What Are Payroll Taxes?

Payroll taxes, also known as employment taxes, are taxes that must be paid by employers and employees. They are usually calculated as a percentage of employee wages.

Do I Need a Business Bank Account?

If you're going to be receiving and spending money as a business, you should generally open a business bank account. In addition to providing a central location for withdrawing and depositing business payments, they also make it easier to keep company funds separate from personal funds. You'll need an EIN to open a business bank account.

Can a Small Business Do Their Own Payroll?

Yes, you can manage your small business's payroll using spreadsheets or online calculators. But the more employees you have, the harder it will be to keep track of employee hours, pay employees, manage payroll taxes and keep records — especially because each employee may have a unique combination of wages, benefits, tax withholding requirements and other deductions. You'll also need a deep understanding of all federal, state and local labor laws and payroll tax obligations.

Should I Hire a Payroll Service or Try Software/Automation?

Before choosing to hire an outsourced payroll service, use an automated payroll software solution or run payroll manually, consider the costs of small business payroll options, as well as the time involved and resources you can dedicate.

How Often Should I Run my Payroll?

Payroll frequency primarily depends on two things: state laws and your business's needs. Most businesses run payroll bi-weekly, but weekly, monthly and semi-monthly are other common pay periods.

What Are my Employer Responsibilities?

As an employer, it's your responsibility to make sure the following payroll tasks are performed, whether you do them manually, use software or hire a payroll service.

What Are the Payroll Reporting Requirements?

All businesses must comply with payroll reporting requirements, including IRS or relevant state agency requirements.

What Happens if I Make a Mistake?

Payroll mistakes can be costly. Employees rely on receiving a timely and accurate paycheck, so payroll errors can irk workers and reduce morale. It's also not uncommon for businesses to misclassify employees as independent contractors. If that happens, a business may risk being sued or fined and may be liable for additional payroll taxes.

How Do I Pay Employees Versus Contractors?

A key difference between paying employees versus contractors is the employer's responsibility for payroll taxes. If you're paying an employee, your business is responsible for withholding the correct amount of federal, state and local income taxes from each employee paycheck. Withholding is based on an employee's income and the withholding allowances calculated in his or her W-4 form. You then pay the withheld employee taxes to the IRS and state agencies as necessary. As a business owner, you're also responsible for withholding any other necessary payroll deductions, such as health care or retirement plan benefits. Employees receive a W-2 at the end of the tax year to help them square away their tax obligations with the IRS.

How Does Holiday Pay or Bonus Payroll Work?

Holiday pay is pay provided to employees on holidays, even if they don't work. For example, some companies may offer employees paid time off for holidays such as Memorial Day, Independence Day and Labor Day. The FLSA does not require businesses to pay employees for any time off, including holidays. It's up to each business to decide whether to do so.

How Should I Keep up With Employee Benefit Packages in Payroll?

If you plan to offer employee benefits such as health insurance or matching retirement plan contributions, you'll have to make the associated payroll deductions. Because deductions may differ for each employee, this can get complicated, especially if you're doing payroll manually. However, if your business uses a payroll software service or outsourcing company, the provider should automatically calculate deductions and contributions for each payroll run, reducing payroll errors and miscalculations. Payroll software solutions may also make it possible to easily integrate benefit information with payroll, accounting and HR business functions so each department has an accurate, up-to-date record of employee benefits.

How Does my Payroll Change When Employees Go on Leave, Like Parental Leave?

Under the Family and Medical Leave Act (FMLA), employees can take up to 12 weeks of unpaid leave in any 12-month period if they have to attend to family or medical needs. Employees are also allowed to keep work-sponsored health plans, but they must continue to pay their contributions. The FMLA applies to private businesses with at least 50 employees, with some restrictions, and all government agencies and schools.

How Do I Know What Tax Exemptions my Business Qualifies For?

In order to be completely exempt from federal income taxes, a business must qualify and register as a not-for-profit organisation, which usually means meeting the requirements for charitable organisations defined in section 501(c)(3) of the federal tax code. Such organisations are also eligible for tax deductible charitable gifts and may be exempt from federal employment taxes.

15 Top Small Business Payroll Questions Answered

If you have a small business — or are looking to start one — chances are you already know that you'll have to handle payroll for your employees. But managing payroll can be more complicated than many people expect. To help get you started, we've answered 15 of the most frequently asked small business payroll questions.

What Are Payroll Taxes?

