How to do payroll: step-by-step process for small businesses

Payroll processing is how you pay employees accurately and on time while at the same time adhering to payroll compliance rules from both the Australian Taxation Office and Fair Work.

What is payroll processing?

Payroll processing is the end-to-end workflow you follow to process payroll for every pay period. It covers all of your payroll operations, from collecting employee hours and payroll data to the direct deposit (bank transfer) that makes sure your employees are paid. In short, payroll is all about:

1. Calculating gross pay (gross wages) and any overtime pay.
2. Applying payroll deductions and tax withholding so you arrive at the net pay (net salary).
3. Paying superannuation contributions (your employees’ retirement savings).
4. Handing out payslips and keeping good payroll records for payroll regulations and audits.

Basic first steps to payroll processing

Before you run payroll, set up a payroll policy and lock in the operational needs around it. It’ll help your small business to not fall into the most common payroll traps.

Start with your fundamentals. Check whether you’ll have hourly employees, salaried staff, or both. Then create your pay cycle (i.e. how often you pay) and the pay schedule (i.e. the exact day you pay). The more consistent the pay schedule, the easier cash flow planning will be for you.

You’ll also want to separate money for wages. Many employers use a dedicated payroll bank account, so there are always enough funds for the pay run, even when cash flow isn’t looking amazing. That step alone eliminates the risk of missed wages and the penalties that can come from underpaying or paying late.

Finally, choose how you’ll manage payroll on a daily basis. You can do it in-house or outsource payroll to a bookkeeper or payroll service provider.

What payroll system should I use?

With payroll systems, your business will need to use modern payroll software. Why? Due to compliance reasons, the ATO will only accept single-touch payroll processing from approved software companies. While necessary, many of these payroll software systems can be integrated with accounting and time-tracking software.

If you were to not use payroll software and opt for manual payroll or basic payroll systems, you would most likely need to hire a bookkeeper or accountant to submit for you.

Payroll software helps you make sure everything is accurate and gives employees self-service options, so they can get their payslips without emailing you every time.

Use STP-enabled payroll or accounting software

Employers must submit a Single Touch Payroll (STP) report to the ATO detailing payroll payments, super contributions, and tax withholding. It keeps payroll processing consistent while reducing the administrative burden.

Good payroll software also helps with:

• Automated tax calculations, including income tax withholding and the Medicare levy.
• Tracking voluntary deductions. Think extra super, salary sacrifice arrangements, union fees or health insurance contributions, if you offer them.
• Storing employee details and account details securely.
• Generating reports you can hand to a BAS agent or payroll team.

If you’re dealing with contractors or staff in other countries, ask about global payroll support too. The safest option is to use a provider that can keep you compliant across all government agencies.

Step 1: Declare your new employee

Before the first pay run, gather up the right employee data and set them up properly. Be aware that this is the point where most payroll mistakes start, so slow down and get it right the first time. You’ll usually need the following before you pay employees:

1. The employee’s full name and contact details.
2. Their TFN details via a tax file number declaration.
3. Their bank account is for direct deposit.
4. Pay rate, role classification and start date.
5. Superannuation fund (or default fund details) for superannuation contributions. Employers are responsible for calculating and remitting superannuation contributions to the relevant authorities.

Once these are in your payroll system, you can calculate each employee’s pay correctly for every pay period, including their leave, allowances, overtime pay, and more.

Step 2: Set up PAYG withholding

If you’re paying wages, you’ll need to register for PAYG withholding so you can withhold tax contributions from wages and pay them to the ATO. This is a non-negotiable for payroll taxes in Australia.

Your payroll software should apply the right tax withholding based on your employee’s TFN declaration and pay cycle. Still, you’re responsible for the result, so spot-check any unusual outcomes, such as someone moving from casual to part-time, or a big lump sum payment. Also, keep an eye on other payroll compliance obligations that might crop up as your team grows, such as:

• Superannuation obligations (and the timing of paying super, AKA Payday Super).
• State and territory payroll taxes apply if your total wages exceed the threshold — this is separate from PAYG.
• Awards, enterprise agreements, Fair Work labour laws, etc.

Step 3: Reconcile your bank accounts

After you run payroll, reconcile immediately to check that:

• Employees are paid the correct net pay.
• Wages have actually left your bank account.
• Your payroll bank account still has plenty of funds for the next pay cycle.

Do this regularly because a business can look profitable on paper while still struggling to fund a pay run if customer payments are late. Reconciliations also make it easier to catch payment double-ups or the wrong account details.

Step 4: Reconcile your PAYG

Treat PAYG amounts like money you’re holding on behalf of the government. When you reconcile your PAYG in your payroll system, you’re checking that:

• The payroll information matches the tax withheld.
• The amounts you intend to pay are consistent with what’s been calculated.
• You can hit due dates without any cash flow surprises.

If you use a BAS agent, they can add real value here by helping you keep good records and cut out the risk of underpaying tax.

Step 5: Issue payslips and keep payroll records

Two non-negotiables are payslips and record-keeping. Here in Australia, employers have to provide a payslip within one working day of paying an employee. You also need to keep employee records, including pay records, on hand. The Fair Work Act requires employers to keep certain payroll records for each employee for at least seven years.

A payslip should show the pay period details, including gross and net amounts and deductions. For hourly employees, it should also show hours and rates.

Remember that employers must comply with payroll regulations set by the Australian Taxation Office (ATO) and the Fair Work Ombudsman (FWO). To stay on top of your legal obligations with pay and payslips, refer to the Fair Work Ombudsman and the stipulations set out under Award Agreements.

Thinking of outsourcing payroll? Hire a bookkeeper

If payroll management is chewing up your week, outsourcing payroll can be a smart move. A bookkeeper or payroll service provider can:

• Set up your payroll software properly.
• Integrate a repeatable payroll policy and payroll cycles.
• Check award interpretations and payroll deductions.
• Help you avoid payroll compliance traps.

Even if you keep payroll in-house, an advisor can be your safety net while you get everything set up. After all, legal compliance in payroll prevents penalties from tax authorities.

Tips for getting payroll right

Whatever software you use, make sure you capture employee hours, run the pay run, review gross pay to net pay, pay employees, and then finalise reporting and records. A couple of other helpful tips before you jump in:

• Accurate payroll processing is essential for businesses to comply with national workplace regulations, including minimum standards, and superannuation obligations.
• Starting July 1, 2026, superannuation contributions in Australia must be paid on the same day as wages under the Payday Super reforms.
• Timely and correct payments in payroll processing foster a positive company culture and high morale.

Bottom line? A few small checks can prevent big fixes later – and keep your payroll processing reliable and predictable.

How to process payroll in Reckon One

To show you how easy it is to process a pay run in Reckon One accounting software: