Top 10 Payroll Challenges for Small Business
This article was originally published at SavvySME.
Many small business owners think that hiring staff is as simple as having a verbal agreement with their employees 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 of 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 hourly rate. 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. Awards 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 Awards 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 agreement 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 and 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 your 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 two 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 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 and 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 a 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 payday, 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 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 setup 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 Summaries Correctly (Income Statement)
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 Summaries, (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 instead. 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.
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 is 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 businesses with these challenges.
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2022 Update: Coming in 2022 are important changes, including the removal of the $450 per month super-free threshold, stapled super funds and the statutory rate increase to 10.5%. Check our blog for further updates on superannuation changes so your business is prepared.
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