Payroll taxes, also known as employment taxes, are taxes that must be paid by employers where total taxable wages exceed a threshold amount. Australia and New Zealand have different requirements, namely that:
- Australia varies payroll taxes by state, with the tax rate ranging between 2.02% and 6.85%.¹
- New Zealand has no payroll taxes. Businesses pay tax on their profits, not on how much they pay employees.
Businesses operating in Australia will lodge payroll tax returns at varying frequencies depending on the respective state in which the payment is due. Payroll Tax Australia sets out the requirements for businesses in Australia and updates relating to COVID-19 as they emerge. Currently, payroll tax measures have been introduced in all Australian states and territories to support COVID-19 affected businesses.²
What Information Do I Need to Begin my Business Payroll?

Before you can start running payroll, you’ll have to do some administrative work to establish your business as a tax-paying entity with the IRS, and you’ll have to collect some tax forms from your employees. Planning ahead can help prevent payroll pains. Here's how to get started:
- Choose a business structure. You’ll have to select a business structure if you haven’t already done so. Business structures include sole proprietorships, corporations and LLCs—all of which have different legal and tax considerations or grouping statuses.
- Apply for the necessary identification numbers. It will differ by the country, state or city that you are operating in. In NSW, Australia, for example, you will need a Client ID, Correspondence ID and ABN. In New Zealand, you will need an IRD number.
- Choose a tax year. Your taxable income will likely be calculated based on your tax year, which is a 12-month period that you choose for accounting and tax purposes. Usually, businesses can opt to use either the calendar year or a fiscal year that ends on June 30. Determine when your payment due dates are and whether you’ll need to be paying monthly, quarterly or annually.
- Gather employee information. Employees will have to fill out their own forms based on the requirements of statutory bodies in different regions.
Do I Need a Business Bank Account?

If you’re going to be receiving and spending money as a business, you should generally open a business bank account. In addition to providing a central location for withdrawing and depositing business payments, they also make it easier to keep company funds separate from personal funds and to track expenses an income. The information you need to open a bank account will depend on the country or countries you’re operating out of. In both Australia and New Zealand you'll generally need information like proof of identity, business name and the nature of your business.
Can a Small Business Do Their Own Payroll?

Yes, you can manage your small business's payroll using spreadsheets or online calculators. But the more employees you have, the harder it will be to keep track of employee hours, pay employees, manage payroll taxes and keep records — especially because each employee may have a unique combination of wages, benefits, tax withholding requirements and other deductions. You’ll also need a deep understanding of all federal, state and local labour laws and payroll tax obligations. With these regulatory frameworks continually changing, it will require significant and ongoing attention.

Given the complexity of payroll operations, it generally only makes sense to run payroll manually if your business has a few employees with a simple tax and benefits structure. Even for those businesses, a payroll software solution can automate complex, time-consuming chores like calculating paychecks. Consider integrating your payroll and accounting software to stay compliant with regulations and connect two of your businesses most important resources, people and money.
Should I Hire a Payroll Service or Try Software/Automation?

Before choosing to hire an outsourced payroll service, use an automated payroll software solution or run payroll manually, consider the costs of small business payroll options, as well as the time involved and resources you can dedicate.

An outsourced payroll service should handle every aspect of payroll. It calculates wages and withholdings, distributes paychecks and takes responsibility for compliance with all tax and labour laws — so your business shouldn't be held liable for any payroll errors. It’s the least time-consuming way to run payroll, but it also tends to be more expensive.

Payroll software solutions automate many aspects of payroll, such as all payroll calculations, while giving your business more control over the process. Some payroll software solutions also automatically file taxes and pay employees via direct deposit or other methods. You may still want to have a payroll expert on your team to ensure that data is entered accurately, and the process runs smoothly. Since your business still has control over the payroll process, you're liable for following all tax laws and labour regulations. However, a good payroll software solution should stay up to date with changing tax and labour requirements at national, state and local level. Payroll software can help you overcome some of the common payroll challenges for small businesses.

Manually running payroll is the most time-consuming way to run payroll because you’ll have to calculate all taxes and deductions, keep up with benefits and employee time off, track hours, send out pay stubs, and handle all yearly and quarterly tax reporting obligations. It can be the cheapest option, but it’s important to note that payroll mistakes can upset employees and also expose your business to financial penalties from regulatory bodies, based on shifting compliance and regulatory requirements. In Australia, regular audits are conducted by state and territory regulatory offices and employers will become liable where they fail to adhere to their legal requirements and obligations. In New Zealand, the New Zealand Companies Office readily enforces laws regarding compliance of corporate regulatory issues. Mistakes can be costly where companies fall outside of requirements in either of these countries.
How Often Should I Run my Payroll?

Payroll frequency primarily depends on two things: regional laws and your business’s needs. Most businesses run payroll bi-weekly, but weekly, monthly and semi-monthly are other common pay periods.

