Common frequently asked payroll questions and answers
Processing payroll means compensating employees for their work. It involves calculating total wage earnings, withholding deductions, filing payroll taxes and delivering payment. These steps can be accomplished manually, but an automated process is usually more accurate and efficient and may help you comply with various payroll regulations.
How do you manually process payroll?
If you’re a small business with only a few employees and choose to process payroll manually, you will need to keep precise records of hours worked, wages paid and worker classifications, among other details. You must also ensure your calculations are correct and remember to file all the necessary taxes and paperwork with government authorities on time. As you add more employees, the more challenging payroll becomes and any mistakes you make can result in costly tax penalties.
Payroll’s impact on cash flow
Even if you’re not paying someone else to do payroll for you, it’s still considered a business expense. This is because your employees’ wages and your share of payroll taxes cut into your profit margin. And if business slows down, you may be faced with the difficult decision of delaying payments or diverting money from other resources.
One way to limit payroll’s impact on your cash flow is to pay your people using direct deposit or digital pay options instead of paper checks. Because you don’t know when someone will cash a paycheck, it becomes more difficult to ensure you always have sufficient funds in your bank account. With direct deposit, you only need to cover the cost of payroll on certain days of the month, allowing you to better manage your finances. Plus, going digital cuts the expense of printing paper.
Payroll regulations
Certain aspects of payroll processing are regulated by the Australian Taxation Office (ATO) and the Fair Work Ombudsman (FWO). Some of the laws you must comply with include:
Fair Work Act 2009
The Fair Work Act entitles employees to a national minimum wage and outlines specific conditions for overtime pay, penalty rates, and other entitlements. This means that you need an accurate means of tracking time and attendance so you can apply overtime wages in line with the law.
The Fair Work Act also requires you to keep certain records for each employee. Payroll records typically include hours worked each day, total hours worked during the pay period, the basis on which employee wages were paid, regular hourly pay rate, total overtime for the pay period, date of payment and the period covered, and total wages paid each period. These records must be kept for at least seven years..
Superannuation Guarantee (SG)
Employers must pay superannuation contributions for their employees if they meet certain eligibility requirements. The SG is currently 11% of an employee’s ordinary time earnings and must be paid at least four times a year to a complying super fund.
Medicare
Medicare Employers and employees both contribute to Medicare. The total contribution amount is 2.9% of an employee’s gross wages. You will withhold 1.45% from your employee’s wages and pay a matching amount.
Payroll processing by states and territories rules and regulations
In addition to federal regulations, you must abide by state payroll processing laws. Each state has its own rules–and some are stricter than others. They govern labour laws, payday schedules and recordkeeping. So, if you’re conducting business across states, your payroll compliance becomes that much more difficult.
A good way to stay compliant is to task an executive or someone from your legal department to compile a list of all the labour laws that apply to your organisation. Ask that he or she track changes to existing laws and document any new laws being proposed. Review these findings on at least a monthly basis so you can adequately adapt your operations and avoid penalties.
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Discover ADP Payroll SoftwareApply for an ABN
An Australian Business Number (ABN) is an 11-digit number that identifies your business to the government and community. You can apply for an ABN free of charge online through the Australian Business Register (ABR). Once approved, it will stay associated with your organisation for as long as you stay in business.
Documents required for payroll
Before you begin processing payroll, you generally need to gather these documents, some of which may be required by government agencies:
Tax File Number Declaration
On their first day of work, new hires usually complete a Tax File Number (TFN) Declaration, which you will use to deduct the correct amount of tax from their pay. Although not required, your employees should fill out a new form each year if their personal or financial situation changes.
Employment Contract
You should have a signed employment contract with every employee that outlines their role, pay rate, hours of work, and other conditions of employment.
Job application
Although candidates often supply a CV, job applications help you obtain consistent information about potential new hires. Most require a signature, verifying the accuracy of the details, which you can use to start preparing a payroll record for anyone you decide to hire.
Bank information
If you plan to offer direct deposit, you will need your new employees to provide you with the name of their bank and account details.
Retirement plan documents
Like health benefits, retirement plans are a voluntary payroll deduction and require an employee’s signature before you can withhold contributions to a superannuation or other retirement account.
How to classify workers
In order to comply with payroll tax laws, you need to properly classify your workers as either employees or independent contractors. The general steps to do this are:
- Assess the nature of the work being done.
A worker may be an independent contractor if you have the right to control or direct only the result of the work, not what will be done and how it will be done. If you control both what will be done and how it’s done, the worker is usually an employee. - Determine if payroll deductions apply.
Withhold income tax and superannuation contributions only on wages paid to employees, not independent contractors. These types of workers pay their own taxes on their income. - File Payment Summaries (PAYG) with the ATO for employees.
Include all forms of compensation paid to employees, including wages and tips, as well as the taxes that were withheld. - File an annual Taxable Payments Annual Report for independent contractors.
