An Employer’s Guide to Setting Up Payroll in Australia

Managing payroll in Australia requires a thorough understanding of national regulations and standards to ensure compliance and efficiency. In this expert guide, we’ll cover compliance, calculation, and elements along with the necessary steps to set up payroll in Australia. 

An Overview of the Payroll System in Australia 

Setting up and facilitating payroll in Australia can be overwhelming considering the number of things to consider, many of which are required by law. 

For instance, setting up payroll requires establishing a legal entity, possible registration to Goods and Services Tax (GST), and registration to Pay As You Go (PAYG), and having a business bank account. As employers, you must also understand the elements of payroll, particularly the deductions and benefits, and the rules set by the Australian Taxation Office. Furthermore, you need to make decisions about facilitating payroll. 

In this expert guide, we’ll cover everything you need to know about the payroll system in Australia. 

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Payroll in Australia: Compliance to Employment Laws and Tax System 

As with any organisation, the priority in facilitating payroll is to be compliant with the relevant legislations. In Australia, the central law that governs employment is the Fair Work Act 2009, which explains the National Employment Standards (NES), and Modern Awards. 

The NES and Modern Awards

The National Employment Standards (NES) outlines the minimum entitlements of an employee in Australia. No employer is allowed to offer terms and conditions that are less than what the NES provides. Along with the minimum wage, NES outlines matters like the maximum working hours, leave entitlements, and redundancy pay. 

Modern Awards, on the other hand, also set out the terms and conditions of employment but they are specific to an industry. Modern Awards can only build on the NES; it provides a fuller picture of the guidelines, but can not offer less favourable terms and conditions than the NES. 

For more information, you can read our guide on the Employment Laws in Australia. 

Tax Compliance

The Australian Taxation Office (ATO) is the revenue collection agency of the government. The ATO requires Pay As You Go (PAYG) withholding, where employers withhold taxes from their employees and pay it directly to ATO.

As for the reporting of the salaries, benefits, PAYG, and super contributions to ATO, there’s Single Touch Payroll (STP).  Basically, this is possible by using an STP-enabled software. Note that STP is required. 

On top of these, remember that employers need to:

• Make accurate calculations
• Thoroughly document everything, particularly the steps, deductions, and payments 
• Report timely to ATO
• Keep up to date with the updates on legislation

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Elements of Payroll in Australia: Pay and Deductions

As with any payroll system, payroll has two primary elements: compensation and benefits and deductions and contributions. In this section, we’ll discuss both in detail. 

Compensation and Benefits

As of this writing, the national minimum wage is $23.23 per hour. With the standard 38-hour workweek, this amounts to around $882 weekly. The rate is the same for casual employees, but to compensate for some of the entitlements they don’t have, they receive an additional 25% casual loading. 

Don’t forget that when it comes to wages and pay, paid leaves have to be taken into account. Examples include paid sick leave of up to 10 days annually, and 20 weeks of paid parental leave, which is combined Parental Leave Pay (PLP) and Dad and Partner Pay (DAPP). Of course, there’s the 4 weeks of annual leave that employees are entitled to. 

Other types of pay also include redundancy pay, which is required if an employee’s role is discontinued, and some allowances that are part of the contract. 

Deductions and Contributions

Both mandatory and voluntary deductions are important elements of payroll in Australia. Examples of these are the income tax, super contributions, and student loan repayments. 

Income Tax

Mandatory deductions include income tax. Here’s an updated table for income tax in Australian Residents for the financial year 2023-2024:

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And this is for the year 2024-2025:

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Note that tax rates vary for foreign residents and there’s still a 2% Medical Levy. 

Superannuation Contribution

Employees are not required to make super contributions for their retirement, but they may choose to do so voluntarily. 

For employers, however, it’s compulsory. As employers, you need to pay 11% of the employee’s ordinary time earnings.  

Student Loan Repayment

Student loan repayment is mandatory once an employee’s income reaches a threshold; it’s also collected by the Australian Taxation Office. Here’s an updated income threshold and rates for student loan repayments in Australia:

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Additional Reminders

Please remember that the payments and deductions listed here are not exhaustive; there may be additional wages and deductions depending on the terms and conditions agreed upon. Examples of additional pay include bonuses, commissions, and overtime pay. For deductions, there may be wage garnishments, voluntary contributions for insurance, etc. 

How to Calculate Payroll in Australia

How does payroll work in Australia? To calculate, the following steps have to be taken: 

• Step 1: Determine the employee’s gross pay some text
  • Hourly: Hourly rate x number of hours worked per pay period 
  • Salaried: Annual salary / number of pay period 
• Step 2:  Subtract pre-tax deductions from gross pay some text
  • For example, Salary Sacrificing Super 
• Step 3: Deduct taxes 
• Step 4: Subtract after-tax deductions some text
  • For example: membership fee to a union, wage garnishments 

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Payroll Period and Pay Stubs 

Unlike in other countries where the law specifies when and how frequent payroll should be administered, Australia has no such rules. However, it’s common to pay employees:

• Monthly, from the 28th to 30th of the month
• Bi-weekly, any agreed day on the 2nd week
• Bi-monthly, every 15th and 30th

There is, however, a regulation on when paystubs should be given. The Fair Work Commission states that employers need to provide them physically or electronically within 1 working day of pay day.  

