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23-Oct-2020 By - team

Have you wondered what payroll is?

Payroll is a word with two possible meanings. It can mean the accounting process of paying your staff – including the amounts for each person and the overall total. It can also mean the list of your paid employees.

We’ll look at both meanings in this guide because understanding payroll is all about understanding the accounting regulations that cover how and when to pay your employees.

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Payroll is an integral part of business accounting for two big reasons. First, because it’s a legal requirement to get it right, especially for tax purposes, second, if you don’t pay your employees correctly then they probably won’t be your employees for long!

So here’s what you need to know to understand payroll for your small business.

STP for advisors – 5 things to discuss with staff

For a seamless and stress-free implementation of Single Touch Payroll (STP) with your practice’s clients, make sure you get your staff on board first.

With the introduction and roll-out of Single Touch Payroll (STP), your staff need to be well-versed and enthusiastic about the change. Their confidence and the way they embrace it will, in turn, have positive benefits for client engagement, resulting in their ongoing patronage.

They need to have a good understanding of:

  • What STP is
  • The STP-enabled products your practice is recommending
  • Your practice’s STP implementation and rollout plan

Set the STP scene for your staff by educating them first. You may also consider making a staff member of your practice’s STP Champion. This will make sure you remain focussed on other areas of your way and that you’re sending a message of confidence and empowerment to your entire team.

Here are my five must-have conversations to have when it comes to STP education for your team.

  1. What is STP?
  2. Why is the ATO introducing STP?
  3. How does STP work?
  4. How will the ATO and others use your STP data?
  5. What benefits will STP bring to your practice and your team?

 

What is STP?

STP is a new way your clients will report their payroll information to the ATO.

For employers with 19 or fewer employees, STP officially started on 1 July 2019.

The ATO recognise that accountants and bookkeepers will often be helping their clients transition to STP and have allowed you until 30 September 2019 to help make the tradition as smooth as possible for everyone.

Suppose you’re unable to get all clients reporting by 30 September. In that case, you can apply for a deferral (and I’ll share how to do that in a later article and why it actually may be a good strategy for individual clients).

What does payroll mean for small business?

At a basic level payroll is giving with one hand and taking with the other. You need to:

  • pay your employees the right amount at the right time, every time (according to their contract and in line with employment law)
  • make accurate deductions from their pay for things like tax and retirement

As you can imagine, there are a lot of rules around payroll. You have to comply with a lot of government requirements.

What’s involved in payroll compliance?

To comply with government regulations, you must:

  • make accurate payments and deductions
  • provide your employee with a detailed payslip that shows what you have done
  • file and pay taxes on time 
  • pay other deductions – such as retirement contributions – to the right places
  • hold onto payroll records for at least seven years

For this guide, we’ll assume you know how to work out your employee’s pay. We’ll take you through deductions and reporting requirements.

Why is the ATO introducing STP?

There are three main reasons:

  • It creates a more level playing field (Australia’s has an estimated black economy of $50 billion)
  • It helps protect employees’ superannuation entitlements (there’s approximately $2.85 billion of unpaid employee superannuation guarantee)
  • The ATO wants to interact with businesses in a more ‘contemporary and digital’ way

How does STP work?

When clients process their payroll, their STP-enabled software will send the ATO:

  • Gross wages
  • PAYG withheld from wages
  • Superannuation is payable for each employee.
  • Then, when your clients pay their employees’ age to their super funds, the super funds (excluding self-managed superfunds) will report to the ATO:
  • The date your client made the payment
  • The amount of superannuation your client paid

How will the ATO and others use your clients’ STP data?

The ATO will analyse and compare information it receives from employers and employees’ super funds and will identify anomalies, making contact as necessary.

Specifically, the ATO will be able to see whether or not the employer has correctly paid their employees and whether payments have been made promptly.

The ATO will also be sharing information with various government departments.

Each pay, your employees’ myGov accounts will be updated, and they will be able to see their year-to-date for:

  • Gross wages
  • PAYG withheld from wages
  • Superannuation payable
  • Superannuation that you have paid to their superannuation fund

Over time, more and more government departments will be able to use your STP data for compliance and statistical purposes.

Initially, the ATO will be sharing STP data with Centrelink, Human Services and Home Affairs.