You generally must report payments of $75 or more to contractors. The completed form gets sent to both the ATO and the worker. Pay attention to the details when determining a worker’s status. Misclassifying a worker can result in penalties and you may be responsible for any unpaid wages, including overtime. If you need help determining the status of a worker, you can consult the ATO or Fair Work Ombudsman.
What is a typical payroll cycle?
The most common payroll cycle or pay period in Australia is monthly. See how it compares to other payroll frequencies:
| Payroll Cycle | Paychecks Per Year |
|---|---|
| Biweekly | 26 |
| Weekly | 52 |
| Semimonthly | 24 |
| Monthly | 12 |
Payroll schedules are a matter of preference, but minimum standards may apply. Employees, especially those in low-wage jobs, usually prefer to be paid more often, but as your pay frequency goes up, so do your payroll processing costs. You’ll need to carefully weigh the expectations of your workforce and your budget and comply with all state laws.
Create a payroll policy
To ensure that your payroll is accurate, processed timely and in accordance with all regulations, you’ll need to establish guidelines with both your employees and your payroll department. A typical payroll policy covers:
Workweek definitions
Clearly defined workweeks are necessary to comply with Fair Work Act overtime rules, as well as state wage payment requirements. You can choose when your workweek starts and ends, but they typically must constitute seven consecutive 24-hour periods.
Time and attendance
Accurate payroll begins with precise timekeeping. Your employees should know how to log their hours – time clock, paper timesheets, etc. – the approval process, and disciplinary action for submitting false records.
Break periods
Full-time employees working 7 to 10 hours a day should receive two paid rest breaks of ten minutes each as enshrined in law. Additionally, they’re entitled to an unpaid meal break lasting 30-60 minutes.
Employees are also entitled to a minimum 12-hour break between the end of one shift and the start of another.
Overtime
Explain who is eligible for overtime pay and how the rate is applied.
Nonexempt employees covered by the Fair Work Act must be paid no less than minimum wage for all hours worked and at least one-and-a-half times their regular pay rate for each hour worked over 38 in a workweek. If your state also has overtime regulations, you must follow the law that provides the most generous benefit to the employee.
Pay periods
Document how often you will pay your employees. Weekly, fortnightly and monthly are the most common. Also, note which specific day of the week will serve as payday.
Mandatory payroll deductions
Make clear all the taxes and witholdings that will be deducted from your employees’ paychecks. Include information on the forms they need to complete to get their withholding amounts correct and how wage garnishments work.
Voluntary payroll deductions
If you offer your employees health insurance or retirement plans, explain the costs and how they can participate. Also, provide information on paying for benefits on a pre or post-tax basis.
Mandatory payroll deductions
Make clear all the taxes that will be deducted from your employees’ paychecks. Include information on the forms they must complete to correct their withholding amounts.
Voluntary payroll deductions
If you offer your employees health insurance or retirement plans, explain the costs and how they can participate. Also, provide information on paying for benefits on a pre or post-tax basis.
Wage structure
Be transparent about the different ways employees are compensated at your business, whether it’s hourly pay, salary, bonuses, commission or stock options. In addition, pay careful attention to state laws covering the payment of final wages to those who leave your organisation.
Payroll recordkeeping
The Fair Work Act and state authorities require payroll records to be kept on file for certain periods of time. Document the recordkeeping laws that apply to you and include details on the types of payroll records you retain and how you store and access them. Your state may also have data privacy laws that limit who can access personnel records.
Designate a payroll processor
Those who excel as a payroll processor have a specific skill set. They tend to be detail-oriented, organised, analytical, and technically inclined. Their success, however, requires the collective teamwork of employees, managers, and the human resources department. For example, workers must submit accurate information and managers need to promptly approve timesheets in order for payroll processors to manage payroll correctly and on time.
Track employee time and attendance
How your payroll administrator manages time and attendance – whether it’s a time clock, a mobile app, or a pencil and paper – is entirely up to you. Keep in mind, however, that doing it manually opens the door to human error. You can help eliminate many of these mistakes, speed workflows, and make the payroll manager’s job easier by using an automated time and attendance solution that integrates with payroll.
Calculate taxes
As an employer, you’re responsible for calculating and withholding money for federal and state taxes from every employee’s pay. The amount you withhold is determined by the tax file number declarations submitted by your employees and current tax rates. In addition, the Australian government requires you to pay superannuation and match what your employees pay in Medicare levies (2% of their taxable income).
Withhold additional payroll deductions
Employees can choose to have you withhold money from their pay to fund superannuation plans and insurance premiums. Each of these requires a separate consent form. Sometimes, you must also withhold deductions for court-ordered garnishments, such as child support and alimony.
Pay statement compliance
Most states require you to provide a pay statement in either print or electronic format at the time wages are paid. Some laws allow employees to opt in or out of electronic statements and you may have to ensure they are able to easily view or print their pay information.
