Therefore, understanding the basics of the payroll process is imperative to make sure you’re doing the right thing. Especially for small or medium sized business who may not have the luxury of an in-house professional or team to manage their payroll function.
With this essential guide on payroll processing, you’ll ensure that your business is ticking all the right boxes.
What is payroll processing?
Payroll processing involves calculating employee wages, deductions, and distributing payments promptly, in compliance with Australian taxation laws.
This process sees businesses are responsible for collecting and maintaining employee work hours, salary rates, and meticulously ensuring every payslip reflects accurate information.
Australia is known to have one of the world’s most complex payroll systems. So, it is important to stress that any mistakes made during the process will mean that you’re not just dealing with disgruntled employees but potentially hefty fines and legal repercussions.
Businesses with a well-functioning payroll function will mean less chance of long hours spent on admin, or responding to the ATO. It will, however, mean more streamlined operations, and a happy workforce. It goes without saying that accuracy in your employee payroll fosters trust and satisfaction, helping to build a productive company culture.
9 steps for effective payroll processing
In this section, we’ll walk you through the nine key steps for effective payroll processing in Australia.
1. Ensure you have completed payroll registration and setup tasks
Before processing payroll for the first time, you need to carry out the initial registration and setup.
This involves:
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Obtaining an Australian Business Number (ABN), an 11-digit number that identifies your business to the government. This is essential for tax purposes and dealing with the Australian Tax Office (ATO).
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Registering for pay as you go (PAYG) withholding, where you are required to withhold income tax from your employees’ wages and remit it to the ATO.
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Obtaining Tax File Numbers (TFN) for your business and employees and ensuring that all employees have completed a TFN Declaration form, which will be used to deduct the correct amount of tax from their wages.
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Opening a dedicated business bank account.
You’ll also need to implement a robust payroll processing software solution that is compliant with Single Touch Payroll (STP) Phase 2, as this is mandatory for reporting payroll information to the ATO.
2. Compute gross pay
Once you’re set up and you have your chosen STP-compliant payroll software, you’ll need to calculate gross pay for each of your employees. This is done by multiplying their pay rate by the number of hours worked within the pay period to get their base salary.
You then need to include any overtime, annual leave, bonuses or additional earnings to calculate their gross pay. Failure to include these additional earnings could result in incorrect deductions and tax calculations, so take care when calculating these.
3. Calculate payroll taxes
Calculating payroll taxes is essential to ensure that your business adheres to relevant compliance requirements, and that your employees are paid accurately. This step is extremely important, as mistakes could lead to poor employee relations, or even legal issues for your business.
4. Determine employee deductions
You also need to identify any other deductions such as pension contributions, health insurance premiums, and other benefits. It’s important to understand the difference between pre-tax deductions and post-tax deductions and ensure that you calculate them at the right point of the payroll process for accurate payments.
5. Calculate net pay
Once you’ve calculated taxes and employee deductions, you then need to deduct these from the gross pay. The amount left is the net pay, which is also referred to as the employee’s take-home pay. This is the final amount that will be paid to the employee for the current pay period.
6. Approve payroll
It’s essential to conduct a thorough review before processing it to make sure that employees are being paid correctly, and that the business remains compliant with all relevant legislation.
Usually, the payroll manager, head of HR or business manager will be the one to approve the payroll. It may be tempting to skip this step during busy periods, but it’s an important safeguard against errors and discrepancies that could be costly for the business.
7. Pay employees
Whether paid weekly or monthly, always ensure that payroll is processed on time to maintain employee trust and support financial visibility within the organisation.
Whichever pay method you choose; you must provide employees with a printed or electronic payslip for the pay period.
The payslip is legally required to show their earnings before and after deductions, the amount of the deductions, and the number of hours worked.
8. File tax reports on time
After processing and paying employees, make sure to promptly file all necessary payroll tax reports and pass on the deductions you’ve made. Payroll information must be reported to the ATO through your STP-enabled software each payday.
It’s important to keep on top of any changes in payroll legislation, tax rates and superannuation to avoid penalties. The ATO and Fair Work Ombudsman websites will be valuable resources for this information.
9. Maintain accurate records
The final step of payroll processing is to ensure that you keep all records up to date.
They must be kept secure, with encrypted cloud storage being the preferred choice for many businesses.
Make sure to also keep records of any relevant payroll transactions for at least seven years for compliance and audit purposes.
What factors affect payroll processing time?
There are many different factors that can affect how long it takes to complete the process. Let’s delve into these factors to understand their impact on payroll processing time.