The less often you run payroll, the less paperwork your business will have to deal with, and you may have lower payroll processing costs. But employees may prefer to be paid more frequently, especially if they are paid on an hourly basis and their total pay varies from week to week. In both Australia and New Zealand, pay frequency is largely dependent on signed employee or industry agreements. It's important to be familiar with any existing agreements in the specific area your business operates to make sure your business is compliant with any pay frequency obligations.
What Are my Employer Responsibilities?

As an employer, it’s your responsibility to make sure certain payroll tasks are performed, whether you do them manually, use software or hire a payroll service. These tasks include, but are not limited to:
- Collecting all necessary employee information.
- Correctly classifying employees (employees versus independent contractors; and hourly versus salaried).
- Determining a pay period that works for your business and employees.
- Establishing time off policies and benefits eligibility, if applicable, in line with local regulation.
- Setting up direct deposit or other payment methods for employees.
- Tracking employee hours.
- Calculating paychecks.
- Withholding the required taxes and necessary deductions in accordance with tax laws in the region.
- Paying the payroll taxes the business owes and the employees' share of payroll taxes that you withheld from their paychecks, if applicable.
- Paying employees.
- Providing pay stubs or electronic payslips to employees if required.
- Complying with all payroll reporting requirements and keeping payroll data for the time required by local governments.
- Keeping accurate records.
- Following all labour laws.
- Paying other payroll expenses, including benefits providers and payroll software or outsourcing fees.
What Are the Payroll Reporting Requirements?

Payroll reporting requirements will vary depending on the countries and states where you’re operating. In New Zealand, companies must file employment information forms every time they issue pay to employees, with information such as the day you paid employees and the period employees worked for that pay. It’s expected that these are filed within 10 days of each payday. Most businesses in New Zealand have to adhere to these requirements, but there are exemptions for groups such as IR56 tax payers, or instances such as where holiday pay is paid in advance.³

In Australia, businesses are now expected to and are penalised where they do not use STP, or Single Touch Payroll. This system requires that the payroll information of employee’s is reported every time they are paid, through specific 'single touch' software. The information required to be reported includes Pay as You Go (PAYG) withholding, salaries and wages and superannuation.

Selecting an external payroll service will assist you through this process as they understand all the legal requirements of their country.
What Happens if I Make a Mistake?

Payroll mistakes can be costly. Employees rely on receiving a timely and accurate paycheck, so payroll errors can irk workers and reduce morale. It's also not uncommon for businesses to misclassify employees as independent contractors. If that happens, a business may risk being sued or fined and may be liable for additional payroll taxes.

To pay employees accurately without the aid of payroll software or a contracted payroll processing company, you need to keep up with many tax and labor laws, all of which are subject to change. Australian and New Zealand regulatory bodies, such Australia’s Fair Work Ombudsman will normally impose penalties for tax mistakes and fine you for payroll mistakes like overtime violations or underpaying employees.

If your business does make a payroll mistake, it's important to recognise the error, explain it to employees, describe how the business will fix the problem and make sure it doesn’t happen again. If you catch the error before employees are paid, you may be able to cancel the payroll cycle immediately, resolve the error and re-run payroll. Otherwise, take steps to resolve the issue and report any discrepancies to any other relevant government agency as necessary to minimise the likelihood of non-compliance penalties.
How Do I Pay Employees Versus Contractors?

A key difference between paying employees versus contractors is the employer's responsibility for payroll taxes.

In Australia and New Zealand, if you're paying an employee, your business is responsible for withholding the correct amount of income taxes from each employee paycheck. You then pay the withheld employee taxes to government bodies as necessary. As a business owner, you're also responsible for withholding any other applicable payroll deductions, such as health care or retirement plan benefits.

Alternately, if you’re paying independent contractors, also known as freelancers, you are not required to withhold or pay taxes on their behalf. Independent contractors receive their full gross pay in each paycheck and are required to pay their own taxes.

With subtle, but important differences between these groups, make sure to do due your diligence for the specific country you're operating in to ensure you understand the criteria for contractors versus employees, and that you are fulfilling your obligations.

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What’s the Difference in Payroll Between Casual, Part-Time and Full-Time Employees?

Australia and New Zealand employees largely fall into these three groups, with exceptions such as film production workers .

In general, casual employees are paid based on an hourly wage and the number of hours they work during each pay period. In Australia, pay can't be less than specified by awards or registered industry agreements, as well as the National Employment standards.

Full time employees are those that generally work around 38 hours per week and are employed by a contract for a permanent or fixed term. Full time employees have different entitlements, including annual and sick leave, carers leave and notice or payment when their employment is terminated.

