Simplifying Payroll: A Step-by-Step Guide for Small Business Owners

February 20, 2024
8
minutes to read
by
Justin Bohlmann
Contents

Proper payroll management is a critical aspect of running a successful small business. However, managing payroll can be a complicated and time-consuming process, especially for business owners who are new to the task. This comprehensive guide will cover everything you need to know about managing payroll for your small business. From understanding Single Touch Payroll (STP) and payroll tax to automating your payroll system and maintaining accurate payroll records, this guide will help you quickly navigate the world of payroll management. So, whether you're a new small business owner or an experienced entrepreneur, read on to learn the ins and outs of managing payroll for your business.

Starting Payroll 

Before you can manage your business's payroll, it's important to understand your payroll needs and how to set up a payroll system. Here are some steps to get started: 

Define Your Payroll Plans 

You'll need to define your payroll plans to get started with payroll management. This includes determining how often you'll pay your employees (e.g., weekly, bi-weekly, monthly), what types of benefits and deductions you'll offer, and how you'll handle taxes. This should be documented so it can be provided to new staff when they join.    

Choose the Right Payroll Software 

Many different payroll software options are available, each with its own features and benefits. Some popular choices for small businesses include ADP, Payroller, Xero Me, and Employment Hero. Consider your business's specific payroll needs and budget when choosing the right payroll software. 

Set Up Your Payroll System 

Once you've identified your payroll needs and chosen a payroll software, it's time to set up your payroll system. This involves entering employee information, setting up payroll schedules, and configuring benefit and deduction options. Your payroll software provider should offer guidance on how to set up your system. Once your system is set up, you'll be ready to start processing employee payroll. 

 

Single Touch Payroll (STP) 

Single Touch Payroll (STP) is an ATO initiative that requires employers to report payroll information to the ATO each time they pay their employees. Here's what you need to know about STP:

What is STP? 

STP is a digital reporting system that requires employers to report payroll information, including salaries, wages, superannuation, and taxes, to the ATO each time they pay their employees. This information is registered through your payroll software, allowing the ATO to have real-time visibility into employer compliance with tax obligations. 

Who Needs to Comply with STP? 

Since 1 July 2019, all employers in Australia have been required to comply with STP. This includes small businesses with fewer than 20 employees. 

Benefits of STP 

STP offers several benefits for employers, including streamlining payroll reporting, reducing the risk of errors, and ensuring compliance with tax laws. By reporting payroll information in real time, employers can also ensure that their employees' tax and superannuation information is accurate. 

How to Comply with STP 

To comply with STP, you must ensure that your payroll software is STP-enabled. All payroll software providers offer STP-enabled versions of their software. You'll also need to ensure you report payroll information to the ATO each time you pay your employees. Your payroll software provider should offer guidance on how to set up and use STP reporting. 

 

Payroll Tax 

Payroll tax is a tax imposed on employers based on the wages they pay to their employees. Here's what you need to know about payroll tax:   

What is Payroll Tax? 

Payroll tax varies by state and is based on the amount of the total wages paid. 

Who Needs to Pay Payroll Tax? 

All employers who pay wages above a certain threshold must pay payroll tax. The threshold varies by state, so it's important to check with your state revenue office to determine whether your business must pay payroll tax. 

How to Register for Payroll Tax 

If your business must pay payroll tax, you'll need to register with your state revenue office. This involves completing an application and providing information about your business and payroll. Your state revenue office should give guidance on registering for payroll tax. 

When is Payroll Tax Due? 

Payroll tax is typically due monthly or quarterly, depending on the state. It's important to ensure that you know the due dates for payroll tax in your state and that you make payments on time to avoid penalties and interest. 

Payroll Tax Deductions 

Payroll tax deductions are not pre-tax deductions. They are calculated after pre-tax deductions, such as salary sacrifice or superannuation, have been deducted. It's important to ensure you're correctly calculating payroll tax to avoid errors and potential penalties. Your payroll software provider or bookkeeper/accountant can assist you in calculating payroll tax. 

 

Will Payroll be Automated? 

