If you’re running a business in Australia, you’ve probably come across all the complicated issues around payroll. Don’t worry if it all seems a bit overwhelming - this guide will help you find out what you need to know about setting up payroll for small business. This guide will cover:
GUIDE
PAYROLL
How to Set up Payroll in Australia
Setting up payroll withholding
What is payroll withholding tax?
Payroll withholding tax refers to the amount of tax withheld from a worker’s salary by an employer, who in turn remits this payment on the employee’s behalf. Learn more about how to set up payroll for your employees in the QuickBooks Online Payroll Guide.
How does payroll withholding tax work?
This article will focus on payroll for Australian companies only. In Australia, payroll withholding tax works through the Pay As You Go (PAYG) system. In the simplest terms, if you’re an employer, it’s your job to work out how much tax your employees owe, subtract it from their pay and send it to the Australian Taxation Office (ATO).
You do this every time you pay your employees, and the process is the same for salaried workers as it is for those paid by the hour.
At this point, it’s worth noting a potential source of confusion. Some US sources talk about ‘withholding’ payroll tax as if it’s a separate thing. In fact, the term doesn’t seem to be used in Australia in this context, and instead refers simply to the standard way of paying tax collected via payroll. Though it is worth noting that deductions that are not tax related may be remitted to separate bodies.
Reporting payroll withholding to the ATO
If your small business needs to withhold payments from employees you need to register for PAYG withholding before you make any payments.
As always, it’s crucial you keep your accounts up to date. In addition to making sure your workers are getting paid the correct amount, you also need to report and send the PAYG withheld (PAYG-W) to the ATO by the 21st of every month if you are on a monthly schedule for reporting, or by the 28th of the month following the end of the quarter if you are on a quarterly schedule for reporting. Your PAYG-W is usually reported on Instalment or Business Activity Statements.
Consider the steps below to ensure you are compliant with PAYG withholding.
- Register for PAYG withholding on the Australian Taxation Office website
- Withhold amounts from employees payments
- Automatically report PAYG withholding via Single Touch Payroll (STP) compliant software such as QuickBooks Payroll
- Lodge a PAYG withholding annual report for all the payments not reported and finalised through STP
How to set up employee payroll checklist
You need to set up payroll as soon as you hire your first employee. It can seem daunting, but the process is quite simple if you break it down.
There are a few things you will need to set up your payroll before you start.
- Company information (including ABN)
- Employee information (including Tax File Number declaration (TFN), Superannuation and bank details)
- Bank details (for setting up the ABA files and superannuation payments)
1. Register for PAYG withholding.
You must register for PAYG withholding before making any payment requiring withholding. This can be done at the same time as you register your business through the Australian Business Register. If your business has an ABN then you can register for PAYG withholding through Online Services, with a registered tax or BAS agent, using SBR compatible software or phoning the ATO business line.
2. Request the employee’s tax file number.
All employees currently are required to complete a TFN Declaration form when they commence employment. This form can then be electronically submitted to the ATO via QuickBooks payroll software.
3. Request the employee’s superannuation details.
You should supply each employee with a Superannuation Standard Choice form. This form advises the employee of your nominated default fund for superannuation payments and gives the employee an option to submit their own preference. It’s also important to double check the Pay Award (if the employee falls under one) to check if there is a specification of which fund should be used, however please note that the employee still has the overriding option to make their own choice.
4. Request the employee’s bank details.
You will need to have the details of the employee’s bank account for electronic payment of their wages. You have the option in payroll to split payment across multiple bank accounts if the employee desires.
5. Set up your payroll software.
Now that you have the basics to hand, you’re ready to set up your company payroll in QuickBooks Online. There you’ll be prompted to enter your ABN, business name and address, along with your name and contact details. You’ll need to complete some standard payroll information such as standard hours for an ordinary working week, how often you pay your employees and the industry you are in. QuickBooks Online payroll software has inbuilt Single Touch Payroll to help ensure your small business is ATO and PAYG compliant.
All the above might sound complicated. If it does, don’t worry - there are plenty of resources, software and free onboarding sessions to help you.
Understanding payroll deductions
What is a payroll deduction?
Payroll deductions can be broken down into three areas
- Payroll tax related deductions
- Pre-tax deductions
- Post-tax deductions
Payroll tax deductions
The most obvious of these types of deductions is for income tax. Workers who earn above the ATO set threshold will have income tax deducted. They will be taxed on the amount earned above the threshold, however an employee may choose not to claim the tax-free threshold and in this instance the taxes levied will be on the entire amount. Whether or not they are claiming the tax-free threshold is determined by what they have completed on their TFN declaration.
Another payroll deduction category is for the repayment of debts for the Higher Education Loan Program (HELP), VET Student Loan (VSL), Financial Supplement (FS), Student Start-up Loan (SSL) or Trade Support Loan (TSL). Thresholds apply before compulsory repayments are required. This additional deduction is usually included in the PAYG withholding amount based on information supplied in the TFN declaration.
The Medicare levy is a levy on your taxable income. This is generally included in the PAYG withholding amount deducted from employee gross wages.
Pre-tax deductions
Workplace Giving deductions are deductions where employees can regularly donate to charities or organisations. They can be either pre-tax or post-tax. If they choose to donate pre-tax, then the amount reduces the gross wages value on which the PAYG withholding tax is calculated. If they donate as a post-tax donation, then this will not reduce their taxable income and they may choose to claim this donation as a deduction on their personal tax return.
Salary Sacrifice Superannuation is a deduction where the employee sacrifices a set amount or percentage of their wage pre-tax to be paid into their complying superannuation fund. This amount is a reportable employer super contribution (RESC) on their annual income summary, and it does not reduce the calculation applied for the payment of superannuation by the employer.
Post-tax deductions
Union or Professional Association fees are those deductions where employees contribute for their membership to a union or professional body.
Child support is a deduction taken from wages relating to child support payments paid across to Services Australia. When deducting child support there is a portion of the employee’s wages which are a Protected Earnings Amount (PEA) and are exempt from withholding.
How to pay payroll taxes
If you’ve made it this far, congratulations - you have enough to understand what payroll tax is and how it affects your business. You know you need to register your employees, send regular updates to the ATO and report and pay any taxes owed each month/quarter.
But how do you pay payroll taxes?
The good news is you have a lot of choice over how to pay payroll taxes to the ATO. Though the ATO encourages businesses to lodge and pay online, you can lodge your IAS or BAS through a registered tax or BAS agent or by completing a paper IAS/BAS and mailing it with the cheque. You also have the option to pay by telephone banking or even in cash at your local Australia Post Office.
Other payment options are listed here.
How to calculate payroll taxes
As we’ve said a few times, it can be tough to work out all the different deductions for each of your individual employees. The ATO helpfully provides a number of tax withheld calculators.
We recommend using a specialist firm or payroll software to work it out your payroll taxes for you. Especially as your business grows, it will take up too much time to crunch your own numbers.
We hope that this guide on how to set up payroll has answered your questions about what payroll is, how it works and how to set up payroll for your small business. To summarise, employers are required to withhold their workers’ taxes and pay them to the ATO. They do so through the PAYG withholding system and must keep the ATO up to date on both monthly/quarterly payments and any changes to employee status. You have payment options, though online is recommended and preferred, and the precise amounts will vary significantly among different workers.
Stay compliant with QuickBooks
Do you have employees on payroll? Choose QuickBooks payroll software to automate your payroll process end to end and have assurance you’re staying compliant and accurate. For more tips on managing your small business, take a look at the QuickBooks Online blog.
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