Set up payroll for your first employee

Hiring your first employee changes what your business has to do each pay cycle. You are no longer just paying invoices on whatever schedule suits you — you are running a reporting system that has to work every single time you pay someone.

The decision in front of you is practical: what has to be in place before the first payday, so that pay runs are boring, repeatable and reported correctly. Get the setup right and each subsequent employee is mostly a matter of adding a record. Get it wrong and you are unpicking corrections while trying to keep a new person happy.

This guide walks through the setup in the order you will actually need it. Where something depends on figures, thresholds or your specific circumstances, it says so and points you to the official source to confirm.

What payroll actually involves

Payroll is a loop, not a task. Each cycle you:

1. Work out what the employee is owed for the period.
2. Calculate amounts to withhold and amounts to set aside.
3. Pay the employee and give them a record of the payment.
4. Report the payment information to the Australian Taxation Office (ATO).
5. Store the records so you can reconcile and correct later.

Most first-time employers underestimate steps four and five. They are not optional extras — the ATO states that all employers should be reporting payroll information through Single Touch Payroll (STP), and that reporting happens each time you pay your employees. That makes software choice the most consequential decision in this setup, because it determines whether reporting happens as a by-product of paying people or as a separate chore you have to remember.

Before the first payday: setup checklist

Work through that table before the employee starts, not on the morning of the first pay run. Registrations take time, and software setup usually takes longer than vendors suggest.

Choose STP-enabled software first

The ATO's instruction is specific: check that your business software is STP-enabled, so you can report your employees' payroll information each time you pay them.

The practical implication is that STP is built into the pay run rather than lodged afterwards. If your software is not STP-enabled, you are creating manual work every payday and increasing the chance of a mismatch between what you paid and what you reported.

When assessing options, ask vendors directly:

• Does it report to the ATO as part of the standard pay run, on or before each payday?
• Can you add a new employee with the starter details the ATO requires (tax file number declaration, superannuation fund details, bank details)?
• Does it produce pay slips for employees automatically?
• Can you amend or correct a pay run after it has been reported?
• Does it keep the records you need for your own reconciliation?

Software is a commercial decision, and this site does not rate or recommend providers. The test is simply whether the product does the job the ATO describes.

Decide whether fringe benefits tax is in scope

The ATO states that if you will be providing fringe benefits to your employees or their associates, and you have a fringe benefits tax (FBT) liability, you must register for FBT.

For a first hire this is usually a decision you make deliberately. If your offer is salary or wages only, benefits are unlikely to be part of the arrangement. If you are planning to add non-cash perks — a benefit provided alongside pay rather than as pay — treat that as a trigger to check whether an FBT liability arises and whether registration is required. Confirm the treatment of any specific benefit with the ATO or a registered tax professional before you commit to it in a contract, because registering after the fact is more work than deciding early.

Check payroll tax in your state or territory

Payroll tax is separate from everything above. The ATO notes that you may also need to register for state and territory payroll tax.

The important detail for a first-time employer is that this is a state or territory obligation, administered by the relevant revenue office, and it operates independently of your federal payroll reporting. Whether it applies to you depends on factors including the wages you pay in a jurisdiction, and those settings differ between states and territories and change over time.

Do not assume you are too small to be affected, and do not assume you are large enough to be caught. Check with your state or territory revenue office directly before your first pay cycle, using your expected annual wages. That single check is cheap; discovering it later is not.

Build the pay run workflow

Once registrations and software are settled, standardise the cycle:

1. Collect starter details early. Tax file number declaration, superannuation fund choice and bank details, captured before the first pay period closes. Late details force manual fixes.
2. Fix the pay calendar. Choose a pay frequency and pay period, and write down the cut-off for timesheets or hours. Consistency reduces errors more than any software feature.
3. Record hours and leave as you go. Leave balances and hours worked should be captured in the same system that pays people, so the pay run reads from one source of truth.
4. Withhold and set aside. Calculate withholding and any amounts to be paid to a superannuation fund, and set those amounts aside as they accrue rather than at the end of the quarter.
5. Pay and issue a pay slip. Check the pay slip content requirements that apply to you.
6. Report through STP with the pay run. Make it part of the same process, not a follow-up task.
7. Reconcile monthly. Compare what was paid against what was reported and against your bank, and correct discrepancies promptly.

A test pay run before the real one is worth the effort. Run a zero-dollar or simulated cycle through the software and confirm the reporting step completes.

Questions to verify for your situation

These depend on facts only you and the official sources have:

• Is the person genuinely an employee for tax and superannuation purposes? Worker classification changes almost everything downstream, and the ATO has guidance on working it out.
• Which pay and conditions apply to the role? Confirm minimum pay, classifications and conditions with the relevant official source before finalising the offer.
• Do you need to register for state or territory payroll tax at your expected wages level? Ask the revenue office, not a forum.
• Will any non-cash benefit be provided? If yes, check your FBT position before signing.
• If you outsource payroll to a bookkeeper or provider, who does what? Outsourcing the work does not transfer the employer's obligations — you still need visibility of whether reporting is happening.

Next steps

Do these in order, before your employee's first day if you can:

1. Shortlist two or three payroll products and confirm in writing that each is STP-enabled and reports each pay run.
2. Confirm your ATO registrations and whether FBT registration applies.
3. Check your state or territory revenue office on payroll tax registration.
4. Set your pay calendar and collect the new starter's details.
5. Run a test pay cycle and confirm the STP report completes end to end.
6. Diary your recurring payroll and reporting dates, plus a monthly reconciliation.

Revisit the checklist when you change payroll software, add benefits, expand into another state or territory, or take on a second employee — each of those can change your obligations.

This article is general information only. It is not legal, tax, migration, credit or financial advice, and it does not account for your personal or business circumstances. Obligations, registrations and thresholds change over time and vary by jurisdiction. Confirm current requirements with the Australian Taxation Office, your state or territory revenue office, and a registered tax or payroll professional before acting. Australian Ltd is not a lender, broker, government body, regulator or comparison service.