Xero payroll lets Australian businesses pay staff, calculate PAYG withholding and super, and report to the ATO through Single Touch Payroll. Setting it up correctly, with the right pay items, super funds and STP registration, keeps you compliant and saves hours each pay run compared with manual processing.
Xero Payroll: A Complete Guide for Australian Business Owners
Getting payroll right is one of the most important â and most stressful â responsibilities you take on as a business owner. Pay your team late, underpay their super, or lodge your Single Touch Payroll data incorrectly, and you’re not just dealing with unhappy employees. You’re dealing with the ATO.
The good news is that Xero Payroll is built specifically for Australian compliance requirements. When it’s set up correctly and used consistently, it handles STP Phase 2 reporting, super calculations, leave accruals, and payslips automatically â removing most of the manual work and a great deal of the risk.
This guide walks you through everything you need to know: what Xero Payroll includes, how to set it up properly, how to run a pay run, and where business owners most commonly go wrong. If you want the short version â book a no-obligation consultation with our team and we’ll handle the entire setup for you.
What Xero Payroll Includes for Australian Businesses
Xero Payroll is a fully integrated payroll module built into your Xero subscription (available on the Business or Payroll plans). It is designed around Australian workplace laws, ATO requirements, and superannuation obligations. Here is what it covers.
Single Touch Payroll (STP) Phase 2 Compliance
Single Touch Payroll is the ATO’s real-time payroll reporting system. Every time you process a pay run, Xero sends a report directly to the ATO â including salary and wages, PAYG withholding, and super liability information. You no longer need to issue payment summaries at the end of the financial year; instead, employees access their income statement through myGov.
STP Phase 2, which became mandatory for most employers from 1 January 2022, expanded the data you report each pay event. This includes disaggregated gross income (separating out allowances, bonuses, and overtime), country of tax residency for employees, and child support garnishee amounts where applicable. Xero is an ATO-approved STP Phase 2 solution, meaning it captures and transmits all required data fields automatically.
You can read the ATO’s full STP Phase 2 guidance at ato.gov.au.
Leave Management
Xero tracks and accrues leave balances for each employee based on their employment type and pay frequency. Standard leave categories â annual leave, personal/carer’s leave, long service leave, and compassionate leave â are pre-configured, and you can add custom leave types to match your awards or agreements. Employees can submit leave requests through the Xero Me app, which you can approve directly from the payroll dashboard.
Super Contributions
Xero calculates the superannuation guarantee (SG) contribution for each employee based on their ordinary time earnings. From 1 July 2025, the SG rate is 12 per cent. Xero updates these rates when legislated increases take effect, so you are always calculating on the correct percentage. You can pay super directly through Xero via its integration with clearing houses, including the ATO’s Small Business Superannuation Clearing House.
See the ATO’s super guarantee employer obligations at ato.gov.au.
Pay Runs
A pay run in Xero processes wages, salaries, allowances, deductions, and super for all employees in a single workflow. You can schedule pay runs weekly, fortnightly, or monthly, and Xero will pre-populate each run with standard earnings ready for your review. Once posted, the journal entries are automatically recorded in your accounts, and payslips are emailed directly to employees.
How to Set Up Payroll in Xero
Setup is the most critical phase. Errors made here â wrong pay calendars, incorrect award rates, missing super details â compound with every pay run and can be time-consuming to unwind. Here is the correct sequence.
Step 1: Configure Your Payroll Settings
Navigate to Payroll > Payroll Settings in Xero. You will set your:
- Organisation details â your ABN and registered business name, which appear on payslips and STP submissions
- Pay calendars â the frequency (weekly, fortnightly, monthly) and the start date of your first pay period
- Payroll accounts â map payroll expense accounts (wages, super, PAYG withholding payable) to your chart of accounts so journal entries post correctly
Step 2: Connect Your Bank Account
Link your business bank account in Xero so that payroll payments can be processed and bank feeds reconciled accurately. If you use Xero’s batch payment feature, your bank file is generated automatically at the end of each pay run and can be uploaded directly to your online banking portal.
