Common payroll mistakes and how to avoid them

Managing your payroll is an important function for a small business. It ensures your employees are paid correctly and on time, creating a positive work environment.

But, payroll mistakes can happen, leading to potential financial issues, legal complications and unhappy staff.

Here are five common payroll mistakes and how to avoid them:

1. Misclassifying your employees

Classifying your employee incorrectly as a subcontractor is a common error. This can result in problems with superannuation payments and result in them missing out on other entitlements like leave accrual.

The Australian Taxation Office (ATO) has strict guidelines to determine how to classify an employee and what tax and other payments are linked to each type of staff member. Misclassifying can result in penalties, back payments and possible damage to your business’s reputation as an employer.

Familiarise yourself with the relevant guidelines set out by the ATO and the Fair Work Commission to ensure accurate classification between subcontractors, casual workers, and part- or full-time employees. Check with your accountant if you’re unsure.

2. Incorrectly calculating superannuation

Superannuation is a critical component of employee remuneration. Employers must make sure you calculate and contribute the correct amount to employees’ superannuation funds. And, make sure you are paying the right fund, as well.

Errors can occur due to incorrect earnings base calculations or failing to include all eligible payments. The superannuation guarantee (SG) is also due to increase to 11.50% on 1 July 2024 and 12.00% on 1 July 2025, so you must stay informed about the current rate.

3. Neglecting leave entitlements

Employees are entitled to various types of leave, including annual, personal and long service leave. You must accurately calculate and track these.

Errors in leave calculations can lead to disputes, possibly with the Fair Work Ombudsman, and financial liabilities. It’s important to be familiar with the Fair Work Act 2009.

4. Not understanding pay-as-you-go (PAYG) tax obligations

PAYG refers to two distinct but related concepts in payroll:

PAYG withholding: An employer withholds a portion of income tax from their employees’ salaries or wages and remits it to the ATO on the worker’s behalf. This is a prepayment of the employee’s annual income tax liability.

PAYG instalments: For businesses and individuals with significant business or investment income, PAYG instalments are quarterly prepayments of estimated income tax throughout the year. This helps avoid a large tax bill at the end of the financial year.

It’s important to note the difference: PAYG withholding applies to employee income tax, while PAYG instalments are for businesses and individuals managing their own income tax obligations.

5. Failing to meet single touch payroll (STP) obligations

STP is a mandatory online reporting system that requires businesses to report employee salary and tax information to the ATO after each pay cycle.

Failing to meet STP requirements can result in penalties payable to the ATO or delayed processing of tax refunds for your employees. Non-compliance can also trigger alarms at the ATO, leading to you being audited.

Tips for a smooth payroll system

Staying informed is key to making sure you are covering all your tax, superannuation and payment obligations. Resources like the Fair Work Commission and ATO are both helpful.

Consider investing in payroll software that automatically calculates, ensures compliance and streamlines record-keeping.

Maintain clear and consistent records throughout the financial year. This includes personal and payment details for your staff, pay slips and timesheets. It is recommended you hold on to these records for at least seven years, in case you need proof of something for the ATO.

If you’re unsure or want to simplify your payroll, reach out to an accountant who can help you through the complexities of managing your business’s finances.

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