Correcting payroll errors in Australia
Reviewed by Mellow Editorial Team, HR & payroll content team
If you make a payroll error in Australia, you generally need to fix it through a corrected STP submission, adjust the employee's next pay, and — depending on the type of error — notify the ATO. The process differs depending on whether you underpaid or overpaid, and how much time has passed.
What counts as a payroll error
Payroll errors fall into a few common categories:
- Underpayment of wages or entitlements — paying less than what the award, agreement or contract requires
- Incorrect PAYG withholding — withholding too much or too little tax from an employee's pay
- Superannuation errors — contributing the wrong amount or paying to the wrong fund
- Wrong leave balances — accruing or paying out leave incorrectly
- STP reporting mistakes — figures reported to the ATO that don't match what was actually paid
Each type has a different correction path, though many overlap in practice.
Fixing PAYG withholding errors via STP
Single Touch Payroll is a real-time reporting system — you report to the ATO at every pay event, not at year end. This means errors in reported figures need to be corrected through the same channel.
If you reported the wrong year-to-date (YTD) figures, you correct them in your next STP submission. STP works on a YTD basis, so submitting the correct cumulative figures in the next pay event effectively replaces the incorrect ones. You do not need to lodge a separate amendment for most within-year errors.
If the error spans a prior financial year (i.e., you have already finalised the employee's income statement by the 14 July deadline), you will need to make an amended STP finalisation. Most payroll software supports this directly. Once you amend and resubmit, the employee's pre-filled tax return in myGov updates automatically.
Correcting underpayments of wages
An underpayment must be remediated promptly. Delaying increases your exposure under the Fair Work Act, and deliberate or systematic underpayment can constitute wage theft under legislation that now applies nationally.
The practical steps:
1. Calculate the shortfall — identify every affected pay period and the exact amount owed, including any penalty rates, allowances or leave loading that was missed.
2. Pay the difference — process a separate remediation payment or include it in the next regular pay run. Do not just quietly adjust future pays upward without a clear paper trail.
3. Withhold tax on the back-payment — the ATO has specific rules for how to withhold from back payments of salary. The withholding treatment depends on whether the payment relates to the current income year or a prior year. A prior-year back-payment is withheld differently, so check the ATO's schedule for back payments before processing.
4. Update STP — report the corrected YTD figures at the next pay event.
5. Notify the employee — give the employee a written explanation of the error and how it was corrected.
If the underpayment is significant or affects multiple employees, consider notifying the Fair Work Ombudsman proactively. Self-disclosure is a mitigating factor in any subsequent investigation.
Correcting superannuation errors
The Superannuation Guarantee requires contributions of 12% of ordinary time earnings, paid to a complying fund. If you have underpaid super, the correction path runs through the ATO, not just your payroll system.
If super was not paid on time or was paid at the wrong rate, you are generally liable for the Superannuation Guarantee Charge (SGC). The SGC is calculated on total salary and wages — a broader base than ordinary time earnings — and also includes an interest component and an administration fee, making it more expensive than simply making up the shortfall.
To minimise penalties, lodge a Superannuation Guarantee Charge Statement with the ATO and pay the SGC by the due date. You can use the ATO's online tools to calculate the charge. If the SGC is paid, the ATO passes the employee entitlement component through to their nominated fund.
Where you overpaid super, you cannot reclaim contributions already sent to the fund. You can adjust future contributions to correct the overpayment going forward, but the money already in the fund stays there.
Handling overpayments of wages
Recovering an overpayment from an employee is legally possible but must be handled carefully. You cannot simply deduct the full amount from the next pay without the employee's written consent, as that may breach the Fair Work Act's rules on deductions.
Best practice is to:
- Notify the employee in writing as soon as you identify the overpayment
- Agree on a repayment schedule that does not cause the employee undue financial hardship
- Document the arrangement in writing before making any deduction
Where an employee refuses to repay, your options are limited to negotiation or legal recovery — unilateral deductions carry significant risk.
Keeping records after the correction
Under tax law, you must retain payroll records for at least five years. After correcting an error, document what went wrong, when you identified it, what you paid (or adjusted), and the updated STP submission reference. A clear audit trail protects you in any ATO review or Fair Work investigation and demonstrates good faith.
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