March 31 - Books

How To Make Sure You’re Payroll Compliant

The Purpose of Payroll and Its Key Functions

Payroll involves calculating employee wages and salaries, deducting taxes, and paying employees on time. Payroll involves several key functions, including:

  1. Calculating gross pay and deducting taxes: Gross pay is the total amount an employee earns before any deductions are made. Payroll involves calculating gross pay and then deducting taxes such as income tax (which is then put aside and paid to the ATO at the end of the quarter or in PAYGI).
  2. Withholding and reporting taxes: Employers are required to withhold and report taxes to the Australian Taxation Office (ATO). These taxes include PAYG withholding, superannuation, and fringe benefits tax.
  3. Superannuation payments: Employers are also required to make superannuation payments to their employees’ chosen super funds.

Common Areas Where Mistakes Occur in Payroll

  1. Forgetting to pay super: Superannuation is a legal requirement, and employers are required to pay a minimum of 10.5% of their employees’ earnings into a complying super fund. Note this amount is increasing to 11% as of July 2023.
  2. Not sending payslips to employees: Employers are required to provide payslips to their employees within one working day of pay day, even if an employee is on leave.
  3. Not including leave in the initial employee set up: Employers need to ensure that leave entitlements are set up correctly in their payroll system, including annual leave, sick leave, and long service leave.
  4. Tax withheld from wages is not saved and set aside to be paid to the ATO on a BAS: Employers need to ensure that they save the tax withheld from employee wages and set it aside to be paid to the ATO on a Business Activity Statement (BAS).
  5. Failure to file the payroll at the time of completion with the ATO to meet the Single Touch Payroll requirements.   

What You Need to Get Right in Xero

Xero is an online accounting software that can help businesses manage their payroll more efficiently. Here’s what you need to get right in Xero to ensure your payroll is compliant:

  1. Superannuation: Ensure that your superannuation is set up correctly and that you are paying the correct amount to your employees’ chosen super fund. If you are using Xero Auto Super, you can pay super as frequently as each payroll.
  2. Pay slips: Ensure that leave is included on payslips, and that they are given to employees within one working day of pay day, even if an employee is on leave.
  3. Leave entitlements: Check that your leave entitlements are set up correctly in Xero, including annual leave, sick leave, and long service leave.
  4. Calendarise your time to run and pay payroll: Establish a process to run and pay payroll on time, and calendarise the time to ensure it’s not forgotten.
  5. Single Touch Payroll: You must lodge payroll with the ATO via the new STP system. Xero steps you through how to do it in a very easy-to-follow way. Importantly, you must finalise STP at the end of the financial year. Without this, employees can’t lodge their tax returns.

The Implications of Not Being Payroll Compliant

Not being payroll compliant can result in severe consequences, including fines from the Fair Work Ombudsman and additional lodgements required for failure to pay super by the due date. Directors and business owners can also be personally liable, and the ATO can impose penalties and interest.

We can assist yourself or bookkeeper with payroll set up and establishing processes to run a compliant payroll. Alternatively, our bookkeepers can manage and process payroll on your behalf. Get in touch if payroll compliance is something you need a hand with.