How Does Outsourced Payroll Work in Australia?

What payroll outsourcing means

Outsourcing payroll means engaging an external provider to process your pay runs and the reporting that surrounds them, rather than doing it in-house. The employment relationship does not change: your staff remain your employees, and you remain the employer for legal and tax purposes.

In most Australian small businesses the arrangement covers regular pay runs, PAYG withholding calculations, Single Touch Payroll reporting to the ATO, superannuation guarantee preparation, leave balance maintenance and payroll reports for your accounts.

What information the employer provides

The quality of a payroll service depends almost entirely on the quality of the information it receives. At onboarding, a provider will usually ask for:

• Employee details: full name, address, date of birth, start date and contact details
• Tax file number declarations and the tax treatment each employee has elected
• Superannuation fund details, including any employee choice-of-fund nominations
• Employment type for each person: full time, part time, casual or fixed term
• The pay rate or salary, and the award, enterprise agreement or contract it is based on
• Pay cycle and pay dates: weekly, fortnightly or monthly
• Opening leave balances and any accrued entitlements being carried across
• Year-to-date payroll figures if you are changing providers or systems mid-year
• Access to your payroll or accounting software, or agreement on which system will be used

The payroll processing cycle

Once set up, each pay period follows a predictable rhythm. A typical cycle looks like this:

1. You submit timesheets, hours, approved leave and any changes such as new starters, terminations or rate changes by an agreed cut-off.
2. The provider processes the pay run, calculating gross pay, allowances, deductions, PAYG withholding, superannuation and leave accruals.
3. A draft pay run is sent to you to review and approve. This is your control point — check unusual hours, new employees and one-off payments here.
4. Payslips are issued to employees and the payment file or payment instruction is prepared for your bank.
5. Single Touch Payroll information is reported to the ATO on or before the day employees are paid.
6. Payroll journals flow into your accounts, and superannuation is prepared for payment by the applicable due date.

PAYG withholding

Employers are required to withhold tax from salary and wages and report and pay those amounts to the ATO. A payroll provider calculates the withholding for each employee based on the information in their tax file number declaration and the ATO withholding tables built into the payroll software.

Those withheld amounts are reported through your activity statements and paid to the ATO according to your reporting cycle. Because PAYG withholding is money held on behalf of the ATO rather than working capital, it is worth keeping it visible in your cash planning rather than treating it as available cash.

Single Touch Payroll

Single Touch Payroll (STP) requires employers to report salary and wages, PAYG withholding and superannuation information to the ATO each time they pay employees, using STP-enabled software.

Where payroll is outsourced, the provider generally lodges the STP report on your behalf as part of each pay run, and completes the end-of-financial-year finalisation declaration so employees can see finalised income statements in their ATO online services.

Late or missed STP reporting is one of the more common payroll problems we see, and it is usually a symptom of a pay run being processed outside the normal system rather than of a deliberate decision.

Superannuation

The superannuation guarantee requires employers to make contributions for eligible employees to a complying fund. Payroll processing calculates the contribution for each employee, records it against the correct fund, and prepares the contribution file for payment.

Payment itself is made by the employer — usually through a clearing house or the payment function in your accounting software. Contribution rates and timing requirements are set by legislation and change from time to time, so confirm current rates and due dates with your accountant or the ATO rather than relying on a figure you remember from an earlier year.

Leave records

Payroll software accrues annual leave, personal or carer's leave and, where applicable, long service leave, based on the employment type and entitlement rules you have set up. Leave taken is recorded against those balances and shown on payslips.

Accuracy here depends on the entitlement configuration being right at the start. If an employee is covered by an award or enterprise agreement, the leave rules, loadings and allowances that apply need to be reflected in the setup — a payroll provider can process what is configured, but classification decisions sit with the employer.

Reporting you should expect

Beyond payslips, an outsourced payroll service should give you a clear picture of employment costs. Reports commonly provided each cycle or each month include:

• Pay run summary showing gross wages, PAYG withheld, net pay and superannuation
• Superannuation liability report and payment status
• Leave liability report showing accrued balances
• Payroll activity by employee for the period and year to date
• Payroll figures reconciled to the wages and PAYG accounts in your general ledger

How onboarding usually works

Moving payroll to an external provider is mostly a data exercise. Expect a short discovery conversation about headcount, pay cycles, awards and current software, then a setup period where employee records, entitlements and year-to-date figures are loaded and checked.

Most providers run the first pay cycle in parallel with your existing process, or review it closely before approval, so any differences are identified before employees are paid. Changing provider part-way through a financial year is workable, but year-to-date figures must be carried across accurately for STP finalisation to be correct.

Responsibilities that stay with the employer

This is the part most often misunderstood. Outsourcing the processing does not transfer your obligations as an employer. The following remain with you:

• Correctly classifying employees and determining the award, agreement or contract that applies
• Setting pay rates that meet the applicable minimum entitlements
• Approving hours, timesheets, leave and each pay run before payment
• Paying wages and superannuation contributions by the applicable due dates
• Keeping employment records for the required retention period
• Providing accurate, timely information to your payroll provider

When outsourcing may suit a business

Outsourcing tends to make sense when payroll has become a recurring pressure point rather than a routine task. Common triggers include:

• The owner is processing payroll after hours and it is competing with client work
• Headcount has grown to the point where award interpretation and leave tracking take real time
• There is no backup if the person who runs payroll is away or leaves
• STP finalisation, super payments or reconciliations have slipped in the past
• You are moving payroll systems and want the setup done once, properly

Related services

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