What is payroll? How do you run payroll?
Updated: Apr 22, 2021
We've noticed that a few of you are confused about what payroll actually is.
The first thing you need to know is that it's not something you can get out of. It's something you have to do if you have a business.
To help you out, we've put together this nice little blog post that will go over what payroll is, the key parts of it and how you can do it.
What is payroll?
Payroll can refer to a few things.
Your business' paid employees and their employee information
The amount your employees are paid in a pay period.
The process of calculating and distributing employee wages and taxes.
Mostly though, it is used to refer to the process. The first two parts are elements needed to run payroll.
This blog will look at payroll as the process.
Parts of Payroll
You'll need to first of all add the employees who you are paying.
You'll need to include certain information for your employees such as personal details, contact details, payment type, bank and superfund details, employment details and tax details.
Without these, you either won't be able to run payroll or your payroll will be wrong.
When you go to run payroll or complete a pay run you'll need to add in the hours that your employees have worked in that pay period.
This is important for employees that are paid on the basis of hours.
However, it's still important for employees on a salary as they need to be completing the correct amount of hours to receive the pay they are being given.
There are two types of leave: annual and sick/carer's leave.
Not all employees receive paid leave but if they are working as a part time or full-time worker, you are required to provide them with paid leave.
It's important to know what's going on with leave as it's a part of your payroll.
Your payroll will be affected if an employee has taken paid leave and not completed their regular employment hours.
Salaries and wages
You can choose on what basis you pay your employees.
A salary is a fixed amount that an employee is payed over a given time period. Often an employee is given a yearly salary.
This is then divided by the number of pay periods in the year.
The employee will then receive this amount each pay period.
A wage is based off the amount of hours an employee has worked.
As the employer, you'll set a rate of pay for your chosen employee and multiply this by the number of hours they have worked.
There might be times that an employee works more than their agreed upon weekly hours.
This is known as overtime.
Overtime pay is normally greater than the normal rate of pay.
This will need to be included when you run payroll.
There might be an occasion where you want to give your employee a bit more that's outside their normal earnings when you do payroll.
This is called a bonus.
This affects your payroll because you might not want it to contribute to superannuation and it will affect their gross earnings for that pay period.
At some point, you might also need to reimburse your employee for an expense they've had during that pay period.
This is also included in payroll as it will affect tax and superannuation.
You might also provide your employee with an allowance at some point.
This tends to be done on business trips where an employee may acquire some additional expenses because of the business.
You also will need to include this in your payroll as it can affect tax and super depending on the type.
If an employee has purchased any tax-deductible items or incurred any tax-deductible expenses, you'll need to include them in your payroll.
This is subtracted from their wages and and lowers there taxable income.
When you run payroll, you will need to deduct the taxes they have incurred in that pay period.
How much is withheld depends on their total earning and any withholding allowances that the employee might have.
Superannuation will need to be paid into an employee's super fund per pay period.
Their super earning are contributions paid on top of an employee's wages.
Employee's are guaranteed a minimum super amount from their employers but an employer may choose to contribute more or an employee can sacrifice some of their salary to go towards their super.
Net and gross pay
Gross pay is calculated during payroll and refers to the total earnings before tax is deducted.
Net pay which is also calculated refers to an employee's pay after all deductions have been made.
How to run payroll
Running payroll can be super simple.
Traditionally it was done by hand which was what gave payroll its name for being long and tiresome.
Some business owners choose to outsource their payroll by giving it to a payroll accountant to complete.
However, this can be expensive.
The easiest option in regards to both time and cost is to use a payroll software.
This, if you choose a good software, will automate most of the process for you, including payslips!
There's no way around this.
If you're Australian, you have to be using a payroll software but it's up to you whether you use it yourself or you get a professional to use it for you.
If you're looking for a free and easy solution, try Payroller.
Trust me, you won't regret it!
We've got a whole bunch of tutorials to get you started!