Calculate Payroll in Australia: Starting a new business is not everyone’s cup of tea. There are so many things that demand your attention and effort that people often push aside such elements that are not demanding immediate work. One of these elements is payroll.
It is a very crucial part of operating a business. Without this, your effort and professionalism mean nothing. It makes sure your business is following all the tax policies and also let your employees know that they are working in a reliable setting.
Here’s all you need to know about payroll in Australia. In this guide, we are going to dive deep into the knowledge of payroll and calculating it.
Payroll: What is it?
Payroll refers to the total amount that a business or a company has to pay to its employees on a specific time. It is basically a list of all the employees with their payments that they need to be paid.
you can also read payroll rules and regulation here
Payroll processing is very important for a business to ensure that the employees are being paid correctly and timely. Payroll manages the total payment including any allowances or deductions.
In Australia, there’s a very strict check and balance on payroll processing. There are many rules and laws that payroll covers such as the Fair Work Act 2009, the Superannuation Guarantee Act 1992 and the Income Tax Assessment Act 1997.
So, when operating a business in such a wide territory, you need to make sure you are abiding by all rules and regulations.
In order to calculate it, you firstly need to know about payroll tax.
What is Payroll Tax?
Payroll tax is actually a collection of different types of taxes which an employer has to pay on the behalf of the employer. Payroll tax is a state tax.
The employer withholds this amount from the employee’s salary and pays it to the ATO.
What does Payroll tax consist of?
It includes two things:
- Income Tax
- Medical and Superannuation contribution
The current rate of payroll tax in Australia is 5.45%.
How can a smooth Payroll understanding benefit your business?
Having a good understanding of payroll is not only about paying your employees on time or accurately. It’s valuable in many more ways!
It tells you about the payment method and frequency whether monthly or hourly wage is better. It also keeps you calculated on your business expenses and budgets. Due to this, you can know whether you can hire more employees or not.
It also adds to the good reputation of your business and its accuracy and punctuality.
Moreover, not having a proper understanding of payroll can cost you a lot of errors and this would not be beneficial for your business in any way.
What Information is Needed to Calculate Payroll?
Before we dive into the calculation process, we first need to know what information an employer needs to know about an employee.
Here’s what you need to know:
- Date of joining
- Contact information
- Date of birth
- Bank account details
- Tax file number (TFN)
- Tax deductions
- Pay details ( wages or monthly salary).
Make sure that you are updated with your employees’ most recent details.
Setting the Payroll Processing
After gaining the necessary information, here’s the setup you need to do:
- Start by registering yourself for PAYG tax. PAYG refers to the tax that your employer withholds from your salary to pay to the ATO. This can be done online. Also, it’s not only done when you have employees, you also need to be registered if you have contractors.
- Calculate the correct amount that you need to withhold.
- You will pay tax to the ATO through Single Touch Payroll– It is Australia’s initiative to specify the employer’s reach to the government. They have designed STP-enabled software for it.
- You are required to prepare a Business Activity Statement (BAS) and lodge it to the ATO.
- Further, you have to make tax summaries for each employee’s account and make sure they have all the copies of their tax documentations.
- To wind it all up, you will have to provide a summary report to the ATO which reports all your payroll activities.
About Single Touch Payroll
The Single Touch Payroll came into effect on 1 July, 2018.
This software is intended to make it easy for employers to report to the ATO. Once the details of your employees are inputted into the payroll software, the software will automatically know and notify the ATO about it.
Once you have set the software, all the information will be sent to the ATO accurately and on time. This way you can also save yourself from late penalties.
Especially while managing a business, you have so much to do, so this software can save your time from the payroll duties.
From 1 July 2021, the ATO made it mandatory for all businesses to use Single Touch Payroll software. So, now every small or big business in Australia is obliged to use it.
How to Calculate Payroll in Australia?
Now that’s the main concern. This is the most important part of the payroll processing. Firstly, you have to calculate total wages, hourly or salary, and then deduct the taxes from that amount to finalise the payment to be released.
Here’s how you can calculate your wages.
Calculating Hourly total wage
Many employers pay hourly wages to their employees. This means you have to keep a track of the regular hours worked and the overtime ones too, if there are any. Keeping a track is very important for accurate payroll calculation.
If a employee makes $16 per hour for 40 hours in a week, and 5 overtime hours, here’s how you can calculate it:
- Firstly lets calculate the wage for regular hours
The payroll formula is:
Wage rate x Number of hours worked = Gross Pay
$16 x 40 hours = $640
- Lets calculate the overtime wage
$22.5 x 5 hours = $112.5
- The gross pay for the week would be
$640 + $112.5 = $752.5
Calculating Salary total wage
Salary wages depend on the frequency you decide to pay. Some employers pay them on semi-monthly pay, which means twice per month, which makes it a total of 24 pays per year. While others decide to pay after every 2 weeks, which makes it a total of 26 pays per year.
Let’s take an example. If an employee is paid on a semi monthly basis, and makes an annual salary of $70,000, assuming the works 40 hours per week, here’s how to calculate it:
- $70,000 / 24 pay period = $2916.66
Many businesses offer many benefits to their employees in addition to their reimbursement. These are company related or personal deductions. Providing superannuation, healthcare or many other benefits are on a before-tax basis. And if there are any benefits or expenses that the employee has elected to deduct from his payment, they are on an after-tax basis.
Voluntary deductions are a great deal to lessen your taxable income and save money. In this case, the pre-tax deductions are very beneficial.
Mandatory Tax Deductions
Once all the voluntary deductions have been made, here’s the taxes part. It’s very important to understand it correctly.
The one managing the payrolls should have all the knowledge about the federal taxes such as FICA ( Medicare and Social Security) and unemployed taxes. They should keep a tab on every state tax law or local tax law. So that they apply it in their business and subtract them from their employees gross pay.
Paying your Employees
Last but not the least, the most awaited step is here. When all the things have been looked after, then the employers are able to release the payments that their employees have earned.
You can pay them either by directly transferring payment into a bank account or online payment or with a cheque. A payroll process can also help with the online payment part.
This guide has provided you with all the details you need to know about payroll and calculating it.
Many business people are so filled with their daily duties that they forget this very important task. It’s not on their priority list. But we are sure this article would’ve helped you in understanding the importance of payroll, especially in such a lawful country, Australia.
Knowing the payroll system inside out can paint a clear picture of the tax effects on your various business decisions. Therefore, staying updated is necessary.
We have done our job, now it’s time for you to do yours!