Setting up payroll can be an incredibly complex and tedious process, especially when doing it for the first time.
Luckily, Xero offers a user-friendly payroll system that makes the process straightforward. In this post, you'll learn a comprehensive, step-by-step approach to setting up payroll in Xero.
We'll cover everything from initial setup like customizing pay templates, to configuring tax rates, managing superannuation funds, creating pay schedules, processing payments, and more. You'll have all the information you need to get payroll up and running smoothly in Xero.
Introduction to Payroll Setup with Xero Accounting Software
Xero provides a user-friendly, cloud-based payroll system that can help businesses streamline payroll management. Setting up payroll properly in Xero is important for ensuring compliance and accurate payments.
Understanding the Benefits of Xero's Online Payroll System
Xero's online payroll software offers several advantages, including:
- Automatic tax calculations and superannuation contributions
- Integration with accounting system for easy reporting
- Cloud-based access from anywhere
- Customizable pay schedules and payment methods
- Tools for managing timesheets and leave
By handling payroll tasks digitally through Xero, businesses can save time and reduce the chance of errors.
Navigating Xero Payroll Settings for Initial Setup
To begin using Xero payroll, businesses need to configure some initial settings under Payroll Settings. This includes:
- Adding payroll accounts for managing transactions
- Setting up payment dates and pay cycles
- Customizing timesheet categories
- Establishing superannuation rules
- Adding tax details for proper deductions
Taking the time to customize these settings helps ensure payroll processes run smoothly.
The Importance of Accurate Setup Xero Payroll
An accurate payroll setup is critical for remaining compliant and keeping employees satisfied with on-time, correct payments. Key elements businesses need to setup properly include:
- Employee payroll details like payment info, tax file numbers, and super accounts
- Correct tax and superannuation rules
- Proper bank account connections for batch payments
- Automating super contributions
With some time invested upfront in setup, Xero payroll can save businesses effort while also improving compliance and transparency.
How do you set up payroll in Xero?
Setting up payroll in Xero is straightforward with their user-friendly interface. Here are the key steps:
- In the Payroll menu, select Payroll settings.
- From the Organisation tab, click Bank Account and select the bank account to pay your employees from.
- (Optional) Use the default wages, PAYG, and superannuation accounts or choose from the other accounts you've created.
- Under Payment dates, select your pay schedule (weekly, fortnightly, monthly etc.) and set the payment date.
- Under Attach documents, upload any necessary employee paperwork.
- Review the Batch payments section to ensure correct payment details.
- Add additional bank accounts if paying employees across multiple accounts.
- Set up payroll accounts for superannuation, wages, PAYG etc if not using defaults.
- Start adding employees via the Employees menu and enter details on the Employment and Taxes tabs.
- Set up pay templates for quick payment runs.
- Use employee notes for any payroll comments or changes.
Following these steps will have Xero payroll running smoothly. Monitor the dashboard for any STP errors needing attention. Adjust Xero payroll settings as your organization grows. Consider setting up timesheet categories for faster processing.
Xero makes managing payroll easy, allowing you to focus on running your business. Their user-friendly interface and cloud-based access streamlines the entire online payroll process.
How do I create a payroll activity summary in Xero?
To create a payroll activity summary in Xero, follow these steps:
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In the Accounting menu, select Reports.
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Find and open the Payroll Activity Summary report. This report provides an overview of payroll expenses and liabilities over a specified period.
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Select the date range to generate the report for. You can choose a custom date range or a preset period like last month.
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For Employees, select all employees, an individual employee, or an employee group to include.
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Payroll reports in Xero use the payment date of each pay run, not the pay period ending date. Keep this in mind when selecting your date range.
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Click Update to generate the payroll activity summary.
The report includes totals for gross pay, tax, deductions, net pay, and liabilities over the period. Review the totals to check if payroll calculations are accurate.
You can export the summary as a PDF or CSV file for record keeping. Xero also archives past reports which you can access anytime.
Let me know if you need any help customizing or interpreting your payroll activity summaries!
Can you have Xero payroll only?
Yes, Xero offers a Payroll-only plan designed for businesses with 4 or fewer employees. This streamlined plan includes key payroll features such as:
- Pay runs to process employee payments
- Salary and leave management tools
- Single Touch Payroll (STP) filing to handle tax reporting requirements
The Payroll-only plan provides an affordable way for small businesses to leverage Xero's user-friendly payroll software without needing to subscribe to a full Xero accounting software plan.
With the Payroll-only option, you can:
- Pay employees and handle PAYG tax deductions
- Track annual, sick, and other leave
- Submit payroll information to the ATO via STP
- Access simple reporting
While this plan doesn't include accounting software access or advanced payroll functionality, it's a cost-effective solution for startups and microbusinesses that want to automate payroll processes for a small team.
Key things to note with Xero Payroll-only:
- Limited to 4 active employees per month
- Doesn't include accounting software features
- Focused specifically on payroll needs
So if you're running payroll for up to 4 people, this paired-down Xero plan lets you leverage quality payroll software without overspending. The Payroll-only option delivers essential features at an affordable price point for early-stage ventures.