Five areas of the law to understand about payroll.

accountant bookkeeping people

Detailed regulations about payroll will vary from one jurisdiction to another, but there are some areas of the law that are likely to be in force wherever you run your business:

  1. Taxation
  2. Any business with staff must withhold the proper payroll taxes from employees’ pay packets and pay the appropriate government taxes. In short, you’re acting as the tax collector for your employees.
  3. Retirement plans and healthcare 
  4. You may also have to manage payments for things like social security and healthcare, and this will vary from country to country. That means withholding the right amounts from your employees’ pay and, usually, paying employer’s contributions too. Sometimes these are fixed charges; sometimes they’re a percentage of each employee’s salary.
  5. Fines and penalties
  6. Suppose you don’t pay the necessary taxes. In that case, you could receive a hefty fine or another penalty, so it’s essential to calculate the amount of PAYG, payroll tax and Superannuation Guarantee Contributions (SGC) owed and pay them on time.
  7. Reporting
  8. Employer obligations such as PAYG, payroll tax and SGC must be reported to the appropriate government agencies, and your employees, in writing. This might be done weekly, monthly or yearly, depending on local regulations.
  9. Payroll is for employees.
  10. Your payroll legally includes the people you directly employ. It doesn’t usually have independent contractors or freelance workers, or anyone who invoices you through their own business. If you’re ever in doubt about who’s on your payroll and who isn’t, talk to your accountant.

In certain countries, you may have other obligations too, such as paying funds towards unemployment cover, or checking that each employee is legally allowed to work in your country.

What are payroll deductions?

Deductions are amounts of money you take from your employee’s earnings before paying them. Premises cover things like:

  • contributions to employee retirement schemes 
  • employee income tax and taxes on benefits
  • payments such as child support

Your employees might also have arranged for deductions to come directly from their pay for additional healthcare insurance, retirement schemes, or charitable donations. You can learn more about these deductions – including the order you make them – in our guide to hiring staff.

What benefits will STP bring to your practice and your team?

I believe STP is a gamechanger for accounting and bookkeeping practices, and it will give you an enormous opportunity to re-design and contemporise your approach.

In addition to streamlining processes in your practice and improving your practice’s profitability, STP has a whole heap of added benefits, including giving you and your team the freedom and flexibility to work away from the office.

I’ve listed several benefits for STP below so that you can choose the best few that will resonate with your staff and clients alike:

  • It’s a reason to introduce clients to a more contemporary way of doing business, such as moving to the cloud.
  • It’s a perfect way to get clients more engaged with their numbers and to start to take more responsibility for them.
  • It’s an opportunity to have a more streamlined practice (no more shoeboxes!)
  • It’s an opportunity to have better quality clients and to attract better quality new clients. (Start them off in the cloud and with sound accounting and bookkeeping habits, and there will be more time for you to provide value-added services. Plus, it’s more likely clients will contact you for higher-level advice.)
  • STP is an opportunity to shift towards a better quality of work for your team to be working on – a way of work that’s so much more rewarding and betters utilises their skillsets
  • Less stress for you and your staff, as it is more likely, clients will keep their data up to date, and they won’t be bringing in their work at the last minute.
  • It will potentially reduce the need for client payment arrangements, as they will be more aware of their PAYG and SG obligations.
  • It’s an opportunity for your staff, as they will have less of the headache and non-rewarding jobs assigned to them.
  • It reduces the chance your clients’ employees will miss out on their super
  • It reduces the chance that your clients will fall behind with their ATO debts as the ATO will have mechanisms in place to contact them earlier than ever before
  • It’s an opportunity for you to overhaul your practice, to reset your practice rules and even reset your client base by removing non-profitable or non-rewarding task and clients.

After the initial groundwork is done and your team now understands STP and all that it entails, you’ll be ready to move onto the more practical, ‘next steps’ part of your implementation plan and rollout.

You will need to decide on the list of STP products you will be recommending, your STP internal processes and your pricing structure.

Chances are your team are so excited about the opportunities and positive changes it will bring to your practice, they’ll be able to allay any fears your clients will have about the impending changes. You will be lodging your first STP reports in record numbers.

Reporting to the ATO

As an employer, you will collect taxes from your employees for the tax office. It would help if you handed over those taxes when scheduled, and file reports to the tax office regularly. These reports show them you’re paying and taxing your employees correctly.

Under Single Touch Payroll (STP), you’ll report to the ATO every payday how much your employees were paid, how much tax was withheld and what contributions were made to superannuation. This report needs to be lodged through your accounting or payroll software, or you can get a registered agent or payroll service provider to do it for you.

How to choose payroll software

Some accounting software comes with payroll features built-in or as an add-on option. There are also stand-alone payroll applications available. Which one you choose will depend on the requirements of your specific business, but here are some points to bear in mind:

  • Work with what you have.
  • Does your business already use accounting software? See if it has in-built payroll or if you can add a payroll application to it. If not, it’s time to upgrade.
  • Find out if it is easy to use
  • Choose a payroll package or payroll accounting software add-on that your accountant or financial advisor can also use. Keep it simple to avoid swapping files in different formats.
  • Go online and use the cloud.
  • These days it makes sense to use cloud-based accounting and payroll software. You can access your payroll information anywhere and at any time, and share data with trusted partners. Plus there’s less IT support work required.
  • Make sure it can grow with you.
  • You may only have one or two employees now, but no doubt you’re aiming high. With scalable payroll software, you won’t have to change systems as your company grows.
  • Ensure it can do real-time recording
  • Make sure the payroll application you choose keeps accurate, up-to-date, real-time records of payroll operations.
  • Get recommendations
  • Ask your accountant or bookkeeper, financial advisor, bank, business partners and owners of similar companies to yours. See what they recommend.
  • Check the reporting requirements.
  • Check to see what types of report are available with your chosen accounting or payroll package. Ask your accountant which ones might be useful for your business.

