Small Business Payroll: 10 Things to Consider

  • Hiring employees, especially for small businesses, isn't as easy as it sounds. It's not only based on agreeing to the same working terms.
  • When it comes to hiring employees, there's a lot of responsibility and factors to consider for your company's payroll, and that itself bring out challenges.
  • Learn about these 10 points to consider for your small business payroll challenges and hiring employees will never in the shades for you any

payroll challenges

Many small business owners think that hiring employees is as simple as having a verbal agreement with their employee about the number of hours of work and rate of pay, and then entering their details into payroll. Hiring employees professionally and correctly requires a fair amount of initial preparation - an understanding about industrial relations and some good business processes.

1. Awards

Many employers are not aware that roughly 80% of employees in Australia are covered by a Modern Award. The ones that do know often say that they pay above the Award. When I ask them which Award they’re paying above, they usually say that they have no idea! One of the important things to understand about Awards is that they specify a lot more than just the minimum wage per hour. They specify the other conditions such as loadings, allowances, overtime, the frequency of payment, (such as weekly, fortnightly or monthly), termination, the threshold from which superannuation is payable, your choice of default superannuation funds and standard hours of work.

Award wages fall into two broad categories – industry Awards and occupation Awards. You first need to establish whether the work that your employees perform is covered by an industry Award. If not, then an occupation Award may apply. It is also possible for different staff to be covered by different Award wages in the same company. You can call Fair Work Australia to get help establishing which Awards apply to your staff.

2. Employment Agreements

After you’ve established which Award(s) apply to your employees, it’s a really good idea to have written employment agreements. It’s easy to underpay your staff without one. For example, paying an employee $30/hour when the Award might state a minimum rate of $20/hour plus loadings and allowances without having an employment agreement in place will mean that the employer is underpaying the employee.

The employment contract needs to state that the hourly rate is in full satisfaction of any other entitlements. In addition, having a written agreement in place means that the employer covers themselves in other areas such as expenses and deductions, employee conduct, confidentiality, conflicts of interest, intellectual property, employer property and termination.

3. Compliance with Workers’ Compensation Insurance & Payroll Tax

An employer needs to ensure that they have a workers’ compensation insurance policy in place for their employees. If the business is expanding, it’s also important to update the insurer regarding anticipated increases in annual payroll, as the insurer will issue penalties for underpaying during the year. The employer also needs to pay payroll tax once payroll exceeds a certain threshold, which is a percentage tax on certain types of remuneration items over a certain threshold. The thresholds and tax rates vary from state to state. In addition, make sure that all contractors are reviewed, as both workers’ compensation and payroll tax may need to be paid for some of them.

4. Superannuation Obligations

Superannuation applies to ordinary time earnings. This doesn’t just apply to gross salaries and wages, but it can also apply to bonuses, commissions, allowances and loadings. In addition, you may also need to pay superannuation for contractors that are sole traders, depending on the nature of the working arrangement. Even if you call your worker a contractor because they’re invoicing you, because you use them sporadically or it’s common in your industry, the ATO may still consider them an employee for superannuation purposes. The ATO has an online contractor decision tool that can assist you in determining this.

It’s also very important to pay superannuation on time for 2 reasons. Firstly, super that’s paid even a day late is subject to ATO-mandated penalties, interest and a heap of paperwork. Secondly, the director of the company becomes liable for any late super, penalties and interest not paid for by the company.

5. Default Superannuation Fund

Every employer needs to provide a choice of superannuation fund to their workers, which includes both hiring employees and applicable contractors. If the worker does not select a fund, then the superannuation contributions need to be paid somewhere, and this is where the default fund comes into play. The default fund needs to be selected by the employer. It must be one of the default super funds listed in the applicable Award.

6. Record Keeping & Pay Slips

It is mandatory for an employer to keep certain payroll records for a period of 7 years. This includes general records such as the employee’s name, commencement date and basis of employment plus pay records, leave records, hours worked including start and finish times for non-salaried employees, employee choice of superannuation fund, super contribution and payment details and termination records. These records need to be secured to ensure privacy. The maximum penalty for each contravention for a company is currently $2,550. Pay slips need to be provided to employees within one working day of pay day, even if they are on leave and certain information needs to be included. Check the Fair Work Ombudsman website for specific details.

7. Correct Payment of Penalties and Overtime

Many industries have working hours outside standard business hours. The applicable Award will more than likely specify loadings, which are additional payments that need to be paid to employees for starting or finishing at certain times of the day. Overtime is also payable for employees working in excess of the maximum standard week of 38 hours, but refer to your Award(s) for specific guidance and applicability.

8. Segregation of Duties

Where a business has a bookkeeper handling the payroll processing, it is an extremely good idea to have a segregation of duties matrix to avoid fraud. This is where one person is responsible for preparing the payroll and another person is responsible for checking and paying the payroll.

9. Taxing Correctly

Although small business accounting software makes it very easy to tax employees correctly for standard pays if the set up is correct, it isn’t capable of correctly taxing unusual payments such as bonuses, commissions and terminations. These scenarios can lead to overtaxing and potentially under-taxing your employees by a significant amount, depending on the circumstances. The tax needs to be calculated manually in these situations and then overridden in the accounting software. Although your employees may appreciate getting a tax refund, when they lodge their tax return, they may be somewhat unimpressed if they end up owing tax through no fault of their own.

10. Preparing Payment Summary Correctly

If certain payments to employees are not set-up and taxed correctly, it may mean that you are taxing an employee for a payment that is actually tax free. If this is then reported incorrectly on the annual Payment Summary, (formerly Group Certificates), then they may not even get a refund as the nature of the payment may be incorrectly classified and therefore go completely undetected. The employee might end up losing money that belonged in their pocket, but instead it ended up going to the ATO. Correct payroll set up for all types of pay items is critical to ensure that the payments made for various types of remuneration are reported accurately in the payment summary.

The industrial relations system in Australia is inarguably complex. There are significant demands placed on business owners to comply with numerous regulations. However, understanding the rules of the game and structuring your processes to ensure compliance are not that difficult if you take the time to learn and understand or enlist the help of some payroll and HR specialists. There are many around who are geared specifically to assist small business with these challenges regarding hiring employees.

How do YOU overcome payroll challenges?

Carmen Morris


I spent 12 years working as a bookkeeper/accountant for family businesses ranging from 2 - 600 employees. I began my own bookkeeping business in January 2013 specialising in Xero accounting software providing bookkeeping and add-on software solutions and we now service clients with up to 100 employees Australia wide.

Comments (2)
Jeff Gordon

Jeff Gordon, Principal at Prestige SME Business Solutions

Well written Carmen, one additional Tip is to implement Fraud Prevention Controls especially in the Payroll Department such as compulsory holidays, 2 level bank transfers authorisation and independent random audits. A Payroll Manager at Clive Peters In Brisbane a few years ago had complete control of this function and stole $20 million. Unfortunately, not long after Clive Peters closed down but the good news was that a fair chunk of the money was recouped as it was mainly invested in properties!

Himanshu Mishra

Himanshu Mishra, Team Leader at TechZest Web Solutions Pvt Ltd

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