How to Set Up Payroll in Australia 

The first step in setting up payroll in Australia is to establish a legal entity for your business. 

For payroll setup, you must take the following steps: 

• Step 1: Apply for an Australian Business Number
• Step 2: If required, register for Goods and Services Tax (GST) 
• Step 3: Register for PAYG withholding
• Step 4: Apply for a Tax File Number (TFN) 
• Step 5: Open a business bank account
• Step 6: Collect employee information
• Step 7: Choose a payroll software 
• Step 8: Set up the payroll software 

Here’s a more detailed explanation of the steps: 

^{Step 1: Apply for an Australian Business Number (ABN).} 

You can apply for ABN online through the Australian Business Register. At the same time as doing this, you can apply for PAYG.  

Step 2: If Required, Register for Goods and Services Tax (GST)

Not all businesses need to register for GST, but if necessary, it’s a requirement. To register, you can:

• Use ATO’s Online Services
• Call 13 28 66
• Have a tax or business activity statement (BAS) agent do it for you 
• Complete the Add a new business account (NAT 2954) form – order a form using our publication ordering service

For more information on GST, you may proceed here. 

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Step 3: Register for PAYG Withholding. 

In most cases, registration with PAYG can be accomplished alongside the ABN application. You can also do it online or have a tax or business activity statement (BAS) agent do it for you. 

Step 4: Apply for a Tax File Number (TFN). 

Like PAYG, you can file for TFN while completing your ABN registration. Likewise, you can do this online.  

Step 5: Have a business bank account. 

You can set up an Australian business bank account in-person or online. To open an account, you need the following information:

• Australian Business Number (ABN)
• Business name
• Primary business address
• ID documents for all owners or business partners 
• Industry type 

Step 6: Request employee information

Another important step of setting up payroll in Australia is to collect employee information. This includes their:

• Tax file number. Have them fill up their TFN Declaration Form, so you can work out how much tax should be withheld from their payments. Note that this is required for every employee. 
• Superannuation details. Ask employees to complete the Superannuation Standard Choice Form. This advises them of the fund of your choice for their super, but also allows them to nominate a fund they want. Note that as employers, you must also check their Award as there may be specifications on which fund to use; however, the employee’s choice can override this. 
• Bank details, so you’ll know where to transfer their payments. 

Step 7: Choose and payroll software

The next step is to choose a payroll software. While in some countries, using a software is optional, considering they can still choose to facilitate payroll manually, in Australia, it’s mandatory for Single-Touch Payroll. 

As such, only choose a software that’s STP-enabled and approved by ATO. After this, consider the features you require in your business. Things like customisation, scalability, and particularly accuracy in calculating payroll should be prioritised. 

Step 8: Setup the payroll software

The final step is to set up the payroll software. In most cases, but still dependent on the software you chose, the process is simple. You only need to enter your business details and employee information, which include (but not limited to):

• Employment details (job title, employment type, start date)
• Bank account details
• Pay rates and frequency
• Superannuation fund details
• Leave balances (annual leave, sick leave, etc.)
• Deductions and tax to be withheld from pay
• Allowances and benefits
• Timesheets for hours worked
• Overtime and penalty rates
• Award or enterprise agreement details

Once your payroll is set up, you are more or less ready to process your first payroll. But, don’t forget to stay on top of your payroll obligations, particularly on legislation updates. 

Some companies also choose to outsource payroll to third parties. If you decide to do this, your provider may take care of most of the steps discussed above. 

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Common Mistakes in Payroll Administration in Australia

Mistakes in payroll administration not only disrupts the cash flow in your business but can also be costly. If the mistakes lead to non-compliance with employment and tax laws, they can even result in imprisonment. As an employer, it’s best to be aware of the common payroll mistakes, such as: 

• Inaccurate record-keeping
• Misclassification 
• Undermining modern awards 

Inaccurate Record-Keeping 

Inaccurate record-keeping can ultimately lead to discrepancies in computations (ie. underpayment, payslip contravention) and can result in non-compliance. This can lead to hundreds of thousands in fines. 

Misclassification

Misclassifying an employee can lead to miscalculations (underpayment and overpayment) of their wages or tax rates. Companies that committed such mistakes can be fined with tens of thousands in fines. 

Undermining Modern Awards and NES

In Australia, employment contracts are not legally required, but when it’s present, it’s legally-binding. Of course, unless it undermines the NES and modern awards. Ignoring them can lead to legal consequences. 

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How to Avoid Costly Payroll Mistakes 

As employers, there are three important steps to take to avoid payroll mistakes that may lead to legal consequences:

• Keep abreast of the employment and tax legislations; it may be a good idea to consult a legal advisor for your payroll administration. 
• Choose a reliable and compliant payroll software.
• Conduct employment background checks on the people handling payroll in your company

Employees handling payroll must have the knowledge about the payroll system in Australia and must be skilled in using the software. These can be determined through employment history verification, professional qualifications checks, and references checks. As they are handling sensitive information and company finances, conducting credit checks should also be your priority. Finally, to reduce the risk of theft, fraud, and embezzlement, you must not skip criminal records checks. 

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