Payroll can look straightforward when you only have a few employees. Enter the hours, process the pay run and send the payslips.
But small errors can quickly affect employee pay, leave balances, superannuation and the accuracy of your business records. They can also become much harder to correct when they continue across several pay periods.
The good news is that many payroll mistakes are preventable. Here are five common problems Australian small businesses should watch for—and practical steps you can take to keep your payroll accurate.
1. Incorrectly classifying employees
Employee classification affects how much a person must be paid and which conditions apply to their employment.
Common classification mistakes include:
- Treating an employee as an independent contractor
- Recording a permanent employee as casual
- Selecting the wrong award or classification level
- Failing to update an employee’s classification when their duties change
- Overlooking overtime, allowances, penalty rates or annual leave loading
Modern award classifications are generally based on factors such as the employee’s duties, responsibilities, qualifications and level of supervision—not simply their job title. The Fair Work Ombudsman provides further guidance about award classifications.
For example, an employee who begins in an entry-level position may gradually take on more responsibility. If their classification remains unchanged, they could be paid below the rate that applies to the work they now perform.
Paying someone a salary does not automatically remove award obligations either. Depending on the applicable award or employment arrangement, the business may still need to monitor hours, overtime, allowances and other entitlements.
How to reduce the risk
Check the employee’s award, employment type and classification when they begin working for you. Review them again when their duties, qualifications, hours or level of responsibility change.
If you are unsure which award or classification applies, obtain advice from Fair Work or a qualified workplace relations professional. A bookkeeper can then help ensure that the confirmed information is entered correctly in your payroll software.
2. Missing or making late superannuation payments
Superannuation is part of an employee’s remuneration, but it can easily be overlooked when cash flow is tight or payroll systems are not properly configured.
Common super mistakes include:
- Calculating super on the wrong earnings
- Using an incorrect employee super fund
- Failing to update employee details
- Processing a payment too close to its deadline
- Assuming a payment has been received because it has left the business bank account
- Not checking rejected or returned contributions
How to reduce the risk
Make superannuation part of every payroll process rather than treating it as a separate task to remember later
Regularly check that:
- Each employee’s fund details are correct
- Super has been calculated on the appropriate earnings
- Payments have been successfully received
- Your accounting records match the super payments processed
- Your accounting records match the super payments processed
Do not wait until a deadline to investigate discrepancies.
3. Miscalculating leave entitlements
Annual leave and personal leave balances should change whenever an employee accrues or uses leave. Problems can arise when payroll software has been configured incorrectly or when employment conditions change without the payroll file being updated.
Common super mistakes include:
- Applying full-time accrual settings to a part-time employee
- Continuing to accrue leave for a casual employee who is not entitled to it
- Using the wrong ordinary hours
- Deducting an incorrect number of leave hours
- Customer invoices or supplier payments are being overlooked
- Failing to adjust accruals after an employee changes their regular hours
- Entering leave manually without checking the resulting balance
A small setup error can continue unnoticed for months. It may only become obvious when an employee takes extended leave or leaves the business and their final pay needs to be calculated.
How to reduce the risk
You will generally need an accountant or registered tax agent when:
Review leave settings when an employee starts, changes employment status or changes their regular working hours.
Compare payroll leave balances with employment agreements, applicable awards and approved leave records. Fair Work also requires employers to keep records of leave taken and the employee’s entitlement balance. Its record-keeping and payslip guidance explains these obligations in more detail.
If a leave balance does not look right, investigate it before manually changing the figure. The incorrect balance may be a symptom of a larger payroll configuration problem.
4. Keeping incomplete payroll records
Payroll records help demonstrate what employees were paid, how the amounts were calculated and whether the business met its obligations.
Depending on the employee and their working arrangements, records may need to cover:
- Employee and employer details
- Pay rates and gross and net payments
- Hours worked
- Overtime and penalty hours
- Allowances, loadings and bonuses
- Tax withheld
- Superannuation contributions
- Leave accrued and taken
- Deductions
- Employment agreements and relevant written arrangements
Employees must also receive compliant payslips within one working day of payday. Current requirements are outlined in Fair Work’s payslip guidance.
Timesheets, payroll reports, bank payments and accounting entries should tell the same story. If information is missing from one part of the process, it can be difficult to confirm that an employee was paid correctly.
How to reduce the risk
Create a consistent process for collecting, approving and retaining payroll information.
Before each pay run:
- Confirm employee hours and approved leave
- Check new employees and any changes to existing employees
- Review allowances, overtime and deductions
- Process and review the draft payroll
- Approve the pay run
- Provide payslips and make payments
- Store the supporting records securely
Good record-keeping is not unnecessary administration. It protects the business and makes payroll questions much easier to resolve.
5. Failing to reconcile payroll reports
Completing a pay run does not necessarily mean that every payroll amount has been recorded and paid correctly.
Payroll should be reconciled regularly against:
- Employee earnings reports
- PAYG withholding
- Superannuation payable
- Leave balances
- Single Touch Payroll reports
- Bank transactions
- The payroll clearing account
- General ledger wage accounts
- BAS and end-of-year payroll figures
Without reconciliation, duplicate transactions, failed payments, incorrect account coding and payroll adjustments can remain unnoticed.
For example, your payroll software might show that an employee was paid, while the payment was rejected by the bank. Alternatively, the employee may have been paid correctly, but the transaction could have been allocated to the wrong account in your bookkeeping software.
How to reduce the risk
Reconcile payroll after every pay run and complete a more detailed review at least monthly. Do not rely only on the total amount withdrawn from the bank.
Investigate differences while the pay period is still recent. Waiting until the end of the quarter or financial year makes it much harder to identify what caused the discrepancy.
When does professional payroll support become worthwhile?
Many small business owners manage payroll themselves when they employ their first team member. That may work initially, but payroll becomes more demanding as the business grows.
Professional payroll support may be worthwhile when:
- Payroll is regularly taking too much of your time
- You are unsure which settings to use
- Do you work with Xero, MYOB or QuickBooks?
- Your team includes casual, part-time and full-time employees
- You frequently make manual payroll adjustments
- Leave or superannuation balances do not look right
- Payroll reports do not match your bank account or general ledger
- You are worried that previous pay runs may contain errors
- You want someone to manage the process consistently
Getting help does not necessarily mean handing over every employment decision. You remain responsible for confirming employee arrangements, classifications and approved hours. However, a professional bookkeeper can help keep the payroll system organised, process the information accurately and identify figures that need further investigation.
A payroll check can provide peace of mind
Payroll mistakes do not always happen because a business owner is careless. They often develop because the software was incorrectly configured, employee arrangements changed or the payroll process became more complex as the business grew.
The important thing is to address concerns early.
Helen provides friendly payroll and bookkeeping support for Brisbane small businesses. She can help review your payroll records, reconcile payroll-related accounts and establish a more reliable process—without judgment or unnecessary accounting jargon.
Not sure whether your payroll records are accurate?
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It is a simple, no-pressure first step to understand where your payroll and bookkeeping records are at, identify possible issues and determine what support your business may need.
This article provides general information only and is not legal, workplace relations or financial advice. Employment arrangements should be checked against current Fair Work and ATO requirements.