As well as these ideas, look into other useful features such as automated calculations of taxes, direct deposit management and timesheet handling. Think carefully about what you’ll need and choose wisely because if you get it wrong, it can be hard to migrate from one payroll system to another.

Payroll options for small business

The more employees you have, the more complex your payroll usually gets, especially if you have a mix of employees on hourly wages and salaries. Throw in some contractors, staff on commission, overtime, expense claims, allowances, and leave entitlements, and your payroll can be different every time you run it. 

Financial Services Professional Team

There are different ways of handling your small business payroll:

  • Pen and paper, or spreadsheets: Businesses prefer these methods with a handful of employees. However, spreadsheets are often not accepted by the tax office.
  • DIY software: Apps can calculate pay and deductions and even fill out tax forms for you. You’ll need to make the payments yourself, however.
  • Payroll service providers: You can outsource your payroll to experts. Some providers will do absolutely everything for you. Others will help with specific tasks.
  • Accountants and bookkeepers: You don’t have to go to a specialist payroll company. Many accountants and bookkeepers can do payroll for you. 

A six-point checklist for a significant payroll

Having the right software is only part of the payroll solution. Now you need to use it properly! Setting up your payroll system properly at the start can save you a lot of time and headaches later. Here are some guidelines:

  1. Register your business
  2. Ensure your registered business number is included in all your payroll documentation and any forms you submit to the tax office
  3. Record your employees’ data
  4. Enter all your employees’ information in your payroll system, such as their name, address, welfare ID number and deductions (if taxes need to be taken out). Also include contact details, salary, leave entitlements, overtime and any other compensation. Check local regulations to find out what data you must have.
  5. Do the paperwork
  6. Make sure your staff complete all necessary tax and superannuation forms and return them to the tax office. Do the same with your records.
  7. Decide on payment periods.
  8. How often will you pay your employees? It might be weekly, monthly or fortnightly.
  9. Keep up to date
  10. Plan on having payroll information updated regularly. Do this yourself or get a bookkeeper or your accountant to do it.
  11. Set up an archive
  12. For records that need to be kept for several years, think about how you’ll archive them. Good payroll accounting software will do some of this for you, but you’ll still need some paper archives for documents like tax forms.

Understand what to do when your payroll changes

Your payroll isn’t fixed – it will vary as you hire new employees. Whenever a new employee joins your business, make sure all the correct government tax documentation is completed and filed.

Payments to the people on your payroll will vary too, and you’ll need to include them in your system in different ways. Some examples include:

  • Salaried worker
  • Paid a fixed salary for each pay period.
  • Regular hourly or casual employee
  • Paid an hourly rate for a certain number of hours each week.
  • Commission
  • Paid for services rendered, products or services sold, usually on a percentage basis.
  • Bonus
  • Paid for good performance over and above expected levels.
  • Supplemental wages
  • A catch-all term that includes bonuses, commissions, overtime pay, terminations and back pay.

Archive your payroll records

The government will want you to keep payroll records for seven years. These records should include the following information for each employee:

  • Name, address and tax file number (TFN). Check this according to your country’s local regulations.
  • Date of hire
  • Date of termination (if not still employed by you)
  • Amounts and dates of all wage, annuity and pension payments
  • Copies of all relevant forms supplied to (and by) the employee
  • Details of sickness or injury payments, including dates, amounts and who made the payments
  • Dates and amounts of tax deposits you made
  • Copies of returns filed and confirmation numbers.
  • Records of fringe benefits and expense reimbursements provided to your employees.

There may also be other information that you’re legally obliged to keep. Check with the Australian Tax Office (ATO) to find out.

Payroll is your responsibility to get right.

You might choose to handle payroll operations yourself in-house, or you might decide to outsource them to an accountant or payroll company. Either way, business owners are responsible for keeping accurate records and filing them with the tax office. So it’s essential to take the time to get it right.

You can make life easier for yourself by choosing the right payroll accounting software and setting it up properly. Get whatever help you need from your accountant, the ATO and Fair Work Australia to make sure this is done correctly. Putting in some effort now will save you tons of time and expenses as your business grows and you take on new employees.

Guest post by : team Form -

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