Part time employees work less than 38 hours per week and are employed via a contract, permanently or on a fixed term basis. Often part time employees will get the same benefits that full-time employees are entitled to, but just proportionate to their reduced overall working time.
How Does Holiday Pay or Bonus Payroll Work?

Holiday pay is generally pay provided to employees on holidays, even if they don’t work. Generally, holiday pay will be provided for national holidays, meaning employees will be paid a certain amount more than they would usually receive for their work. Each country has its own regulation regarding public holiday pay, as well as holidays that are specific to it.

For example, New Zealand has eleven public holidays each year that full-time, part-time and contracted workers are entitled too, where an employee will be paid no less than one and a half times their normal pay if they are required to work.

In Australia, the Fair Work Ombudsman enforces that awards, enterprise agreements and other registered agreements can grant employees entitlements where they work public holidays, and that employees can refuse to work on public holidays where they have reasonable grounds.

In the case where a business isn't required by law to pay employees a higher rate on public holidays, some companies might choose to offer higher rates voluntarily. Regarding tax, usually holiday pay is treated as normal pay and is taxed the same way.

Bonus pay is a form of supplemental wages — pay employees receive on top of their regular wages. Since bonus pay is different from regular wages, it will usually be taxed differently. Calculating specific tax requirements will depend on relevant regulation, but there are two general ways to calculate payroll taxes on bonus pay: the aggregate method and the percentage method.
- Aggregate: If bonuses are paid alongside regular wages, the bonus pay is added to the employee’s regular wages, which may increase the employee’s tax bracket. Tax withholdings are then calculated based on the temporarily updated tax bracket.
- Percentage: The bonus must be identified as separate from regular wages and is then taxed at a flat rate on the entire amount.
How Should I Keep up With Employee Benefit Packages in Payroll?

Offering employee benefits can be costly and managing them can take a lot of time and effort. But it’s often worth it because benefits packages can attract better talent and help your business retain employees.

If you plan to offer employee benefits such as health insurance or matching retirement plan contributions, you'll have to make the associated payroll deductions. Because deductions may differ for each employee, this can get complicated, especially if you’re doing payroll manually. However, if your business uses a payroll software service or outsourcing company, the provider should automatically calculate deductions and contributions for each payroll run, reducing payroll errors and miscalculations. Payroll software solutions may also make it possible to easily integrate benefit information with payroll, accounting and HR business functions so each department has an accurate, up-to-date record of employee benefits.
How Does my Payroll Change When Employees Go on Leave, Like Parental Leave?

When employees take leave, the changes to their pay depend on a number of factors. These include the size of your company, its location, the type of leave and your company’s leave policies and of course, the country your company is operating out of.

Regarding parental leave, in Australia, the Fair Work Ombudsman sets out that employees can get Parental Leave Pay (PLP) from the Australian Government and paid parental leave from their employer. Employers have to keep various records when PLP is granted, including the amount of PLP funding they receive and the period each payment covers.⁴ Employees who get PLP also have to get a pay slip for each payment, which specifies that the payments are under the PLP scheme. PLP does not affect the ability of companies to offer or contractually agree to provide parental leave pay or other leave entitlements.

In New Zealand, per the Parental Leave and Employment Protection Act 1987, employees may be eligible for up to 26 weeks of parental leave payment. Employers have 7 days to respond when an employee tells them they wish to take parental leave. Employers can’t decline parental leave the staff are entitled to, and employees can refer the matter to the Labour Inspectorate for help where they do. Employers must write to employees within 21 days of leave being taken to confirm arrangements, including specific information such as that their job is being kept open.

It's not usual that employers will be required to pay employees for voluntary leave, such as taking time off work to pursue an educational opportunity, but businesses may create their own voluntary leave policies. These policies aren't necessarily enforced by local laws but may assist in retaining employees and improving their overall satisfaction in your business.
How Do I Know What Tax Exemptions my Business Qualifies For?

In Australia, business.gov.au sets out many deductions that may be available to your business. These are the expense that are directly related to earning your business income. Where they are both personal and business related, such as a car or a computer, deductions will be reduced proportionately.

In New Zealand, business.govt.nz sets out similar deductions. Expenses that relate directly to the day-to-day running of your business can be claimed, as well as capital expenses.

Often, companies will be exempt from income taxes where they qualify and register as a not-for-profit organisation, which usually means meeting the requirements for charitable organisations per local regulatory standards. Such organisations will often also be eligible for tax deductible charitable gifts and may be exempt from employment taxes.

Where businesses aren’t tax exempt, they will likely qualify for tax deductions, including vehicle expenses, salaries and wages, office supplies, employee benefits, furniture and equipment, office supplies, travel expenses, and more. Small business tax deductions are worth researching because they can reduce your yearly tax bill — substantially in some cases.