Payroll 101: What Do You Need Before You Can Pay Your Employees?

By Ken Mansell

Paying a new employee isn't as simple as just setting up a weekly payment. The government requires you to put together several documents and undertake a series of calculations before you can hire employee number 1. So, what do you need to do to enter the exciting and often extremely stressful world of being an employer?

1. Confirm they are actually allowed to work for you 

If your new worker is not an Australian citizen, a permanent resident or New Zealand citizen (we do love our New Zealand family, except when it comes to playing rugby), you must confirm they have a visa with permission to work. The Department of Home Affairs has a website to help you with this

2. Are they actually an employee or are they really a contractor?

Sometimes the person you think is an employee is actually a contractor, and often the person you think is a contractor is actually an employee. Get this wrong and you will pay the wrong taxes, not pay the right taxes and find that you have breached a series of laws.

To check if your worker is an employee or contractor, you need to consider the whole working arrangement. There are a number of factors that need to be considered, not just the terms of the employment contract. There isn’t one factor that makes a difference on determination on its own.

The ATO has a helpful tool to assist you in making this decision.

3. Set up to withhold taxes, being PAYG withholding from your payments to employee (or even to your contractors…)

Don’t think you can start paying your employees yet. Now you need to register for PAYG withholding to

withhold tax from your employees' wages (or from payments to contractors if they don't quote an ABN).

And please remember you have to register for PAYG withholding before you are first required to make a payment that is subject to withholding. This is required even if you don't withhold an amount from a payment made.

You can learn about the different ways you can register for PAYG withholding on the ATO’s website.

4. Ask your employee for the infamous “Tax file number” or TFN

The employee needs to give you more than just their TFN number. They need to complete the TFN Declaration form and give it to you.

The employee can complete this form in two ways, being:

  • Through the ATO online services linked to their myGov account (if they do this, they need to print out the declaration form and give it to you for your records) OR
  • On paper, by downloading the Tax file number (TFN) declaration. Note that is they use the paper form you need to send the ATO the completed form to us within 14 days and retain a copy of the form for your records.

5. And don’t forget superannuation…

You have a requirement to pay superannuation for the employee and they can choose where they want that super to be paid. Therefore, you now need to give the employee a pre-filled Standard Choice Form.

There is information that the employer needs to include on this form before they give it to the employee, but most important is that the employer needs to include on the form the employer’s “default super fund” details.

What is a “default super fund”? This is a super fund that the employer will pay their super into if the employee does not choose their own fund. And this just can’t be any fund, as it has to be a complying fund that offers a MySuper product.

You can find these funds on the Super Fund Lookup but you should contact the fund you chose to make sure they will take contributions from you.

Now you know what fund you will make the contribution to (the employee’s choice or your default fund) you'll need to set up an electronic system in preparation for reporting and paying your first super contributions in the “SuperStream” standard. But most will use the government run Small Business Superannuation Clearing House until they have too many employees (or they realise what a headache super can be).

6. And 7 and 8 and 9 and… the stuff just keeps on coming

Just when you think it’s all done and you are ready to start paying your employees, you realise there is still other stuff to consider. Things like:

  • Setting up a system to manage the actual payments;
  • Keep records of your workers and of all the information you have just collected;
  • Working out if you are providing fringe benefits and registering for Fringe Benefits Tax;
  • Considering workers compensation requirements; and
  • Checking if you need to register for payroll tax with your state or territory revenue office. You'll only need to do this if your total payments to employees and certain contractors exceed the threshold in your state or territory.

Admittedly, it's a lot of work, so if you think your first employee won’t be your only employee, consider outsourcing your human resources or payroll needs to a service provider who can help you get it right and free up time to focus on your business.

About Ken Mansell

Ken takes the label “tax nerd” as a badge of honour. He has worked for KPMG and Deloitte, as the tax counsel for ASX and NYSE listed entities, worked on tax policy for the Federal Government, as an advisor to the Assistant Treasurer, and on the secretariat of the Henry Review of Taxation. Ken runs “Tax Rambling” where he tries to share his love of tax with the rest of the world.

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