What Are the Main Steps Involved in Payroll Processing?

28 Mar 2024

Payroll processing requires companies to perform a series of crucial steps to ensure that employees are compensated accurately and in compliance with relevant regulations. In this guide, we’ll delve into these key phases of payroll management, from onboarding new employees and tracking their work hours to calculating wages and ensuring tax compliance. We’ll also highlight the importance of professional payroll services in achieving seamless payroll processing.

Importance of payroll processing

Payroll processing ensures employees receive proper compensation in line with the national workplace regulations, including minimum standards, modern awards, the national minimum wage, and superannuation obligations. It is essential for businesses to efficiently and accurately manage their payroll processes to remain compliant with the Fair Work Commission, avoiding potential penalties and protecting their reputation. To ensure a streamlined and smooth payroll process, companies usually entrust professional payroll services providers to perform the relevant tasks.

Employee Onboarding and Documentation

The very first step of payroll processing begins with integrating a new employee into the company, which includes document collection, paperwork submission, and compliance assurance:

  • Employers are required to keep and maintain accurate employee records and provide payslips to employees in Australia. This includes gathering essential personal and employment details, such as tax file numbers (TFNs), superannuation fund details, and other relevant documentation.
  • Employers must comply with the TFN declaration and superannuation requirements when onboarding new employees. This involves verifying that the TFN declaration forms are completed accurately and that the superannuation contributions are made in accordance with the regulatory obligations.
  • Once the necessary information and documentation are collected, employers need to accurately set up employee details in the payroll system, including recording salary, wages, bonuses, deductions, and other relevant information for each employee.

Time and Attendance Tracking

Next step is to ensure that time and attendance tracking is in place, which is a critical component of payroll processing that encompasses various essential functions to provide accurate and fair compensation for employees. There are many different payroll services companies that can help implement a system to track employee work hours and attendance, such as the use of time clocks, mobile apps, or online systems to:

  • Record when employees start and end their work shifts accurately.
  • Record and verify data such as overtime and leave, capturing data on regular work hours, overtime, and any leave taken by employees.
  • Help identify and resolve any inconsistencies in employee time records, such as missed punches or unauthorised overtime.

Payroll processing services often include automated time and attendance solutions, scheduling, and payroll integration to streamline workforce management and ensure accurate payroll and compliance.

Calculating Gross Wages and Deductions

After getting all the necessary information on employee attendance, leaves, and work hours, employers will next calculate gross wages and deductions in payroll processing. The gross wages are determined based on employee hours worked and applicable rates. This includes the base salary or hourly wages, as well as additional earnings like bonuses, commissions, or overtime pay. To ensure accurate calculation of gross pay, the Australian Taxation Office (ATO) provides a gross pay estimator tool to help employers.

To calculate net pay, various deductions are subtracted from the gross pay. These deductions typically include federal, state, and local income taxes, superannuation contributions, Medicare taxes, and any voluntary deductions like union dues or charitable contributions. Employers are responsible for deducting these amounts and remitting them to the relevant authorities.

Additionally, employers should also stay informed on legislative changes and seek legal and professional services to ensure compliance with any updated regulations surrounding payroll processing.

Tax Withholding and Reporting

To ensure compliance, employees should provide their TFN and complete a declaration to influence tax withholding. They can use ATO tax tables, payroll software, or services to calculate accurate withholding based on earnings and other factors. The following is a tax table provided by ATO for employers to calculate the income tax in 2023-2024:

Taxable Income Range Income Tax Calculation
$0 to $18,200 No tax
$18,201 to $45,000 19 cents for every dollar above $18,200
$45,001 to $120,000 $5,092 plus 32.5 cents for every dollar above $45,000
$120,001 to $180,000 $29,467 plus 37 cents for every dollar above $120,000
Above $180,001 $51,667 plus 45 cents for every dollar above $180,000

Note: These calculations do not account for the Medicare levy, which is an additional 2%.

Depending on business size and Pay As You Go (PAYG) amounts, employers also must remit withheld taxes to the ATO monthly or quarterly, aligning with the PAYG system. PAYG system is a method of paying income tax in instalments to help employers fulfil their tax obligations, allowing employers to withhold a portion of their employees’ tax on each payment so it can be easier for employees to manage their tax liabilities during the year. Employers must apply for PAYG withholding systems prior to withholding tax from payments made to their employees and companies.

Additionally, in terms of tax reporting, the transition to Single Touch Payroll (STP) service by the ATO has streamlined reporting. Employers now report wages, taxes, and superannuation data to the ATO during each payroll cycle, allowing employees to access their information online, and eliminating the need for physical payment summaries.

