Payroll is so much more than just another admin task. This process is not only a legal requirement of the ATO; it is, of course, also vital to your team.
Getting payroll right means your employees are paid correctly and on time, as they deserve to be.
But let’s be honest, the payroll process can be overwhelming, and even one mistake could mean penalties—or worse—upset employees.
We’ve put together this guide to show you how to calculate payroll liabilities accurately, efficiently, and in compliance with Australia’s tax laws.
Ready to make payroll stress a thing of the past?
Understanding Payroll Liabilities
Payroll liabilities refer to the wages your business owes its employees, the contributions you must make on their behalf, and the deductions you’re legally required to take from their pay.
Such contributions and deductions include
- Income tax (PAYG withholding): Tax you deduct from employee wages and send to the ATO.
- Medicare levy: A compulsory contribution to fund Australian healthcare services.
- Superannuation: Payments to your employees’ super funds.
- Salary sacrificing: Pre-tax deductions, such as extra super contributions or novated lease payments.
- Court-ordered garnishments: Amounts deducted from an employee’s wages to settle debts like child support or unpaid fines.
Meeting your payroll liabilities keeps you compliant with the ATO, maintains trust with your employees, and helps you stay on top of your business’s finances.
How To Calculate Payroll Liabilities: A 5-Step Guide
1. Gather Employee Information
You must collect up-to-date information about your employees so your payroll calculations are correct and compliant with tax laws.
This information includes
- Tax File Numbers (TFNs)
- Salaries or hourly rates
- Superannuation fund details
- Benefits and deductions like salary sacrifice agreements and garnishments
Equally important is how you store this data. Under the Privacy Act of 1988, you must protect your employees’ personal information.
Use secure systems and limit access to only those who need it to prevent data breaches.
2. Calculate Gross Pay
Calculating gross pay ensures you don’t underpay or overpay your employees.
Gross pay is the total amount your employee earns before any deductions. How you calculate it depends on whether they’re salaried or hourly.
For salaried employees, gross pay is typically their annual salary divided by the number of pay periods.
For example, if their annual salary is $52,000 and you pay fortnightly, the gross pay per period is $2,000 ($52,000 ÷ 26).
For hourly employees, multiply the hours worked by their hourly rate.
For example, if an employee works 38 hours at $30 per hour, their gross pay is $1,140 (38 × $30).
You must also factor in
- Overtime: Calculate based on the overtime rate (e.g., time-and-a-half or double-time).
- Bonuses and commissions: Add these to the pay period when they are earned.
- Allowances: Include payments for travel, meals, or tools.
3. Work Out Deductions
Deductions are amounts you take out of your employees’ gross pay before they receive their net pay.
To calculate PAYG withholding
- Use the employee’s TFN declaration to determine their tax status.
- Refer to the ATO’s tax tables or use payroll software to calculate the withholding amount based on their earnings.
- Factor in the Medicare Levy (currently 2%) and consider any adjustments for income thresholds or tax offsets.
- Report and pay PAYG withholding each pay cycle to the ATO through Single Touch Payroll (STP). These payments are due monthly or quarterly, depending on your withholding amounts.
Superannuation contributions are calculated as 11.5% (as of July 1, 2024) of an employee’s ordinary time earnings (OTE), including regular hours worked but excluding overtime.
Pay this amount to the employee’s nominated super fund at least quarterly to stay compliant.
Aside from tax and super, there are other deductions to consider, such as
- Salary sacrifice: Deduct the agreed pre-tax amount (e.g., extra super) from gross pay before calculating PAYG withholding.
- Higher Education Loan Program (HELP)/Student loan repayments: Use the ATO’s income thresholds and rates to calculate the repayment percentage, then deduct it from gross pay.
- Court-ordered deductions: Follow the court order for the exact amount or percentage, deduct it from net pay, and remit it to the designated agency.
4. Calculate Net Pay
Now it’s time to figure out your employees’ net pay—what they actually take home.
The calculation is simple: Gross Pay – Total Deductions = Net Pay.
