Basics of Payroll That Every Business Owner Should Know

• Reading Time: 8 Minutes
• Published: March 31, 2023
• Last Updated: February 14, 2025

Are you tired of feeling lost and overwhelmed when it comes to managing payroll? Do terms like tax file number declaration, superannuation guarantee, and PAYG withholding make your head spin? Fear not – we are here to help you! Irrespective of whether you have an in-house payroll department or you rely on outsourced payroll management services, properly and accurately handling payroll is crucial. We will provide a comprehensive guide on the basics of payroll that every business owner needs to know. Whether you are a newbie or simply need a refresher, by the end of this post, you will have everything you need to confidently handle your company’s payroll matters. So, grab a cup of coffee, and let us get started!

What Exactly is Payroll?

Payroll is the process by which employers pay their employees for their work. It involves calculating how much each employee is owed based on their hours worked and issuing payments accordingly. Payroll can be a complex process, particularly for businesses with large numbers of employees.

There are a number of different elements that need to be taken into account when calculating payroll, including tax obligations and superannuation contributions. Employers are also responsible for withholdings, such as those for Medicare and other deductions. Getting payroll wrong can have serious consequences, so business owners in Australia must understand the basics well.

In order to ensure that the payroll is processed accurately, business owners can choose in-house payroll experts or make an even better decision by relying on outsourced payroll management services. There are numerous advantages of outsourced payroll services, and they help streamline the payroll process, removing any blockages on the road to efficient payroll management.

Why Do You Need A Payroll System?

A payroll system is a crucial part of any business, large or small. It ensures that employees are paid accurately and on time and that all required taxes and deductions are withheld from their paycheques. Payroll systems can be complex, but there are a few key things that every business owner in Australia should know about them.

• Payroll systems help businesses comply with tax laws. The Australian Taxation Office (ATO) requires businesses to withhold certain taxes from their employees’ paycheques, and a payroll system can help ensure that this is done correctly.
• Payroll systems can help businesses manage their finances more effectively. Accurate records of employee earnings and deductions make tracking spending and budgeting for future expenses easier.
• Payroll systems can help businesses save time. Automated features such as direct deposit and online payslips can reduce the amount of time spent on administrative tasks related to employee pay.

There are many other benefits of using a payroll system, but these are three of the most important for business owners in Australia to understand.

What Do I Need To Know To Start Payroll?

As a business owner in Australia, you need to be aware of the basics of payroll in order to ensure that your employees are paid correctly and on time. There are some payroll process fundamentals that you must know and follow to ensure efficient and accurate processing. You must also have some basic and important employee information in order to start your payroll process. Following are some things you need to know:

• Employee’s full name, address, and date of birth
• Employment classification (part-time, full-time, casual)
• Tax File Number (TFN)
• Employment start date
• Usual working hours
• Superannuation fund details
• Leave entitlements

Besides these basic employee details, a business owner must also have knowledge about the following things:

• How much to withhold from each employee’s paycheque for taxes
• The required frequency of pay (e.g., weekly, bi-weekly, monthly)
• How to calculate overtime pay
• Any special deductions that need to be withheld from employee paycheques (e.g., union dues, health insurance premiums)
• The correct way to fill out and file payroll tax forms

By understanding the basics of payroll, you can avoid penalties and interest charges from the ATO, as well as ensure that your employees are happy and properly compensated for their work. Businesses can also manage their payroll with Xero, NetSuite, etc., to streamline the process.

Finalising The Pay For Your Employee

One must meet minimum entitlements when it comes to your employees. Before finalising the pay for your employees, it is crucial to be aware of the minimum payment requirements to avoid any legal consequences in the future. Following are some minimum entitlements requirements that you must know about to ensure you make the right payment:

• National minimum wage: Minimum wage is the base rate of pay an employee must get for ordinary hours worked. Employee wage cannot be lower than the minimum wage rate, even if the employee agrees to it. As of July 1st, 2022, the national minimum wage before tax is $21.38 per hour or $812.60 per week. Casual employees who are covered under the national minimum wage are also entitled to at least 25% casual loading. In the case of the award and agreement-free employees, the Miscellaneous Award’s percentage scale is applied to the national minimum wage.
• NES (National Employment Standards): NES represents a set of 11 minimum entitlements to be provided to all employees as per the Fair Work Act, 2009. NES covers every employee under the national workplace relations system.
• Awards: Awards or modern awards refer to the legal documents that apply to employers and employees and outline the conditions of employment and minimum pay rates. Over 100 industry or occupation awards cover most people working in Australia.