The goal of these regulations is transparency. The hourly rate, total hours worked, gross pay, net pay and deductions are usually required details. Avoid violations by contacting state labour departments for specific pay statement guidelines.
How to issue paychecks
You can purchase cheque stock from the bank that has your payroll account or a stationery supply store. When placing your order, make sure that the cheque stock is designed to prevent fraud, uses ink that can be interpreted by bank cheque readers, and has all of the necessary information. Most will display your business name, the employee’s name and address, the cheque number and date, and the bank’s name and address. Once the cheques are printed, seal them in a double-window envelope so that the destination and return addresses are visible, apply the appropriate postage, and put them in the mail. This process can be simplified by using a payroll service, which in some cases, includes cheque delivery.
Direct deposit vs. payslips
Printed cheques were the tried and true method of compensation for many years, but thanks to technology, there are more efficient and less expensive ways to pay your employees. Two such methods in use today are direct deposit and payslips.
Direct deposit electronically transfers money from your payroll bank account to the personal bank account of an employee. The transaction is instantaneous and most banks don’t charge for it. For these reasons, direct deposit has surpassed printed cheques as the preferred method of payment. However, employees must have a valid bank account and it can sometimes take up to two weeks to set up.
A more recent payment option that’s growing in use are prepaid debit cards or payroll cards. They’re ideal for workers who don’t have a bank account, but still want immediate access to their pay.
Whichever wage payment methods you choose to offer to your employees, be sure to review all state-specific requirements. Most allow electronic payment, but it generally cannot be the only option.
How can I improve my payroll process?
Long hours spent on administrative work and responding to letters from the ATO are tell-tale signs that your payroll process could use some improvements. Here are some tips to streamline your operations:
- Unify your pay periods
Paying different types of workers on different schedules (i.e. paying hourly employees weekly and salaried employees fortnightly) complicates payroll. Find a pay period that complies with state laws and works best across your entire workforce. - Invest in payroll software
The automated features available in payroll software eliminate repetitive tasks, like manual data entry. This reduces errors, saves time, and improves compliance. - Integrate your payroll with other processes
Many types of payroll software can be seamlessly integrated with time clocks and accounting ledgers. When these operations are in sync, you may have more accurate payroll calculations. - Use digital timekeeping solutions
Paper timesheets often lead to mistakes. Time tracking software uses biometric identification to prevent fraud and automatically calculates the hours worked. - Keep current with regulatory requirements
Laws governing payroll and employment are constantly changing. Staying informed of the latest legislation will help you maintain compliance and avoid expensive penalties. - Work with a payroll service provider
Often, the surest way to improve your payroll process is to work with a provider who can handle all aspects of payroll on your behalf. You may have peace of mind knowing that your employees are paid on time and your taxes are prepared correctly.
Payroll processing FAQs
What is a payroll processor?
A payroll processor is someone who administers payroll. Employers can hire someone specifically for this purpose, but in most cases, the role is filled by an office manager, human resources director, or even the owner. As a result, many payroll processors have responsibilities beyond simply running payroll. They’re often tasked with providing customer support and answering employee questions, analysing the payroll system, keeping up with regulatory issues, working with auditors, and troubleshooting technical errors.
How long does payroll take to process?
The method you choose to process payroll will determine how long it takes. Manual calculations can take hours to days, depending on how many employees you have and the laws that you must comply with. If you’re a large business that operates across state lines, processing payroll this way is usually unfeasible. A more efficient approach is to use payroll software, which can run payroll in minutes thanks to automation.
What is full-cycle payroll processing?
The amount of time in between each pay day is known as a payroll cycle. It can be as short as a week or as long as a month. During this period, several repeatable steps take place:
- Employees work and track their hours
- Gross pay is calculated based on hourly wage
- Taxes and other deductions are withheld from wages
- Net pay is delivered to employees via cheque, direct deposit or pay slip
What is end-to-end payroll processing?
End-to-end payroll processing integrates payroll with other aspects of workforce management, such as performance measurement, training, scheduling, benefits, and compensation. By making this connection, you can improve communication, recordkeeping, analytics, and efficiency throughout the employee life cycle.
Why is the payroll process important?
Payroll processing is important because paying employees late or filing taxes incorrectly may result in penalties and interest on back taxes. Payroll that’s unreliable can also hurt employee morale and tarnish your business reputation. When you consider these ramifications, it’s often best to dedicate the necessary resources, whether it’s time or money, to make sure you get payroll right.
What is the payroll process?
To run payroll for the first time, employers generally must perform the following:
- Apply for an Australian Business Number (ABN)
- Gather employee tax documents
- Open a bank account specifically for paying employees and taxes
What are the types of payroll processing?
When it comes to processing payroll, you have several options to choose from, depending on the size of your business and individual needs. The most common are:
- Do it yourself (DIY)
- Outsource payroll to an accountant
- Purchase payroll software
- Work with a managed payroll provider