Example: If an employee’s gross pay is $2,000 and deductions total $400, their net pay is $1,600 ($2,000 – $400).
5. Provide a Payslip
You’re legally required to provide a payslip within one working day of paying your employees to help them understand their pay and keep your business compliant with Fair Work regulations.
Each payslip must include
- Your name and ABN (if applicable)
- The employee’s name
- The pay period
- Gross pay
- Net pay
- If the employee is paid an hourly rate, the ordinary hourly rate, the number of hours worked at that rate, and the total amount of pay at that rate
- Tax deductions
- Superannuation contributions
- Any allowances, bonuses, incentive-based payments, loadings, penalty rates, or leave entitlements
Remember Your Responsibilities as an Employer!
Additional payroll responsibilities include workers’ compensation insurance.
This legal requirement covers your employees if they get ill or injured at work.
Policies are managed through state or territory schemes.
If your total wages exceed state thresholds, you’ll also have payroll tax liabilities.
You need to register and lodge payroll tax returns with the revenue office of the state or territory where your business operates.
Finally, Australian law requires you to keep payroll records for at least seven years, including payslips, tax details, and super contributions.
These records ensure compliance and help resolve pay disputes and queries from the ATO.
Making Payroll Easier: Tips and Tools
Managing payroll doesn’t have to be a headache.
Payroll software like Xero or MYOB can automate calculations, generate payslips, and streamline payments to the ATO, saving you time, reducing the risk of errors, and keeping you compliant with Single Touch Payroll (STP) requirements.
For quick manual checks, use free online calculators from the ATO for PAYG withholding and super contributions.
These tools can assist with specific calculations without needing full software.
Are you faced with complex payroll situations? Is your business growing at a steady pace? Or perhaps you just want to free up your time?
In any case, seeking help from a payroll specialist or accountant is a smart move.
Watch Out for These Payroll Pitfalls
- Incorrect tax withholding or TFNs: Using the wrong tax information can lead to underpayments or overpayments. Submit amended STP reports or contact the ATO for guidance.
- Incorrect superannuation rates: The current rate is 11.5% of ordinary time earnings (OTE). Mistakes can mean penalties and missed contributions.
- Employee classification errors: Misclassifying employees or contractors can affect workers’ compensation, payroll tax, and entitlements.
- Missing ATO deadlines: PAYG withholding, BAS lodgements, and super contributions must be paid on time. Late payments can result in penalties and interest charges.
- Poor record-keeping: By law, you must keep accurate payroll records for at least seven years. Non-compliance can lead to fines and complications during audits.
Take Control of Your Payroll with GeekBooks
Your payroll liabilities don’t have to feel like a burden. With the right knowledge and tools, you can manage your payroll efficiently and confidently.
But do you have the time to meet your payroll responsibilities?
If you’d rather focus on running and growing your business, you need a payroll expert on your team.
Get in touch with GeekBooks today to find out how our professional, hassle-free payroll services will help your business.
Complete our online booking form or contact us on 02 9158 3591.
FAQs About “How To Calculate Payroll Liabilities?”
How Do You Account for Payroll Liabilities?
Use payroll software like Xero or MYOB to automatically track wages, taxes, and super contributions.
Regularly review reports to see what you owe and when payments are due.
Maintain clear records of payslips, deductions, and payments, and stay on top of deadlines for the ATO, super funds, and other obligations.
What Are the Three Types of Payroll Liabilities?
- Employee wages: The gross pay you owe to employees before deductions.
- Payroll deductions: Amounts withheld from wages, such as PAYG tax, super salary sacrifice, and student loan repayments.
- Employer contributions: Payments you must make, like superannuation contributions and workers’ compensation insurance.
How Do You Accrue Payroll Liabilities?
You accrue payroll liabilities by recording any wages, taxes, deductions, and contributions owed but not yet paid.
This involves tracking amounts for employee wages, PAYG withholding, superannuation, and other deductions in your accounting system until they are paid to employees, the ATO, or relevant agencies.