Within your small business, people are your most valuable resource but unless they are a family member they are unlikely going to work for free. This means that you will need to pay them. That sounds easy but you have to deduct income tax, pay superannuation, accrue holiday and sick leave and the list goes on. In this guide, we will look at payroll requirements, explain how you pay tax, and look at some of the solutions to make it easier.
There are 10 minimum entitlements you have to provide to all employees called The National Employment Standards (NES). The 10 minimum entitlements of the NES are:
Maximum weekly hours.
Requests for flexible working arrangements.
Parental leave and related entitlements.
Personal/carer’s leave, compassionate leave, and unpaid family and domestic violence leave.
Community service leave.
Long service leave.
Notice of termination and redundancy pay.
Fair Work Information Statement.
Note there are some exceptions for casuals. More details can be found on the NES website
WHY should I care about payroll?
The payroll process is important as a small business need to do two things:
- Pay employees the right amount at the right time, every time. Fairwork provides a base pay calculator which can be found here. https://calculate.fairwork.gov.au/FindYourAward
- Withhold the appropriate amount of tax, provide that to the Australian Tax Office with the required reports, and as part of this keep accurate records. You also need to provide the employee with a payslip and keep records for 7 years.
WHAT you need to know about Payroll and Tax
Three types of tax must be paid:
- PAYG withholding – Pay As You Go tax is the employer assisting the employee meet their end of year tax liability. You must register to start the process, you must ensure the worker is entitled to work in Australia and you must withhold the tax every time you issue payment to your staff. Details on how to pay this tax can be found later in this guide. More details can be found on your obligations here. https://www.ato.gov.au/business/payg-withholding/
- Payroll Tax – This is a state-by-state tax and is a tax on your business not the employee. It is calculated as a percentage of your total wage bill once you exceed a certain threshold. Further details can be found here. Threshold and payroll tax rates, as well as payment requirements, can be found here:
- Fringe benefits Tax – FBT is a tax that employers pay when they provide certain benefits to their employees, including their employees’ family or other associates. The benefit may be in addition to, or part of, their salary or wage package. More details and how to pay can be found here https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ A common example of this may be FBT payable on a company car used for work and pleasure.
A further requirement in the payroll process is the payment of Superannuation. If you pay an employee more than $450 a month then you must contribute a further legislated amount to an employee’s chosen superannuation fund. https://www.ato.gov.au/Business/Super-for-employers/
Leave is also an entitlement that must be calculated but is not compulsory on the payslip. The types of leave include:
- Annual Leave – workers accumulate leave from the day they start at a rate of 4 weeks for every 12 months worked. It does not apply to casuals and should be accrued in your accounts so you know that you have a debt that must be paid at some time.
- Parental Leave – Also known as Maternity leave, it is an entitlement of leave when a child is born or adopted. To be eligible you must have worked for at least 12 months for your organisation and the leave is up to 12 months unpaid. https://www.fairwork.gov.au/leave/maternity-and-parental-leave
- Sick and carer’s leave – Full-time and part-time employees can take paid leave to help with personal illness or injury, caring responsibilities, and family emergencies. Employees are entitled to 10 days of sick leave for every year of service. Casuals get none. https://www.fairwork.gov.au/leave/sick-and-carers-leave/paid-sick-and-carers-leave
- Public, Religious, and cultural holiday – Employees are entitled to paid leave on Public holidays that fall on a normal working day. Religious and cultural holidays do not have entitled leave however if you do not allow employees to celebrate these it can be discrimination. A simple solution is to celebrate them together through work events.
- Long service leave – Employees get long service leave after a long period of working for the same employer. Most employees’ entitlement to long service leave comes from long service leave laws in each state or territory. https://www.fairwork.gov.au/leave/long-service-leave
(Casuals are entitled to LSL in some states and territories)
Allowances and deductions may also form part of the payment process with additional funds provided for uniforms or travel, normally the subject of some sort of award. https://www.fairwork.gov.au/awards-and-agreements/awards Deductions may include a car lease payment or an extra employee-contributed super payment coming out of their scheduled pay.
HOW do you pay an employee properly?
The more employees you have, the more complex your payroll becomes. You might have a mix of employees on hourly wages and salaries. Throw in some contractors, staff on commission, overtime, expense claims, allowances, and leave entitlements, and your payroll can be different every time you run it. Your options are:
- By hand: Either on paper or a spreadsheet. Note this may not meet tax office requirements.
- Payroll software: Apps can calculate pay and deductions and even fill out tax forms for you. Be sure to read our essential guide on payroll software.
- Payroll service providers: You can outsource your payroll to experts. Some providers will do absolutely everything for you. Others will help with specific tasks.
- Accountants and bookkeepers: You do not have to go to a specialist payroll company. Many accountants and bookkeepers can do payroll for you.
Now that you have managed to work out how to pay your employee you also have to report and pay the Australian Tax Office. You will have to abide by the Single Touch Payroll reporting guidelines. https://www.ato.gov.au/business/single-touch-payroll/in-detail/single-touch-payroll-employer-reporting-guidelines/ You will report to the ATO every payday how much your employees were paid, how much tax was withheld and what contributions were made to superannuation.
SUMMARY – Adhere to Government Regulation around Payroll
Paying an employee is a complicated process with government regulation around conditions, awards, and taxation. It is important that you understand and follow the regulation and ensure your employees are paid the right amount on time every time.
There are lots of great tools and assistance available to help make this process easier.