Understanding Payroll Tax

Payroll tax is a tax levied on employers by the government based on the wages paid to employees. The amount of tax payable depends on the state in which the business is located, as well as the amount of wages paid.

Payroll tax is used to fund a variety of government services and programs, such as education, health care, and infrastructure. The payroll tax is also used in Australia to fund the country’s social security system.

The amount of payroll tax that is withheld from an employee’s wages will be calculated based on their taxable wages for the financial year. Taxable wages are the total money a person earns from their employer before income tax, the Medicare levy, and any other deductions. Most employees’ taxable wages will equal their gross wages (the total amount of money they earned before any deductions were made).

If you don’t pay your payroll tax the consequences can be serious. The ATO can take legal action against you, and you may have to pay penalties and interest. If you don’t pay your payroll tax, you may also find it difficult to get a loan or finance from a bank.

Payroll Tax Legislation To Be Followed

As a business owner, you must know some important payroll tax legislation to ensure you comply with the law and pay your employees correctly. Irrespective of how you manage the payroll, in-house or with the help of outsourced payroll management services, following the relevant legislation and regulations are compulsory. Let us look at these legislations in detail.

• Fair Work Act (FWA) 2009- This act defines the obligations and rights of the employer and employees, respectively, at the workplace. As per FWA, employers must ensure their employees are paid accurately and maintain proper records of payments and leave entitlements. The employees must also be given payslips showing their gross pay, deductions, and net payments for every period. The three minimum rights of employees relating to their entitlements as per the act include:
  •  National minimum wage
  • Pay rates based on different types of work
  • Personal, annual, and parental leave entitlements
  • Fringe Benefits Tax (FBT)- Certain non-cash benefits offered to eligible employees attract tax imposition by the Australian government, and such taxes are called FBT. Tax is charged on the value of the benefits offered and is to be paid by the employer. Some benefits that attract FBT include company cars, low-interest loans, housing, and other non-cash benefits.
  • Pay As You Go (PAYG)- It is a system used by the ATO (Australian Taxation Office) to help collect income tax from businesses and individuals. This system requires businesses to register with ATO and get a PAYG withholding number. Businesses must withhold a certain amount from their employees’ paycheques as tax and submit it to ATO, either monthly or quarterly.
  • Single Touch Payroll (STP)- Single Touch Payroll is a new reporting system used in Australia to help streamline reporting process to the ATO. Businesses are required to send their employees’ payroll information in real time to the ATO with the help of STP-enabled software. As of July 1st, 2019, STP is mandatory for every business in Australia except a few small businesses. Businesses must use payroll software that is STP-enabled and register it with ATO to start reporting via STP. This system makes it easier for businesses to calculate and pay the tax withheld, calculate and keep track of superannuation, and report the salary and wages of employees.
  • Superannuation- Based on the salary and wages of every employee, businesses are required to accurately calculate the super contribution for each employee. The super contributions must be sent to the superannuation fund chosen by the employee monthly or quarterly. Businesses must also provide their employees with choices of superannuation funds and proper records of all the contributions made. The minimum contribution required as of July 1st, 2021, is 10.5% of an employee’s OTE (Ordinary time earnings), also known as Superannuation Guarantee (SG) charge.

  Useful read: Easy Way to Tackle Super Funds for Small Business

  Why is Payroll Tax Compliance Important?

  There are a few reasons. First, you could face serious penalties if you don’t comply with the law. Not only could you be fined, but you could also end up facing jail time. Additionally, if you have employees, they likely expect that you are taking care of this for them – and if you don’t, they may not be very happy with you. Finally, good payroll tax compliance can help ensure your business runs smoothly and efficiently; after all, no one wants to deal with the hassle of an audit!

  How Can You Ensure Payroll Tax Compliance?

  In order to ensure payroll tax compliance, employers must withhold the correct amount of money from employee paycheques and promptly remit those funds to the appropriate tax authorities. Additionally, employers must keep accurate records of all employee earnings and taxes withheld in order to be able to produce these documents if requested by a government agency.

  Businesses can also switch to payroll outsourcing services to help ensure the entire payroll process is managed efficiently and the taxes are withheld and paid accurately without incurring too much cost.

  Conclusion

  Payroll is a complex subject, and understanding it is critical for business owners. We hope this blog has given you a basic understanding of payroll, its components, and how to use them to manage your finances effectively. Remember, keeping accurate records and staying up-to-date on payroll regulations are key to running a successful business. With the right tools, processes, and knowledge in place, you will be well on your way to success!

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