Payroll processing: What Is It? And How To Get Set Up

Published on 22/01/2020 by Anna Hammond

Payroll processing refers to the steps taken to pay employees for each pay cycle. It takes into account the employee’s salary, working hours, bonuses, benefits, and tax remittance. 

On the surface, that may sound quite straightforward. In reality, payroll can be a complex process—especially for someone with little to no finance background. In this article, we cover the basics of payroll processing and highlight the technology you’ll need to begin.

monthly payroll processes

Who should handle payroll within a small business?

According to ABS data, there are approximately 781,908 businesses with 19 or fewer employees in Australia. That’s around 36.8% of Australian businesses. In most cases, these companies don’t have in-house finance management. 

For a small business that doesn’t have a dedicated payroll administrator, payroll processing often falls to the business owner. There is a lot to consider when filing multiple payroll records.

With that in mind, it’s worth investigating the option of payroll software, third-party outsourcing, or a combination of both.

Why businesses need an efficient payroll process

Your employees are your best resource, so it makes sense to look after them and their remuneration. Beyond perks and benefits, the first thing businesses have to ensure is:

  • Employees receive an accurate pay rate
  • Salaries get paid on time
  • Management of annual leave (and other types of leave) is correct
  • Commissions and bonuses are honoured.

These processes should be smooth, seamless and without any major issues. As a business grows, technology can help an organisation to handle multiple employee salaries at once.

In-house payroll vs outsourcing: which should you choose?

Inhouse vs outsourcing payroll process

A big choice you need to make before investing in any software is whether to keep the function in-house or outsource it to a third-party. The decision is crucial and could save your business thousands of dollars. 

Let’s look at the benefits and challenges of each:

Outsourcing payroll

Benefits:

Here are a few ways a company might benefit from outsourcing the payroll process:

  • Time-saving: The main benefit of outsourced payroll processing is the amount of time saved from the endless hours spent calculating pay, deductions and keeping track of income tax withholdings.
  • Avoid mistakes: With payroll comes workplace agreements and EBAs. When a mistake happens, it can be costly. Third-parties ensure the minimum standards are adhered to.
  • Focus on core business activities: By outsourcing payroll to a third-party, organisations can focus on the functions that generate revenue and drive growth.
  • Security: A good payroll processing service will have robust payroll systems that are fully secure. Sensitive information is therefore protected by the company.
  • Peace of mind: The hassle and pain often associated with payroll processing are mitigated through the help of experts. 

Challenges:

Outsourcing also has its shortcomings. It costs more than software, and even though you’re putting the process in the hands of specialists, there is still potential for human error. 

In-house payroll management

Benefits:

Here are just a few reasons to bring the payroll process in-house:

  • Cost: The upfront cost may be larger initially because you’ll need to purchase and implement software. However, the processing of payroll is extremely cost-effective in the medium to long term.
  • Data control: Sensitive information, such as salaries, benefits and work status remains in-house. The data remains on a secure database owned and managed by you, giving you greater control. 
  • Flexibility: Changes, such as deductions or salary increases, are easy and quick to apply.
  • Employee empowerment: Payroll platforms should include the option to self-service. This means employees have access to the platform and can take responsibility for keeping their data up to date.
  • Fee transparency: The price of payroll technology is consistent and transparent. A third-party may provide extra fees for activities such as changes, or adding overtime.

Challenges: 

In-house payroll processing is the less expensive option, but there are some extra costs that businesses may need to consider. 

Even if a business has 19 or fewer employees, by law they’ll still need to purchase a single touch payroll software. This is because the Australian Government requires businesses to report payroll information to the Australian Taxation Office (ATO).

However, don’t view the requirement as a punishment. Payroll platforms make the process significantly more manageable. Instead of administrators having to manually calculate and pay salaries, wages, taxes and super, they can simply automate it.

How much does payroll software cost?

In a recent poll that we put out to 250 Australian customers, we discovered than 98% of people will read through reviews and compare a product, service or software before buying. When we asked which piece of information within a product listing was most vital, 85% of people cited pricing.

So, how much will payroll technology set you back? Some common factors determine the cost. These include:

  • The pay cycle
  • The total number of employees
  • How many states your employees reside in
  • Whether you require direct deposit
  • Demand for additional tax filing-services.

Most payroll programs have a per-employer or per-paycheck fee, on top of the base account fee. The base fee varies per software, but you can expect to pay anything between AUD$20 to $100 per month. 

Additional fees, such as a one-off set up fee, may also apply. Before committing, it’s worth exploring payroll software that offers free trials

What are the features of a payroll system? 

Here are five features you should pay attention to when investigating software platform options: 

Setup and support

When you first use the software, you’ll need to enter your company’s and employee’s information. Guidance from the software company will make it easier to transition your current payroll system to a software program. They will also help with any teething issues you face and provide some basic training.  

Payrolling processing

The platform you choose should automatically calculate the pay for individual employees every pay period. The system takes into account updates to wage rates, hours worked, overtime, holiday pay, and taxes. It will also factor in relevant deductions.

The platform then automatically makes the payments to employees by direct deposit, prepaid debit cards or a paper check. 

File and pay payroll taxes

Taxes are the most challenging aspect of the process, which is why the Australian Tax Office insists that small businesses should submit reports through single-use payroll software. The program calculates taxes for you, and some file and deposit payroll taxes for you too.

Ensure the platform you select stays up to date with changing payroll laws and tax rates. A cloud-based platform should apply these updates automatically for you. 

Multiple payment options

Payroll software allows you to pay employees electronically—one option is via direct deposit. You can pay the employee’s wages directly into their bank. This way, there’s no need to print and distribute paychecks. 

Other payment options include:

  • Digital payments: Send salary to platforms, such as PayPal. 
  • Paper checks: A system that doesn’t get used often today, but could be useful for companies with very few employees.
  • TransferWise: A useful option for those who have employees abroad.
  • Prepaid Debit Cards: This method is similar to direct deposit, but exists for workers without bank accounts.

Having these alternatives allows employees to be flexible to those who don’t want to be bound to traditional banking.

Employee self-service portal

Allowing staff to log into the portal and update their paperwork is a useful feature for payroll administrators. They can also review and download their payroll history.

This aspect also works well with time-tracking. Employees pay will automatically update according to the data. 

How to choose payroll software

When it comes to exploring what options are available to you, refer to this article as a checkpoint. We’ve included all the crucial aspects you’ll need to decide which solution will suit your needs best, the expected budget, and the benefits you’ll see in return. 

Ready to purchase payroll software? Check out Capterra’s software buyers guide to selecting payroll software today. 

This article may refer to products, programs or services that are not available in your country, or that may be restricted under the laws or regulations of your country. We suggest that you consult the software provider directly for information regarding product availability and compliance with local laws.