Accuracy of data
Ensuring the accuracy of employee data is crucial for smooth payroll processing. Details such as hours worked, pay rates, deductions and benefits must be entered correctly to ensure the accuracy of pay calculations. Any mistakes or discrepancies in data entry can significantly slow down the process, as rectifying errors requires additional time and effort.
Number of employees
The size of the workforce directly affects the time taken to process payroll and generate payslips. In larger organisations with a higher number of employees, there’s more data to input and verify, which means that calculating salaries, deductions and taxes takes longer.
Complexity of payroll structure
The complexity of your payroll structure adds another layer of intricacy to the processing time. You might be dealing with various pay rates or periods, additional earnings such as overtime or commission, and deductions for super contributions or student loans. Managing a more intricate structure takes more time and attention to ensure accuracy and compliance with regulations.
Payroll frequency
How often you pay your employees also impacts payroll processing time. Weekly or fortnightly runs, more common in retail and hospitality industries, require more time and resources than monthly runs, as data needs to be processed and verified for each run. For monthly payments, you only need to follow the end-to-end payroll process once each month, making this option less time-consuming.
Approval processes
Internal approval processes play a crucial role in determining how long it takes to process payroll. Manager approvals for timesheets and leave approvals or payroll changes are essential steps in the process to ensure that everything is accurate and compliant. Delays in obtaining approvals can slow down the payroll process and could lead to delays in employee payments.
Payroll processing methods
The method used to process payroll significantly influences the time it takes to complete the process. There are primarily two methods: manual and automated payroll processing. Let’s look at each of these in more detail.
Use of STP-enabled payroll software
STP reporting cannot be a manual payroll process. STP requires employers to report payroll information to the ATO electronically each time they pay their employees.
This means you need to use STP-enabled payroll software or engage a third-party provider, such as a registered tax or BAS agent, to report on your behalf.
Outsourcing
Outsourced payroll involves delegating payroll processing tasks to a third-party service provider. While outsourcing may initially seem like it would take longer, it can expedite the process and free up internal resources for other important tasks.
Outsourcing allows businesses to tap into specialised expertise, leading to faster and more efficient payroll processing while ensuring that all compliance requirements are met.
When deciding whether in-house or outsourced payroll is right for your business, you need to weigh up the cost of outsourcing versus the savings you’ll make by freeing up your internal resources and improving the efficiency of your process.
Common payroll processing challenges and solutions
Australian businesses face many challenges in payroll processing. It is important to understand these issues in greater detail so you can implement effective solutions for greater compliance, accuracy, and maintaining positive employee relationships.
Keeping up to date with legislation and regulation changes is one common payroll processing challenge. Australian payroll is governed by a complex and frequently changing landscape of tax laws, superannuation regulations, Fair Work Act requirements and state-specific tax obligations. Recent changes, such as the upcoming implementation of payday super and criminalisation of intentional wage theft add to this complexity.
Implementing payroll compliance software for your business will help keep your business compliant, competitive and in control.
One crucial stumbling block is data entry errors. Even minor mistake in calculating wages, overtime, allowances or deductions can lead to underpayments or overpayments and significant employee dissatisfaction.
Using online timesheet software and award management helps reinforce the knowledge that payslips are accurate and compliant with Australia’s tough regulatory conditions.
Choosing the right payroll software
Selecting the right payroll software for your needs is no easy task, but it is one that will be a game-changer.
Not only will you be enhancing your payroll accuracy, but also your operational efficiency.
Essential features such as automated payroll processing, STP Phase 2 reporting, employee self-service portals and payroll security are indispensable when surveying your software options.
Automation is easier with an all-in-one payroll solution, as standalone payroll software is often more manual with data coming from other sources. You can read more about this comparison in our eBook: separate applications vs an all-in-one platform.
Don’t underestimate customer support's role when sussing out software options. Timely assistance can make all the difference when technical queries arise. Look out for customer reviews to see how payroll software vendors stack up from a customer support perspective.
While assessing the payroll software options, weigh up cost-effectiveness against the software features. Think of it as an investment, a strategic asset that should offer scalability as your business grows, accommodating your needs without overloading your budget.
Conclusion
Payroll processing in Australia requires exacting attention to compliance with legal standards.
Understanding common challenges, from data entry errors to regulatory updates, aids you in confidently tackling payroll pitfalls.
Choosing the right payroll software for your business will turbocharge the overall efficiency of your operations, enhance accuracy, reduce errors, and save valuable time.