How to do payroll in Xero

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business owner doing payroll
Cloud Accounting
Partner & Head of Tax
October 12, 2020
minute read

A step-by-step guide on how to set up payroll in Xero

Often one of the more complex and time-consuming areas for a small business owner can be payroll and the constant reports that you need to lodge with the ATO.

Luckily, Xero has created a payroll system that's so easy to understand that every small business owner can manage it. And with so many built-in efficiencies, you won't need to spend all day working on getting your pay run completed.

This article takes you through a step-by-step guide on how to set up your payroll in Xero, and how to actually do your payroll run.

If you’re new to Xero, a Liston Newton Xero specialist can help you familiarise yourself with this intelligent accounting platform. Contact us today to learn more about how this platform will help make your business’ accounting and bookkeeping easier.

How to set up payroll in Xero

We’re going to start at the beginning, to ensure you have everything you need to set up your payroll in Xero the right way.

Collect your payroll information

The first step is to collect all the necessary business information. This includes:

  • Bank account details of your business
  • Your wages payable and expense account details
  • A list of all the necessary pay items, such as earnings, deductions, reimbursements, and the corresponding expense account
  • Super details for each employee
  • Business pay calendars

You’ll then need to gather your employee information. This covers:

  • Personal details, contact details, and bank details
  • Employment details, including tax file number, salary, super, and leave
  • Current pay balance for the financial year, up to when you start using Xero

Then you need to make sure your Xero payroll is set up.

Set up your payroll account

  1. In your Xero account, click on your business name, hit Settings, then Payroll settings.
  2. In the Organisation tab, click on Bank account, then select the account from which you’ll pay your employees.
  3. Click Save, and you’re done.

Set your payroll calendar

You can set a payroll calendar that corresponds with your regular pay run.

  1. In your Xero account, click on your business’ name, hit Settings, then Payroll settings.
  2. Select Calendars, then hit Add.
  3. Here you can set the Pay period, Start date, and First payment date.
  4. Click Add. You’ve now set up your pay calendar.

You now need to create your employee pay templates.

Create your pay templates

  1. Click the Payroll menu, select Employees, and then hit the employee’s name to see their details.
  2. Click the Pay Template tab, where you can set and adjust their earnings, deductions, super, and reimbursements.
  3. Hit Save. Your employee pay templates are now set up, and you can go back into them to edit them at any time.

Now it’s time to create a pay run.

How to do payroll in Xero

Create a pay run

  1. Head to the Payroll menu, select Pay employees, then hit Add Pay Run.
  2. Select the correct pay period, hit Next. You can choose here to add a payslip message.
  3. Make sure all your employees appear on the pay run.
  4. Now, ensure the pay details are correct. You can click each individual employee’s pay details to adjust their earnings, add deductions, or any other relevant details. Click Add [pay item] to enter these details.
  5. Then hit Save, and Close, and you’ll be taken back to the Pay Run menu.

Once your pay run has been created, and all the details are correct, it’s time to post your pay run.

Posting your pay run

This is the easy part.

  1. From your current pay run in Xero, click Post Pay Run, and then click Yes to confirm it.

Your pay run has now been posted. Xero accounting makes it explicitly clear on their website that they’re not a payroll intermediary, and that they don’t make payments on behalf of your business. It’s still up to you to actually pay your employees.

Troubleshooting your pay run

Some errors you might come across include:

  • Employee limit exceeded. Your Xero account allows you to process pay runs for a set number of employees under your pricing plan. You can increase this limit by changing your Xero pricing plan.
  • Error message saying a particular account type is no longer active. You’ll receive this message if a chart of account has been overwritten or archived. You can fix inactive account errors by updating pay items to active accounts, or restoring the account code itself.

Paying your employees

To physically complete the payment process, Xero generates ABA payment files that you can download and then import into your internet banking platform to make batch payments. This is the mechanism that actually ensures your employees receive their wages each pay run.

  1. In the Payroll menu, hit Pay employees.
  2. Select the relevant pay run, click on Pay Run Options, and click Download ABA.
  3. You can now save this file and import it directly to your chosen internet banking platform. If you’re having trouble uploading this file, contact your bank for support.

Email your employees their payslips.

  1. In the Payroll menu, click on Pay employees, and select the pay run period you’re after.
  2. Hit Pay Run Options, click on Email Payslips, choose the employees you want to send it to, and hit Email Payslips.

You can also do this with historical payslips, as well.

  1. Back in the Payroll menu, click on Employees and select the employee you’re after.
  2. Go to the Payslips tab and click on Payslip History.
  3. Here you can download any historical payslips, save them as PDFs, and send them directly to your employees.

Reconciling your payroll payments

After you’ve completed the payroll process and your employees have been paid, it’s time to reconcile your payroll. A statement line for the recent payroll run will appear in your bank account in Xero, and you need to add in a spend money transaction.

  1. Go to the Accounting menu, click on Bank accounts, and select Reconcile xx items for the bank account from which you made your payroll payment.
  2. Find the statement line that represents that payroll payment.
  3. Go to the Create tab and create a spend money transaction. Enter the necessary transaction details. What is the account to which you code your payroll transaction, which should match the one selected in your payroll settings.
  4. Click OK.

You’ve now reconciled your payroll run.

The final word

If payroll has been the part of your business that has always made you uneasy, or cost you too much valuable time, then we recommend switching to Xero payroll. It’s easy to understand, even easier to use, and will take the headache out of your regular payroll runs.

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