Does Xero have a payroll system?
Xero offers a built-in payroll system as part of its cloud-based accounting software. This allows businesses to manage payroll completely within Xero without needing an additional system.
Some key things to know about Xero's payroll system:
- Automated calculation of pay based on timesheets entered in Xero. Any time logged against projects flows into payroll timesheets.
- Support for different pay types like salary, hourly, overtime, bonuses, reimbursements, etc.
- Automatic tax calculations and filings based on latest rates and regulations.
- Ability to attach supporting documents like contracts or tax forms directly in employee profiles.
- Options for paying employees by direct deposit or printed checks. Batch payment runs can be scheduled.
- Full integration with the wider Xero accounting system - no need for manual journal entries for payroll transactions.
So in summary, Xero does provide a built-in payroll system as part of its cloud accounting platform. This can save businesses time and money by avoiding the need for a separate payroll system. The Xero payroll functionality handles everything from timesheets to payments to tax filings.
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Adding and Managing Employee Information in Xero
Adding an Employee: A Step-by-Step Guide
To add a new employee in Xero, navigate to the Employees tab and click "Add employee". You will then need to fill out details in the Employment tab and Taxes tab.
In the Employment tab, provide the employee's personal details, job title, pay schedule, bank account, tax file number, and employment start date. Make sure all relevant details are accurately entered.
In the Taxes tab, select the appropriate tax scale based on the employee's tax residency status. Input their tax file declaration and deduction details.
Once all information is entered, save the employee profile. You will then be able to generate payslips and include them in your payroll batches going forward.
Customizing the Pay Template for Individual Employees
The Pay Template section in Xero allows you to customize wage rates and payroll calculations for each employee.
To access an employee's Pay Template, go to the Employees tab, select the relevant employee, open the Payroll section on the left sidebar, and click "Pay Template".
Here you can add multiple pay categories, such as regular wages, allowances, overtime, commissions etc. Input the pay rates, units, and categories as needed. You can also add pre-tax and post-tax deductions.
The Pay Template will automatically calculate total earnings, deductions, taxes, and net pay based on your inputs. You can preview payslips to confirm accuracy.
Be sure to regularly review and update Pay Templates as needed when employment terms or tax requirements change.
Utilizing the Employee Notes Section for Additional Details
The Employee Notes section allows you to record extra details, attachments, tasks, and reminders related to each employee.
This is useful for tracking performance reviews, employment contract amendments, training certificates, disciplinary notices, and any other employee-related communications.
To access it, select the desired employee from the Employees tab, open the Payroll section in the left sidebar, and click "Employee Notes".
You can add multiple note categories, upload files, set reminders for upcoming tasks and events, and log a timeline of all employee interactions and documents.
This centralized hub keeps all key employee details neatly organized in Xero for easy reference and management.
Configuring Tax Settings and Managing Superannuation
Setting Up Tax Rates and Thresholds in Xero
Setting up tax rates and thresholds accurately in Xero is crucial for ensuring payroll tax compliance. Here are the key steps:
- Navigate to the Settings area in Xero and select Payroll settings.
- Under Tax tables, select your country (e.g. Australia) to view the default tax rates and thresholds.
- Review the tax rates and thresholds and make any adjustments needed to align with current requirements. Make sure tax brackets and rates match ATO guidance.
- Scroll down and enable any relevant payroll tax types like PAYG withholding. Adjust thresholds if needed.
- Save tax rate changes. Xero will now calculate taxes and withholdings using the updated rates.
Recheck tax rates in Xero whenever tax laws change or at the start of a new fiscal year. Keeping tax calculations current avoids issues or penalties.
Managing Superannuation Contributions and Funds
Managing super obligations for staff is a key payroll duty. Follow these recommendations when setting up super in Xero:
- Under Payroll settings, select Super funds then click Add super fund.
- Enter details like the fund name, type, bank account, USI, and preferred contribution method.
- Set the fund as the default if you want it automatically assigned to new employees.
- Allocate the appropriate fund to each employee under their Employment tab.
- Enter the employee's membership number if applicable.
- Set the minimum contribution percentage according to legal requirements.
- Adjust the contribution basis as needed (ordinary time earnings, salary sacrifice etc).
It's important to keep super funds and employee contribution rules up to date in Xero. This ensures accurate payments and compliance. Monitoring this area regularly is advised.
Establishing Pay Schedules and Processing Payroll
Setting up accurate pay schedules and efficiently processing payroll in Xero can streamline operations and ensure compliance. This involves:
Creating and Managing Pay Schedules
To get started, navigate to the Payroll settings and define your pay periods, such as weekly or monthly. Specify the payment date for each period.
You can create pay templates with default settings like pay rates and super contributions. Assign the templates to new employees to quickly set them up.
Revisit the pay schedule periodically and make any needed adjustments, such as for public holidays.
Executing the Payroll Filing Process in Xero
When it's time to run payroll, confirm all timesheets are entered and approved. Process any leave requests.