Superannuation Contributions

Superannuation contributions are typically a key component of payroll processing and its related services, ensuring employees’ retirement savings grow with each pay cycle. Employers must:

  • Calculate contributions at a legislated rate of an employee’s gross earnings, which includes all regular wages and most bonuses. This rate, currently at 11%, is on an incremental rise, aiming to reach 12% in the coming years, demonstrating a commitment to enhancing retirement savings for the workforce.
  • Comply with Superannuation guarantee (SG) obligations, which necessitates the choice of compliant superannuation funds for contributions and adherence to quarterly submission deadlines to avoid penalties like the Superannuation Guarantee Charge.
  • Make timely fund payments. Employers are tasked with ensuring contributions are made to the nominated superannuation funds by the due dates each quarter. This process requires diligence and efficiency in managing payroll systems to safeguard employees’ financial futures.

Payslip Generation and Distribution

After making the calculations of superannuation contributions, the creation and distribution of payslips is the next fundamental step. This is to ensure the employees’ compensation is reflected during the process within payroll management. It includes the following components:

  • Providing detailed records of each pay period, including an itemised list of gross wages, taxes withheld, superannuation contributions, and any other deductions, leading to the net pay. These payslips serve as an official record for employees, detailing their compensation and deductions.
  • Ensuring timely distribution, whether through digital means or in print, within one working day of payment. This practice not only aligns with regulatory standards but also fosters a transparent and trustworthy relationship between employers and their staff.
  • Enhancing financial awareness among employees by clearly outlining their earnings and deductions, aiding in personal financial planning and management. The inclusion of superannuation contributions on payslips further highlights the employer’s role in contributing to the employee’s future financial security.

Payment Processing

Effective payment processing is the very core of all payroll operations. Usually, payroll services include the following parts to ensure streamlined processing for the companies:

  • Secure and efficient transfer of wages through methods like direct deposit, which is preferred for its reliability and speed. This ensures employees receive their earnings promptly and without error, reflecting the organisation’s reliability.
  • Accuracy in payments for wages, bonuses, and other entitlements is paramount to fulfilling contractual obligations and maintaining employee satisfaction. This step involves meticulous checking and verification processes to ensure every payment is correct.
  • Financial reconciliation involves aligning payroll transactions with the organisation’s financial records. This critical step ensures that all payments are accurately recorded and reconciled, facilitating straightforward financial audits and reporting.

Recordkeeping and Compliance

It’s important also for any employer to maintain payroll integrity; effective recordkeeping services and adherence to regulatory standards must be in place to facilitate it. To ensure this, employers should:

  • Provide detailed documentation for each employee, including agreements, pay records, and contributions, and it must be meticulously maintained. This not only complies with regulatory requirements but also supports the organisation in the event of audits or disputes.
  • Conduct regular audits to assess the accuracy of payroll processes and the integrity of the recordkeeping practices. These audits help identify discrepancies early, allowing for timely corrections and continuous improvement in payroll management.
  • Maintain data privacy, protecting sensitive information from unauthorised access. This commitment to confidentiality underscores the organisation’s dedication to ethical practices and compliance with data protection laws.

End-of-Year Reporting and Compliance

Finally, employers must perform critical reporting and compliance tasks during the end-of-year period, such as:

  • Submission of final reports through streamlined systems like the STP, which automates the reporting of tax and superannuation information to the tax office with each payroll event. This replaces the need for manual payment summaries for employees, simplifying the end-of-year reconciliation process.
  • Conduct thorough reconciliations to ensure all payroll activities are accurately captured and reported. This includes a detailed review of superannuation contributions and tax withholdings, ensuring that the organisation’s financial reports accurately reflect its payroll activities.
  • Finalising STP declarations signifies the completion of the financial year’s payroll reporting, confirming the accuracy and completeness of the data submitted. This critical step ensures that employees can confidently file their tax returns, relying on the accuracy of the payroll data provided throughout the year.

How can BoardRoom help you?

BoardRoom offers reliable payroll services in Australia, designed to drive workplace efficiency and ensure compliance with complex payroll legislation. Our Australian-based payroll team brings deep expertise, a compliance focus, and award-winning technology to businesses of all sizes. By outsourcing payroll services to BoardRoom, your company can benefit from efficient, accurate, and fully compliant payroll processing, allowing employees to focus on more critical tasks. With our commitment to providing accurate and timely payments, lower compliance risks, access to regional and local payroll expertise, and advanced reporting capabilities, BoardRoom helps businesses make better-informed decisions and take their operations to the next level.

We provide payroll outsourcing services in multiple countries across the Asia-Pacific region, offering flexible payroll solutions and comprehensive support for local statutory obligations and filings. Partnering with BoardRoom and leveraging our payroll technology and services, such as the Definitiv payroll and HR software, can simplify payroll and HR administration services, streamline processes, and empower businesses to concentrate on their core activities. Talk to BoardRoom today to find out how our payroll services can help your business.

Contact BoardRoom for more information:

Tom Bloomfield

General Manager, Growth & Partnerships

+61 2 9290 9617