This post follows from Part 1 - Introduction

To get started doing your payroll there are a few things you’ll need to organise.

• First, you’ll need some business information and employee information, and,
• Secondly, you’ll need to set up your payroll settings in Xero.

Information You’ll Need on Hand for Set Up

Here’s a list of information you’ll need on hand for the next part, being setting up. Organise (1) and (2) below to make setting up in Xero smooth. There’s no issue if you can’t get it all at once, you can always start in Xero and collect that information later on if you wish.

(1) Information for Setting up Employees

• Employees need to fill out when they start:
  • A tax file declaration when they become an employee (NAT 3092) and,
  • A Superannuation Standard Choice form (NAT 13080).
    Make sure you have these forms on hand to help you with setting up your employees in the system.

(2) Information for Setting up the Pay System

• Frequency - are you paying your employees monthly, fortnightly, or quarterly?
• Pay period - when does the pay period start and end.
• Payment dates -
  • when do employees get paid for their wage/salary and
  • when are you going to be making payment for superannuation to the fund?
  • when will you be making payment to the tax office for tax withheld from employees
• Payroll tracking - are you going to be tracking payroll in terms of employee groups and/or timesheet? (Optional)
• Logo (optional)

Once you have this information, let’s start setting up payroll.

There are a number of steps which we’ll go into greater detail below. You’ll need to set up:

1. General settings - these are the basic settings.
2. Payslips - customising the look of payslips
3. Pay items - these are things that make up your pay slip e.g. reimbursements, leave etc… you need to set these items up.
4. Payroll Calendars - pay is often done in cycles e.g. fortnightly, so we need to set up payroll calendars so that pay can be done in an orderly fashion.

General Settings

1. Go to Xero > Payroll. A welcome screen will appear if this is your first time accessing the area. Follow the onscreen prompts to set up default setting. Otherwise, follow below to organise your general settings.
2. Settings > General Settings > Payroll Settings > click “General tab”. Below is an image of what the payroll general settings look like:
   
   • You can see that the default settings for your accounts have been put in for things like:
     • Bank account - choose the bank account from which you will be paying employees salaries/wages from.
     • PAYG Liability - selective the account (usually “PAYG Withholding Payable”) where your PAYG withholding will stay for the time being (this is the amount which you’ll need to pay to the ATO at some point down the track).
     • Wages Expense
     • Superannuation liability account - this is the account that holds how much superannuation you’ll remit to the superannuation fund.
     • Superannuation expense account - this is the amount spent for superannuation that is recorded as an expense for the business. Confused about the difference between an expense and liability? Here’s a post that explains the difference between expense and liability.
   • We’ll ignore payroll tracking categories and timesheet categories for now so put “None” in this field - if you are interested in payroll tracking categories, please comment below.
   • The payroll year should be 365 days or 364 days in a leap year (52 weeks).

Pay Slips

By law, employees must be provided with a pay slip. Fortunately, once you set up your payroll, it’s quite easy to issue an employee with a pay slip. Let’s customise your pay slip and here’s how:

1. Go to Settings > General Settings > Payroll Settings and click “Payslips” tab.
2. Click the “Choose File” button and upload your logo. Then save it.
3. Check the box next to:
   • “Show Annual Salary” - this will show the employee’s annual salary on their payslip.
   • “Show Employment Basis” - this will show part-time, full-time or casual type of employment.
4. Save.

Pay Items

1. Go to Settings > General Settings > Payroll Settings > Pay Items > “Earnings” tab. You’ll see a dashboard like the below:
   
   • To add a new earnings, navigate to “Earnings” (above “Deductions”) and click “+ Add Earning Rate” and add in the details. Note that:
     • “Account field” select a direct cost wages account will mean that you can see the gross profit of the employees.
     • “Rate” is “Fixed”
     • “Type of Units” is “Hours”
     • “Rate per Unit (optional)” leave blank.
     • If you tick “Exempt from PAYG Withholding”, the item won’t be subject to PAYG withholding tax. I usually leave this item unchecked.
     • If you tick “Exempt from Superannuation Guarantee Contribution” the pay item won’t accrue/collect superannuation. I usually leave this item unchecked.
   • Other items for which you may create an earnings item for are:
     • Overtime
     • Staff that are overhead instead of direct cost e.g. administration staff compared to sales staff.
2. To create a deduction, reimbursement or leave pay item follow similar steps to creating an earnings pay item and modify accordingly for the item. The government website fairwork.gov.au will assist you with the obligations you have to meet for employment and the various entitlements.
3. To delete a pay item, just go to Settings > Payroll Settings > Pay Item and click on the check box beside the Pay Item and click “Delete”.

Payroll Calendar

1. Go to Settings > General Settings > Payroll Settings > “Calendar” tab.
   
2. Click “Add Calendar” button (top right) and fill in the required details - under “Calendar Type” you would select your frequency e.g. monthly, weekly, fortnightly etc… and the payment day being the first payment date e.g. 2 January (and you would transfer the money on this date), then save.
   
3. To edit a payroll calendar, go to the calendar and edit it.
4. To delete a payroll calendar, go to the calendar, check the box beside it and then click “Delete”.

Wow! That’s a lot to take in within one sitting so congratulations - you’ve done all the hard work with setting up. What’s next?

Move on to Part 3 - Adding Employees.