The idea of actually employing staff can seem like a novel one for a one- or two-person business that was started in a garage. Regardless, payroll is one of the many responsibilities that small business owners have to shoulder as their enterprises grow out of the spare bedroom or garden shed.
As with any crucial aspect of running a business, payroll isn’t as simple as most would like it to be. The premise is simple enough – create a system that pays staff correctly and on time, and that doesn’t cost your business the earth.
There are three basic approaches to managing payroll. The first is to create and manage payroll systems entirely in-house, from collecting employee information through to manually paying each staff member’s super. The second is to outsource the process completely to a professional – an accountancy or payroll company that has the relevant experience, but charge accordingly. The third option is a compromise between the first two – pay a consultant to help you set up a payroll framework that can be easily managed by you or a staff member into the future.
As a business owner, there are many obligations involved, both to employees and to the tax office, which must be met to keep the business from incurring any unwanted penalties. Provided you’re aware of what these obligations are, and can monitor their changes over time, then managing your payroll efficiently and effectively shouldn’t prove too much of a challenge.
Managing payroll inhouse
The first step is to decide whether payroll can be managed inhouse, or whether it’s safer to outsource the process entirely.
“You need to consider a few things here,” says Clair Couttie, human resources business partner at fibreHR. “Do you have the capability and understanding to ensure you are compliant with all the legal, tax and industrial relations issues associated with payroll?”
The main benefit to looking after payroll entirely on your own is that you have a lot more control over how it’s managed, monitored and tracked. It also means keeping tabs on the variables that pertain to each employee’s wage – superannuation, pay as you go (PAYG) tax contributions, and annual and sick leave allowances. The more employees, the more complex a task it is to manage all of your obligations to them.
“If you have payroll inhouse, you have more flexibility in terms of time to process and arrange for any manual payments. You can run the payroll when and how you want to, as you have control of absolutely everything,” says Couttie. “On the downside, if you don’t have that capability, and you don’t understand the taxation, legal, and industrial relations implications, it can be a bit of a difficult process.”
The first consideration is to make sure your business complies with the awards set out by the Fair Work Ombudsman. According to the Ombudsman, an award outlines the minimum conditions and terms of employment for a particular type of employee. It details the minimum amount a worker should be paid, depending on their job, and outlines their entitlements with regard to things like leave, tax and superannuation.
“Every award is different, and, depending on each state, different again,” says David Henderson, founder of DavidHendersonOnline.com. “Most of the states have a similar structure, because they come under the Fair Work Act these days, but certain industries and transitional components come into play.”
There are 122 different awards in Australia – you can determine which ones are relevant to your business by using the Ombudsman’s online Award Finder.
Part of the challenge of adhering to employee obligations is being mindful of how they change over time. This is easy to do if you only keep a couple of employees, but it becomes exponentially more difficult as your staff grows along with your business.
“Are you being notified of when their award increases? That could impact the amount of money that you’re actually paying your staff, if you’re not up to date with what’s happening in terms of industrial relations,” says fibreHR’s Couttie. “As a small business, you could be inadvertently underpaying your people, and contravening a whole lot of industrial relations laws.”
Another major difficulty of managing payroll inhouse is consistently and correctly documenting the figures that pertain to each employee. One incorrectly recorded detail – an error in the leave entitlements of an employee, or an incorrect PAYG amount – can snowball into considerable unforeseen costs down the track.
“A lot of the time, where people struggle is with leave accruals and the like – just tracking them and making sure the right amount of leave is being accrued according to the statutory requirements,” says Stuart McLeod, general manager of payroll at Xero. “Each employee on a salary has got four weeks leave which is accrued over the period they’re working. They’ve also got 10 days worth of sick leave. Make sure you’re deducting it as it’s taken, and tracking those records.”
Tax and superannuation
Having identified the awards relevant to your business, it’s time to consider what’s involved in actually paying them. An important part of this mechanism is managing the business’ PAYG tax requirements for each employee. For every dollar paid to a staff member, the business will have to pay a portion of tax to the Australian Taxation Office (ATO) determined by that employee’s award or salary bracket. If you’re employing casual staff, this needs to be calculated weekly, depending on how many hours each employee worked.
