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Hiring staff, what you need to know about the tax implications

Unless your business relies entirely on kind-hearted family and friends to run the store, you’ll need to employ staff.

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Unfortunately, doing so brings with it a whole host of tax and superannuation obligations that you’ll need to comply with.

Here’s my rundown of what you need to do about tax and super when you take on staff.

  • You must register for PAYG withholding.  You will need to deduct tax from each wage or salary payment to your staff and pay it to the ATO through the PAYG system. You’ll also need to withhold PAYG if you make payments to other businesses which don’t disclose their ABN. You can register through the Australian Business Register (ABR) website or if you already have an ABN, you can register for PAYG through the business portal of the ATO website.
    TIP: You need to deduct income tax from wages and salary payments you make to all your staff, even if the payments are made to family members. You need to remit those tax payments to the ATO at the same time that you pay your GST.
  • You must get new employees to complete a Tax File Number Declaration form. If they don’t, you need to deduct tax at the highest marginal rate (45%).
  • You must pay superannuation contributions on behalf of each employee, into the fund of their choice. These payments must be made at least four times a year at a rate of 9.5% of the amount they earn from their ordinary hours of work. Payments must be made on behalf of all employees (including temporary or casual staff) who are over 18 and earn more than $450 (before tax) per month. In some cases, you also need to pay super on behalf of contractors who provide labour to your business, even if they have an ABN.
  • You’ll need to keep records of who you paid wages to, how much and when.
  • Don’t try to treat people who are really employees as contractors. The burden of getting that decision right rests with the hiring business. If you incorrectly – based on the facts – deem someone to be a contractor when they are really an employee, you will still be liable to account for PAYG on wages, pay superannuation and give annual leave and long service leave.  The Fair Work Act prohibits “sham contracting arrangements”, where an employer treats a worker as an independent contractor in an attempt to avoid meeting employee entitlements. It is illegal for a business owner to convert staff into contractors. Employers who try it can face prosecution for tax evasion and can be penalised for flouting superannuation laws and avoiding workers compensation laws.

Don’t forget single touch payroll

If you employ staff, you must have payroll software that is Single Touch Payroll (STP) compliant. This is a legal obligation for all businesses that pay staff, even if you only have one staff member.

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STP is a new way for employers to report tax and super information to the Tax Office every time you pay your employees. It started from 1 July 2019 for employers with fewer than 20 employees.

You’ll report the following information through STP-ready payroll software:

  • payments to employees such as salaries and wages
  • pay as you go (PAYG) withholding
  • super information.

Previously, employers had to give their employees payment summaries to enable the employees to complete their individual tax returns and submit a payment summary annual report to the tax office after the financial year ended. With Single Touch Payroll, employers will no longer need to give payment summaries to employees and lodge payment summary annual report forms to the tax office.

When employers start using STP payroll software, employees will be able to view their payroll information online from their MyGov account after the employer files pay details each time to the ATO through STP payroll software. The payroll information will then be prefilled in the employee individual tax return at financial year end. Employers will have to ‘finalise’ the employees’ EOFY payroll information through the STP enabled software by 14 July 2020 for 2019-20 year.

This action has been taken by the government to improve compliance around pay as you go (PAYG) tax withheld and employer super guarantee payments to employees.

Small businesses can start reporting any time from 1 July 2019 to 30 September 2019. If you need more time to get ready, you can apply for a later start date.

If you already use payroll software, check to see if it offers STP reporting by talking to your software provider or accountant. If you don’t use payroll software, you can choose an STP ready payroll solution or talk to your accountant for advice on the best solution for your business. If you have 1-4 employees, you can choose a low-cost STP solution.

And remember, start reporting by 30 September 2019!