How to process payroll in Free Accounting Software

Payroll processing in Free Accounting Software

This tutorial demonstrates how to run a payroll using Free Accounting Software. Pay slips are probably the most complicated transactions that small business owners will need to process but once set up they often just repeat the exact same each week/fortnight. So take a bit of time to work through the set up and hopefully get it right first time.

1. Set up your business

You should set up all business details as some of these print on the pay slip and are used in the processing as well as Single Touch Payroll lodgement. Most fields are self explanatory.

The Business Management System ID is an identifier that you can assign to this software. The idea is that with Single Touch Payroll lodgements the business may be using more than one payroll system. If so the employee ID of different systems may clash. If you are using another system for Single Touch Payroll as well as Free Accounting Software give this a different ID number. This is probably not going to be an issue with most micro businesses but you need to put something in this field so just put a "1".

2. Tax codes set up

Tax codes in Free Accounting Software are not just for GST or even just taxes, it's really a more generic thing used for making a provision for something. In relation to payroll there are tax codes for PAYG Withholding and Superannuation.

There are 3 flavours of PAYG Withholding:

  1. PAYG withholding applies. This goes on the gross pay and flags that this component of the payment is subject to PAYG Withholding. It's the gross pay not the PAYG. It goes on the BAS as salaries and wages and the PAYG Payment Summary as gross payments. Although PAYG Payment Summaries are a thing of the past with Single Touch Payroll, and it is reported with each Single Touch Payroll lodgement as gross pay.
  2. PAYG Withheld. This is the actual PAYG Withheld. It goes on the BAS and get's paid to the ATO. With each Single Touch Payroll lodgement it gets reported to the ATO as tax withheld.
  3. PAYG Withheld Paid to ATO. This is used for when you are making the payment to the ATO for PAYG. You don't want to use the PAYG Withheld tax code as that would be put on your next BAS as negative PAYG Withheld. Most businesses struggle with recording the payments of BASs correctly. In Free Accounting Software this tax code is not set up by default and it's not envisaged that many users will be entering the actual payments of PAYG Withheld to the ATO.

There are 3 flavours of Superannuation:

  1. Employer superannuation. This is the SGC super the employee earns on each payslip.
  2. Additional employer superannuation. Sometimes called super salary sacrifice.
  3. Voluntary super.
  4. The payments of the above. Again you do not reuse the above tax codes when making payments as it will stuff up future lodgements.

Don't forget that late paid super is not a tax deduction. Make sure you pay it on time. It's always sad to see a hard working business owner getting a metaphorical kick in the guts for not paying the super on time.

3. Set up accounts

With Free Accounting Software the account is used as the payroll earnings type. The previous version of Free Accounting Software had another thing for this, which I think most software does, but why make things more complicated than they need to be?

There are some default accounts set up for payroll but most businesses will probably want to modify these or create new ones for their specific circumstances. The best way to create one is by copying an existing one. Some of the default accounts are:

  1. Normal time. Pays 1x the employees normal rate. Super accrues on top of normal time.
  2. Time and a half and Double Time. These pay 1.5x and 2x the normal rate and super does not get paid on top of this.

You should also pay annual leave, personal leave and long service leave under separate accounts so that you can track how much leave your employees have taken. The system does not accrue leave. This is because I am trying to keep it simple. It's not a legal requirement to print leave entitlements on the pay slip.

Note that the account has a default tax code which gets used when paying the employee. You can override this on the pay slip but you should not do this as it will create real confusion later on.

4. Employee set up

Each employee is first required to be set up as a counterparty.

Definition: Counterparty: An opposite party to a transaction.

In Free Accounting Software all suppliers, customers and employees are first set up as a counterparty. Super funds are also set up as a counterparty.

Employees require additional information to be entered, such as payroll details, TFN declaration information and Superannuation fund. Note that the employee's TFN declaration form can (and should) be lodged to the ATO. If you have already lodged it that's ok but you need to enter the details so that the software knows how much tax to withhold. Also information from this TFN declaration gets used in the Single Touch Payroll lodgement each pay.

Super funds require some additional information to be entered. mainly just to tell the software that it is a super fund. You need to set up a super fund so that you can put the employee into that super fund.

5. Create a batch and add pay slips

With Single Touch Payroll lodgement being required, you need to create a batch to group up the pay slips being lodged. Batches are a good idea when it comes to payroll anyway.

The batch has the default payment date and pay period on it as well as a name/description and a status.

First save the batch and then click Go to batch transactions. Add all the pay slips you need to.

Once you've done the above set up the actual entering of the pay slip is fairly straightforward (I hope). The software will calculate PAYG withholding and superannuation. The system will also calculate the Year to date totals for Single Touch Payroll lodgement. The calculated totals are displayed on the pay slip entry page for you to review as you enter the pay slip (and before lodging it to the ATO).

There is also a button to generate a PDF of the pay slip that you can give to your employees.

6. Lodge the Single Touch Payroll batch to the ATO

Once you have entered all the pay slips, go back to the batch. There is a button called Single Touch Payroll lodge. Click on that button and review the information. You can enter your AUS key password and lodge it. There is a separate video that demonstrates this.

By lodging the Single Touch Payroll batch you will not have to issue your employees PAYG Payment Summaries at year end. Free Accounting Software does not have a PAYG Payment Summary lodgement option so it's probably advisable to start lodging using Single Touch Payroll.