“Think of a small retail shop – they need to record what each person is doing each day, so that at the end of the week they can pay them the appropriate hours,” says Henderson. “As they have different rates every week, the tax also changes every week, because of the hours worked and the variable dollar figure.”
This process is much simpler for businesses that pay staff a salary instead of by the hour.
“If I think about my staff here, we never touch our pays. Every week, or every month, or fortnight, they’re paid exactly the same number, because they’re not getting overtime,” says Henderson. “All we actually do, from a practical point of view, is once a year, we set a direct debit, which happens every fortnight for the next 26 fortnights. Then, we don’t touch it.”
Failing to pay the correct PAYG, or paying it after its due date, can land you with serious penalties that rapidly accrue interest if unpaid (see here for more details).
Superannuation is another major financial responsibility for payroll managers to keep track of. The calculation of super is relatively straightforward – a constant minimum of 9%, unless otherwise negotiated in the employee’s contract. It needs to be paid by the business quarterly (the deadlines for payments can be viewed at the ATO website, here). Each employee may have their own superannuation fund, and each of these will demand its own peculiar lodgement method.
“Usually, you need to use BPay to pay into the super fund,” says Xero’s McLeod. “A lot of them have portals that you need to log into to let them know the payment for which period the payment was accrued, and who it applies to and things, so it can be a bit onerous once a quarter to go and sort all that out. Of course, there are fines if you pay it late, so you need to be careful.”
It’s unwise to rely on self-devised systems and excel spreadsheets to keep track of the many different facets of the payroll process. If you choose not to outsource to a payroll provider, it’s a good idea to invest in software that helps to catalogue the data and automate payments.
“By doing it manually, you’re probably putting your business and yourself at risk of fines,” says Xero’s McLeod. “You might not be covering yourself as much as you want to, or as much as you should.”
Accounting software like MYOB and Xero offer payroll functions, and sometimes separate, dedicated payroll programs, that can automate many of the things that managers need to keep tabs on. Other, purely cloud-based accounting systems, like Reach Accounting, offer similar services that are typically more streamlined, feature-light, and can integrate easily with existing systems by use of application programming interfaces (APIs).
“There are different levels of systems out there. Some of them track annual leave and long service leave and sick leave. The basic ones don’t do that as well, or are harder to do it in,” says Henderson. “If you’re employing only casuals, and you’re not going to be paying them annual leave, you don’t need to go to the next level of complexity. Whereas if you’re actually paying them annual leave, holidays and sick leave, you need to be able to track it. Some people would use a simple Excel spreadsheet, and if you’re under six employees, that works in some cases. But then, as you get bigger, that gets more and more complicated.”
Consulting and outsourcing
Short of outsourcing payroll entirely to a third party business, the cleverest approach is to find a consultant to help you set a system up in the first instance. This helps to rule out any bad habits early on, and sets you on the right track with regards to payroll best practices.
“If you don’t believe you have the capability to run your own payroll then you should look at outsourcing to a payroll provider. There are plenty of payroll providers who offer very cost-effective services in terms of consulting,” says fibreHR’s Couttie. “Some payroll outsource providers also offer a bit of a combination of services. They can offer quite inexpensive payroll software packages that can be run inhouse by a bookkeeper, for instance.”
The safest bet is to remove all risk of error from your own workload, and to place the entire process in the hands of a professional accountant experienced in payroll. This is often the best approach, but is also the most costly. It’s essential to do the legwork and research how much the company you use will actually manage for you. Make sure you’re getting value for the money spent.
“I would recommend that you review their coverage of service,” says Couttie. “For instance, will they alert you when award increases occur so you can review staff wages and make adjustments to ensure compliance? Do they have an advice line as part of their service offering so you can ask them questions with regards to award coverage and pay rates? Does their system allow you to automatically upload your payroll data into their system to be processed? Does the system allow for automated leave processes? Without these services your payroll provider will only be providing a transactional service with little value.”
For most small businesses, the best approach is to manage it inhouse with a professionally informed set up, and possibly some dedicated payroll or accounting software. Often this will depend on the total number of employees you have working for you.
“If you do have more than a couple of people, I would always suggest getting your accountant to help set up your payroll,” says Xero’s McLeod. “It’s much better to get it set up correctly in the first place than it is to come back and try it correct it later on. Much less costly in the long run, also.”
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