Go through the Payroll Summary page and review all details before filing. Address any errors or warnings, such as STP errors.
Submit payroll and confirm the batch payment details. Payments will process on the due date.
Monitor employee payroll accounts periodically. Make any corrections or adjustments in a timely manner by processing pay reversals or additional payments.
Maintaining accurate schedules and carefully executing payroll can ensure staff are paid correctly and on time while remaining compliant. Let Xero handle the complex tasks so you can focus on operations.
Linking Bank Accounts and Managing Payments
How to Add Bank Account Information for Payroll
To add a bank account in Xero for payroll purposes, follow these steps:
- Navigate to the Bank Accounts section under Accounts
- Click the Add bank account button
- Select your bank from the list of supported banks
- Enter your bank account details like account number, routing number, etc.
- Upload a copy of a bank statement or void check to verify the account
- Check the box to confirm you have authority to add this account
- Click Connect Bank Account to link it with Xero
Once connected, Xero will withdraw two small deposits to validate the account. Log back into Xero within 1-2 days to enter those amounts and complete verification.
Adding bank details enables efficient payroll transactions like:
- Direct deposits of employee net pay
- Payment of payroll taxes and superannuation
- Processing supplier invoices related to payroll
Processing Batch Payments and Payroll Transactions
To run payroll in Xero, follow this general process:
- Enter timesheets for all employees for the pay period
- Review the draft pay run and confirm all details are accurate
- Approve the pay run to finalize payroll for processing
- Create a batch payment via Bank Accounts > Batch Payments
- Select the bank account, pay date, employees to pay
- Add invoices for any supplier payments related to payroll
- Review & submit the batch for processing
On the selected Pay Date, the batch will automatically process all:
- Employee payroll including deductions and net pay
- Payroll tax payments
- Superannuation contributions
- Any supplier invoices added to the batch
This enables efficient, automated payment distribution each pay run. Monitor batch status under Bank Accounts > Batch Payments.
Enhancing Payroll Management with Additional Features
Xero offers several useful features to enhance payroll management beyond basic salary payments. These additional capabilities help streamline administrative tasks and provide greater visibility into employee data.
Attaching Documents to Employee Records
The Attach Documents tool allows you to upload files directly to an employee's profile in Xero payroll. This keeps all their essential paperwork organized in one central location.
To get started, open the employee's details and select the Employment tab. Next to Attach Documents, click Add to upload files from your computer. Supported file types include PDF, JPEG, PNG and DOC/DOCX.
Once a document is uploaded, it will appear in the employee's Attach Documents section with the filename, date added and file size. You can add multiple files for each employee as needed over time.
Key benefits of using Attach Documents include:
- Centralized employee file storage
- Eliminates paperwork and filing cabinets
- Easy access to documentation
- Can store signed contracts, tax forms, licenses, etc.
Overall, the document attachment feature simplifies payroll compliance and keeps sensitive employee information secure.
Utilizing Timesheet Categories for Detailed Tracking
For businesses that bill employees' time to clients, Xero offers Timesheet Categories for precise hour tracking. This helps allocate billable time across projects.
To configure Timesheet Categories:
- Go to Payroll Settings > Time Categories
- Click Add Time Category
- Enter details like the Category Name, Billable Rate, Tax Rate and Description
- Click Save. Repeat to add multiple categories
Now when employees log hours in Xero, they can assign times to the appropriate categories.
For example, a marketing agency might create separate categories for Content Writing, Graphic Design, Client Meetings, etc. This allows precise time allocation for billing.
Key benefits include:
- Streamlined client billing
- Detailed visibility into projects
- Ensures accurate cost tracking
- Can export reports by category
With Timesheet Categories, businesses gain greater insight into how employee hours are spent. This enhances payroll accuracy while supporting client accounting needs.
Conclusion: Ensuring a Smooth Payroll Journey with Xero
Recap of Key Steps in the Xero Payroll Setup Process
Setting up payroll in Xero requires careful attention to detail across several key steps:
- Adding employee details such as contact information, employment status, tax details, and bank accounts
- Configuring payroll categories for earnings, deductions, reimbursements, and leave
- Setting up pay schedules and pay runs aligned to payment dates
- Establishing Superannuation funds and contribution rules
- Enabling Single Touch Payroll for tax reporting compliance
- Testing payroll with sample employees before going live
Following best practices around data entry, configuration, reporting, and validation is critical for accurate, compliant payroll in Xero.
Maintaining and Updating Payroll Accounts in Xero
While the initial setup lays the payroll foundation, ongoing maintenance is crucial:
- Review and update employee salary packages, bank details, tax declarations etc.
- Adjust Superannuation contributions based on legislative changes
- Configure new earnings and deductions categories as needed
- Modify pay schedules/runs for changed pay frequencies or dates
- Maintain payroll audit trails and activity logs
- Troubleshoot and resolve payroll errors to avoid compliance issues
Keeping payroll data current through regular system reviews and updates ensures smooth payroll processing, happy employees, and continued legal compliance.
