Navigating Small Business Payroll: A Step-by-Step Guide

At foundU, we understand the complexities of payroll management across all industries and business sizes. Our step-by-step guide will clarify how to do payroll for a small business and assist you in navigating your payroll obligations efficiently to avoid costly mistakes. 

Understanding Small Business Payroll

Managing small business payroll is challenging but crucial to your success. It goes beyond just legal compliance; good payroll governance directly influences employee satisfaction and business operations, so it pays to understand what it entails.

What Is Small Business Payroll?

Payroll for a small business encompasses managing employee compensation and adhering to taxation and legislative obligations as a small business employer.

Key components include:

• Managing employee information like tax file numbers (TFNs) and employment contracts.
• Recording and tracking employee work hours, breaks, leave, allowances, and entitlements.
• Calculating and processing employee wages, superannuation, deductions, and Pay As You Go (PAYG) withholding.
• Issuing payslips to employees.
• Ensuring compliance with employment legislation.
• Generating mandatory payroll reports for taxation compliance.
• Fulfilling accounting and administrative requirements. 

Payroll Compliance for Small Businesses

Compliance with payroll regulations is complex and ever-changing, requiring a thorough understanding of your obligations as an employer. Government taxation policies, employment laws, National Employment Standards (NES), and Modern Awards drive these regulations, significantly impacting your small business payroll. Non-compliance can lead to substantial penalties, making it essential to stay informed.

Key compliance areas include:

1. National Employment Standards

These Standards set minimum entitlements for employees, covering conditions such as leave, maximum working hours, termination, flexible working arrangements, and public holidays. Failing to meet NES Standards renders your payroll non-compliant.

2. Modern Awards and Enterprise Bargaining Agreements (EBA)

Industry-specific instruments determine pay calculations, including base rates, shift and pay rise structures, overtime, penalty rates, and allowances. They are legally binding and must be complied with.

3. Taxation Compliance

Reporting through the ATO’s Single Touch Payroll (STP) is mandatory. You must have STP-enabled software for your payroll system or engage a third party, such as a registered tax or BAS agent, to report STP on your behalf.

When paying employees, you're obligated to withhold a portion of their pay for tax, known as PAYG withholding. You must report and pay the amount withheld to the ATO through your STP and business activity statement (BAS). Ensure you calculate and pay the correct Super Guarantee (SG) for eligible workers at least quarterly. Keep track of the SG rate as it progressively changes each year.

Regularly self-assess your liability to pay payroll tax to the State Revenue Office (SRO).

Stay vigilant with reporting, lodgement, and payment due dates to avoid financial penalties. To remain compliant, keep all records for a minimum of seven years.

Overall, remember these key requirements for good small business payroll compliance:

• Set up your payroll software correctly based on your industry, business size, and relevant awards and agreements.
• Document your payroll policies and procedures, outlining roles and responsibilities, particularly when using a third-party payroll service provider (PSP).
• Ensure correct calculations and maintain accurate record-keeping.
• Use a calendar to ensure timely and up-to-date reporting.
• Maintain clear and transparent documentation throughout the payroll process.

As new Australian payroll laws were implemented at the end of 2023, ensuring your payroll system remains compliant is vital. Refer to our guide on staying updated with legislation changes, avoiding penalties, and leveraging technology.

Setting Up Your Small Business Payroll

Choosing the Right Payroll System

Setting up payroll for small businesses can be overwhelming, but getting it right is crucial to avoiding costly errors.

Start by assessing whether you have the time to manage payroll yourself, have the capacity to hire an employee dedicated to the task, or if outsourcing to a third party is a better option, such as a registered accountant, BAS agent, or payroll service provider.

If managing payroll internally, you can choose between off-the-shelf accounting software with payroll capabilities or a cloud-based payroll solution. Consider factors such as budget, small business size and structure, industry and award complexity, STP2 compliance, and cybersecurity standards mandated by the ATO.

Ensure your choice aligns with your small business needs to streamline payroll processes effectively.

Registering for Payroll Taxes

Employers exceeding a monthly wage bill threshold are required to pay 'payroll tax' to the State Revenue Office (SRO). Failure to register when liable can result in penalties and interest charges, stressing the importance of compliance.

To fulfil your payroll tax obligations, follow these steps:

1. Register with your State or Territory’s SRO.
2. Self-assess your payroll tax liability.
3. Make monthly payments.
4. Submit an annual reconciliation at the end of the financial year.

Running Payroll for Small Businesses

Streamlining Payroll with Technology

Due to the complexity of employer obligations and employment laws, a dedicated payroll software solution can save your small business time, money, and stress. All-in-one platforms eliminate the need to monitor changing rates, awards, legislation, and superannuation, especially beneficial for small businesses lacking the capacity to dedicate a full-time employee to the task.

foundU offers a one-click payroll system, providing accurate, compliant, and automated payroll processing. With native in-built payroll, it's the industry's most agile pay calculator. Manage onboarding, employee records, and payroll effortlessly from a single platform. Employees have access to shift schedules, leave applications, and pay slips, streamlining administrative tasks. And you can enjoy easy shift approval and real-time cost calculations against your budget, making the payroll process stress-free.

Common Payroll Mistakes and How to Avoid Them

Without effective payroll governance or supporting systems, small businesses are prone to common payroll errors, including:

• Discrepancies in PAYG withholding: Regularly reconcile payroll totals with year-to-date STP data and BAS totals to identify PAYG withholding shortfalls. Failure to address discrepancies may result in interest charges for backdated PAYG withholdings.
• Employee misclassification: Understanding the distinction between employees and contractors is crucial, as it impacts tax reporting and entitlements. Misclassification can lead to penalties.