns with the expenses it incurs. The accrual method records payroll expenses in the month that they are incurred, regardless of when you pay for the expenses. This matching concept presents a more accurate picture of company profit. This accounting method does not post expenses based on cash outflows.
Assume that a restaurant owes workers $3,000 in payroll for the last five days of March and that the next payroll date is April 5. Using the accrual method, the $3,000 wage expense is recorded on March 31, along with recording a $3,000 increase in wages payable liability.
When the business owner processes payroll on April 5, cash decreases by $3,000, and wages payable decreases by $3,000. The expense records in March, when employees actually worked those hours. Therefore the March revenue is more closely matched and aligned with its March expenses, including the $3,000 in payroll costs.
Using the accrual method, you record both the wages payable obligation (payroll liability) and expenses in the same period. The restaurant example shows a $3,000 wage expense and a $3,000 wage liability balance posted on March 31. When the business owner pays cash on April 5, the liability balance decreases.
The payroll process requires you as an employer to collect information, perform calculations, pay workers, and submit withheld payments to third parties.
New employees must complete a TFN (Tax File Number) declaration. The form, along with the tax threshold tables tells employers how much to withhold from an employee’s pay for tax purposes.
The TFN declaration also guides employees who have multiple jobs and offers an option of not opting in for the tax-free threshold.
Gross wages are the starting point for payroll. The number of pay periods per year determines how much of a worker’s salary you pay on each payroll date. If you pay an employee on an hourly basis, the pay period indicates the start and end dates for payroll, along with the number of hours worked in that period.
Net pay is the amount the worker receives after all deductions and withholdings. Use the information you’ve collected to calculate net pay.
Let’s say you process payroll weekly. Now, let’s say an employee’s annual gross pay is $58,240. Their gross pay per period is $1,120. Using the ATO’s individual non-business tax calculator you would deduct $204 in PAYG withholding giving you a post-tax pay of $916. If there were any additional deductions after this, they would further reduce the pay. The net pay is the amount after tax and deductions have been made.
After each payroll has been processed, you will need to lodge your Single Touch Payroll (STP) report electronically.
Business owners must report on and submit payments for PAYG withholdings. The reporting and payment frequency is dependent upon whether the business is classified as a small, medium or large withholder and is reported on the Activity Statement
If your business is one of the many who are required to lodge a Taxable Payments Annual Report (TPAR), then this must be lodged annually by 28 August each year.
All businesses are required to maintain detailed payroll records. Accurate recordkeeping can protect your business in the event of an audit. The ATO and FWA requires businesses to retain payroll records for a period of seven years.
Businesses must post three common payroll journal entries. If you use a payroll service, you can save time and process payroll correctly.
Processing payroll requires a company to complete several steps and calculate withholdings for employees. The accrual method allows you to match payroll expenses with revenue and posts payroll expenses and liabilities in the same period. Using a payroll solution such as QuickBooks Payroll powered by Employment Hero to process payroll and avoid manual calculations can save time and errors. Documenting your payroll process will also be of great benefit.
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