How to run payroll in Australia: a step-by-step guide
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll in Australia means calculating each employee's gross pay, withholding income tax via PAYG, deducting any other obligations such as the Medicare levy or HECS/HELP repayments, paying superannuation on top, and reporting every pay event to the ATO through Single Touch Payroll.
Set up before your first pay run
Before you pay anyone, you need a few things in place.
Register for PAYG withholding through your Australian Business Number (ABN) in the ATO's Business Portal. You cannot legally withhold tax on behalf of employees — or remit it — without this registration.
Collect a Tax File Number declaration or TFN declaration from each employee on or before their first pay day. This tells you their tax file number and whether they are claiming the tax-free threshold. If an employee does not provide their TFN, you must withhold tax at the highest marginal rate.
Also collect a super choice form so each employee can nominate their preferred complying superannuation fund. If they do not choose, you must check whether their award or enterprise agreement stipulates a default fund, and if not, use the ATO's stapled fund process to find their existing fund.
Enrol in Single Touch Payroll-enabled software. STP is mandatory for all employers. Every time you run a pay event — weekly, fortnightly, monthly — your software reports gross wages, tax withheld and super information directly to the ATO. There is no separate end-of-year payment summary process; STP replaces it.
Calculate gross pay
Gross pay is the starting point for every calculation that follows. For salaried employees it is straightforward: annual salary divided by the number of pay periods. For hourly employees, multiply hours worked by the applicable rate, then add any overtime, allowances or penalty rates that apply under their award or enterprise agreement.
Ordinary time earnings (OTE) is a specific concept for super purposes. It excludes overtime but includes most regular allowances. Getting OTE right matters because super is calculated on it.
Withhold the right amounts
Income tax (PAYG): Australia uses a progressive income tax system. You do not need to know every rate bracket — your payroll software uses the ATO's weekly or fortnightly tax tables to calculate the correct withholding based on each employee's gross pay and their TFN declaration settings. Employees who have claimed the tax-free threshold will have less withheld than those who have not.
Medicare levy: The Medicare levy is 2% of taxable income. For most employees it is already factored into the ATO's tax tables, so your software handles it automatically alongside income tax withholding.
HECS/HELP repayments: If an employee has indicated they have a study debt on their TFN declaration, you must withhold an additional amount each pay period. Repayments are calculated on a banded scale based on the employee's projected annual income. Again, ATO tables and compliant payroll software handle the banding — your job is to make sure the debt flag is correctly set in the system.
The total amount you withhold goes to the ATO, typically on a monthly or quarterly cycle depending on your withholder category.
Pay superannuation
From 2026, the Superannuation Guarantee rate is 12% of ordinary time earnings. You must pay this amount into each employee's nominated complying superannuation fund.
Super is not deducted from the employee's pay — it is an on-top cost to you as the employer. The practical consequence: when you budget for a $70,000 salary, the actual employment cost is higher once you add 12% super.
Super must be paid at least quarterly, though many employers pay more frequently to avoid cash-flow surprises. Late super payments attract the Superannuation Guarantee Charge, which is calculated differently from standard super and is not tax-deductible — a meaningful penalty.
Run the pay event and report via STP
Once gross pay, withholdings and super are calculated, you pay the employee's net amount directly into their nominated bank account. Your STP-enabled software then sends a report to the ATO at the time of each pay event — not at the end of the year. The report captures year-to-date gross income, tax withheld and super liability for every employee.
At the end of the financial year, you complete an STP finalisation by 14 July. This replaces the old payment summary and makes the information available to employees in their myGov accounts for tax return purposes.
Leave and termination payments
Employees accrue leave as they work. Under the National Employment Standards, most full-time employees are entitled to four weeks of annual leave per year. Leave accruals must be tracked in your payroll system and paid out at the employee's ordinary rate when taken or, on termination, as a lump sum.
Redundancy payments also fall under the NES. The scale is based on years of continuous service — the longer the service, the larger the entitlement. Termination payments can trigger different PAYG withholding rules depending on the payment type, so always check the ATO's guidance or consult an adviser before processing a final pay.
---
Run HR and payroll in Australia with Mellow
Mellow brings HR, payroll and 12 AI agents into one platform — built to handle Australia properly, with payroll included, from £4 per employee per month. The AI agents don't just answer questions; they generate contracts, run cost estimates and draft letters for you.
[Start a free trial →](/register)