What is a pay run and how does it work in Australia?

In Australia, a pay run refers to the process of paying employees their wages or salaries. While ‘payroll’ is a broader term, a pay run is the act of actually remunerating your employees.

Doing a pay run involves calculating and disbursing payments to employees, including withholding taxes, superannuation, and other deductions. You also need to send payslips and undertake mandatory Single Touch Payroll reporting.

In Australia, you must pay your employees at least monthly, but you can also choose to do so weekly or fortnightly.

Pay runs and Single Touch Payroll

Before we look at the basic steps and processes involved in performing a pay run, we need to take a moment to understand Single Touch Payroll (STP).

A government initiative aimed at streamlining the reporting of payroll and tax information to the Australian Taxation Office, STP has a significant impact on how pay runs are processed in Australia.

STP requires employers to report payroll data to the ATO in real-time or each pay run, rather than through annual or periodic reporting.

Performing payroll now unequivocally requires businesses to use compliant payroll software or accounting software capable of STP reporting. The idea is that data is more accurate, and the process of payroll reporting is streamlined and more automated.

Here’s how STP affects pay runs in Australia:

·       Real-time reporting

Under STP, employers are required to report employee payment information, including salaries and wages, superannuation contributions, tax withholdings, and other payroll-related data, to the ATO, each payroll or every time you pay employees.

·       Compliance

STP is a mandatory requirement for most employers in Australia, and non-compliance can result in penalties. It ensures that employers are meeting their tax and superannuation obligations accurately and in a timely manner.

·       Employee onboarding and termination reporting

Employers are also required to report when employees are hired and when they are terminated, which means adding new employees to the payroll system and removing departing employees should be done through the STP-enabled software.

·       Superannuation reporting

Superannuation contribution information, including the amount paid to each employee’s superannuation fund, must be reported to the ATO through STP. (This ensures that employers are meeting their superannuation obligations.)

Pay runs and software

Since the mandate of STP rolled out, every business is now essentially required to process payroll and pay runs through their chosen software.

Different software packages may work differently to others, however there are fundamental steps which common across almost all payroll software systems.

While you can choose to use a simple payroll solution, many businesses opt for a broader accounting software package that handles payroll, but also performs accounting and bookkeeping functions, creating better efficiency.

How do you do a pay run?

The specific steps for conducting a pay run in Australia will depend on the software you use. However, the general steps involved in doing a pay run are as follows:

1.      Payroll preparation

Firstly, gather all employee information. You must maintain accurate records of all employees, including their personal details, employment contracts, tax file numbers (TFNs), and superannuation fund details.

2.      Make sure you’re compliant

Ensure your pay runs are compliant with the Fair Work Act and other applicable modern awards, (including minimum wage requirements, leave entitlements, and termination procedures.)

3.      Check your timesheets

To do a pay run you need to track hours and wages. This is often achieved through timesheets. Use fit-for-purpose software to record the hours worked by each employee, their salary or hourly rate, and any overtime, bonuses, or other earnings.

4.      Calculate gross pay

Determine the total earnings for each employee for the pay period, including base pay, overtime, and other allowances.

5.      Calculate deductions

You now need to deduct income tax. Based on their tax file number and the applicable tax tables, calculate the amount of income tax to withhold from each employee’s pay.

The other major deduction is superannuation. You now need to calculate and deduct superannuation contributions from each employee’s gross pay and ensure that these contributions are paid to the employee’s chosen superannuation fund.

6.      Calculate net pay

Now that you have gross pay, you need to subtract all deductions to determine the net pay. (This is what your employee will receive in their bank account.)

7.      Generate and review payslips

Now that you have net pay you need to generate payslips for each employee, detailing their earnings, deductions, and net pay. Make sure you review these for accuracy.

Importantly, payslips must be provided to employees within one working day of their payday. This is ideally sent to your employee’s email address. Penalties can apply for non-compliance.

8.      Submit payroll Information to the ATO through STP

Now that you have all your pay run information ready, check your draft pay run for accuracy and report your payroll and superannuation information to the STP reporting function in your software solution.

9.      Pay your employees

After everything is done and has been reviewed for accuracy, you need to process the pay for your employees, usually via a bank transfer to their nominated bank accounts through online banking. Make sure you know the correct payment date to make sure you pay employees on time!

10.  Keep pay run records

For future reference and auditing, ensure that you accurately record each new pay run, including payslips, payment summaries, and STP reports.

While you can achieve pay run processing on your own, many businesses use payroll software and engage with professional accountants or payroll service providers to streamline the pay run process and maintain compliance.