Automation has become a buzzword in business, and payroll is no exception. Automated payroll refers to using software to automate the process of calculating and processing payroll. This can include everything from calculating wages and taxes to generating pay slips and making payments. Automated payroll offers several benefits for employers, including saving time and reducing the risk of errors. By automating payroll processes, employers can ensure that calculations are accurate and payments are made on time. 

Several payroll software providers are on the market, including ADP, Payroller, Employment Hero, Xero Me, and Paychecks. These providers offer a range of features and pricing options, so it's important to research and compare providers to find the best fit for your business.  

Implementing automated payroll involves:

  • Selecting a payroll software provider.
  • Setting up your payroll information in the software.
  • Testing the system to ensure it works correctly.

While automated payroll offers several benefits, there are also some challenges to consider. These can include the cost of software and training, the need to ensure data security, and the potential for errors if the system is not set up correctly. It's important to weigh the benefits and challenges of automated payroll before deciding whether to implement it in your business. 

 

Payroll Records 

Keeping accurate and up-to-date payroll records is essential for small businesses. Here's what you need to know about payroll records: 

  • Employers are required by law to keep accurate and complete payroll records for each employee. This includes the employee's name, address, date of birth, tax file number, start date, hourly rate or salary, and any allowances or deductions. 
  • Employers are required to keep payroll records for a minimum of seven years. However, it's recommended that employers keep records for at least ten years to ensure compliance with record-keeping requirements and a complete record of their employment history. 
  • To ensure that your payroll records are accurate and up to date, it's important to establish and maintain a record-keeping system. This can include setting up a separate file for each employee, accurately tracking hours and leave, and keeping records of changes to employee details or pay rates. 
  • Payroll software can also automate record-keeping processes, making it easier to maintain accurate records and reducing the risk of errors. Automated record-keeping can include features such as employee self-service portals, which allow employees to view and update their information, and real-time reporting, which provides up-to-date information on payroll expenses. 
  • It's important to ensure that you comply with all record-keeping requirements and regulations, as failure to do so can result in penalties and fines. 

Small business owners who fail to make payroll tax payments on time may be subject to penalties and interest charges. These penalties can be substantial and can significantly impact a business's cash flow and financial stability. 

Small business owners need to stay on top of their payroll tax obligations to avoid penalties and fines. This could involve setting up automatic payments, using payroll software to track payments and due dates, and seeking advice from a payroll expert or accountant. By staying organised and proactive, small business owners can ensure they meet their payroll tax obligations on time and avoid potentially costly penalties and fines. 

 

The Future of Payroll 

With the advancement of technology, payroll is becoming increasingly automated. Here are some trends and developments in the world of automated payroll: 

Automated Payroll Systems 

Automated payroll systems, such as ADP, Payroller, Employment Hero, Xero Me, and Paychecks, are becoming increasingly popular among small businesses. These systems automate many of the tasks involved in payroll, including calculating taxes and superannuation, managing employee data, and generating payslips. 

Benefits of Automated Payroll Systems 

Automated payroll systems can offer a range of benefits for small businesses, including increased accuracy, reduced administrative burden, and improved compliance. They can also save time and reduce the risk of errors and inconsistencies. 

New Payroll Innovations   

With the continued advancement of technology, payroll will likely become even more automated. This could include using artificial intelligence (AI) and machine learning to automate more complex payroll tasks, as well as developing new software and tools to streamline the payroll process. 

 

Managing payroll can be complex and time-consuming, especially for small business owners with limited resources and expertise in accounting and bookkeeping. However, with the help of automated accounting software and payroll systems such as ADP, Payroller, Employment Hero, Xero Me, and Paychecks, small business owners can streamline their payroll processes, save time and money, and reduce the risk of errors and compliance issues. 

By following the steps outlined in this article, including registering for single-touch payroll, understanding payroll tax obligations, and staying on top of payroll records and due dates, small business owners can effectively manage their payroll and ensure the financial health of their business. Remember, managing payroll is essential to running a small business, and investing in the right tools and resources can help you save time, money, and stress in the long run.

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