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 “pre-tax” or “before taxes.”
Employee time
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. Overtime is when an employee works extra time. It can include work done beyond their ordinary hours of work. The Award establishes what is considered “reasonable overtime”, the overtime rates, and when the rates are applied. The overtime rates may also vary amongst the different awards. Fair Work Australia is the body that oversees and monitors compliance with workplace laws.
Benefits contributions and reimbursements
Benefits are contributions you might provide to your employees. The most common types of benefits include health insurance, superannuation and paid leave. 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.
- Some types of garnishments include (but are not limited to)
- Child support payments
- 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
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.