Step 3: Add Your Employees
Go to Payroll > Employees and add each team member. For each employee you will enter:
- Personal details â full legal name, date of birth, address
- Tax file number and tax details (including any HECS-HELP debt and tax offsets)
- Employment type â full-time, part-time, or casual
- Start date
- Pay template â their base salary or hourly rate, and any recurring allowances
- Leave entitlements â aligned to the National Employment Standards or the applicable Modern Award
- Superannuation details â their chosen fund’s Unique Superannuation Identifier (USI) and their member number
- Bank account for salary payments
New employees are required to complete a Tax File Number Declaration, and many will also submit a Superannuation Standard Choice form. Keep digital copies on file. From 1 November 2021, most new employees are subject to stapled super fund rules, where you may need to request their existing fund details from the ATO before assigning a default fund.
Step 4: Set Up Pay Items and Leave
Pay items control how earnings and deductions are categorised and reported through STP. Under STP Phase 2, each pay component must be assigned the correct ATO-defined income type (such as Salary and Wages, Closely Held Payees, or Working Holiday Makers) and the correct gross income disaggregation category (gross, bonuses, commissions, overtime, etc.).
Xero includes default pay items that cover most situations, but if you pay shift allowances, tool allowances, or industry-specific entitlements, you will need to create custom pay items mapped to the correct STP categories. Getting this wrong leads to incorrect STP reporting, which the ATO can identify and query.
Step 5: Connect to the ATO for STP
Before your first pay run, you must connect Xero to the ATO’s STP system. In Xero, go to Payroll > Single Touch Payroll and follow the prompts. You will need to confirm your ABN and authorise Xero as your STP-enabled software. Once connected, every pay run will automatically transmit a payroll event to the ATO. The first submission acts as your STP registration â you do not need to separately notify the ATO that you are using STP.
If you are unsure whether your setup is correct before your first submission, this is exactly the kind of thing our team at Pinnacle Accounting & Advisory reviews during a Xero health check.
How to Run a Pay Run in Xero
Once payroll is set up, processing a pay run follows a straightforward workflow. Here is what happens each pay period.
- Create the pay run. Go to Payroll > Pay Runs and select New Pay Run. Choose your pay calendar and the pay period end date. Xero will create a draft pay run pre-populated with each employee’s standard earnings.
- Review and adjust earnings. Check each employee’s pay for that period. Add overtime, bonuses, commission, or allowances as required. If an employee took leave, ensure the leave has been recorded and approved so it appears correctly. Verify that super has calculated correctly â it should be 12 per cent of ordinary time earnings for most employees, though some allowances and irregular payments are excluded.
- Check PAYG withholding. Xero calculates the tax to withhold from each employee’s gross pay based on their TFN declaration and tax scales. Review the PAYG withholding total for reasonableness. Large fluctuations from the previous period warrant a closer look before posting.
- Post the pay run. Once satisfied, click Post. Xero will lock the pay run, record the journal entries in your accounts, and queue the STP submission to the ATO. Payslips are emailed to employees automatically at this point.
- Pay your employees. Use Xero’s batch payment export to generate a bank file and upload it to your internet banking, or process payments manually using the payslip totals as a reference.
- Pay your super. Super payments must be made at least quarterly, but many accountants recommend monthly payments to reduce end-of-quarter liability. Use Xero’s super payment feature or a clearing house to batch and remit super contributions. Remember that super must be received by the fund by the quarterly due date â not just sent by you.
Xero Payroll and Single Touch Payroll â What You Need to Know
STP has fundamentally changed how Australian businesses interact with the ATO on payroll matters. Under the old system, you reconciled everything at year end and issued payment summaries. Under STP, the ATO sees your payroll data in near real time â which means errors are visible faster, and consistency matters more than ever.
Key points every business owner using Xero Payroll should understand:
- Every pay run is a declaration. When you post a pay run in Xero, the STP submission includes a statutory declaration that the information is true and correct. Posting incorrect data â even accidentally â can create compliance issues.
- Amendments are possible but visible. If you make an error in a pay run, you can submit an update event through Xero to correct it. The ATO can see both the original and the amendment, so it is better to get it right first than to correct repeatedly.
- Finalisation is required annually. At the end of each financial year, you must submit a Finalisation Declaration through Xero to confirm that all payroll data for the year is complete and accurate. This replaces the old payment summary annual report. The deadline is 14 July for most employers.
- STP Phase 2 disaggregation matters. If your pay items are not correctly categorised under Phase 2 rules, the ATO’s pre-fill data for employees’ tax returns will be wrong. This can trigger queries from both the ATO and your employees.
Full ATO guidance on STP reporting requirements is available at ato.gov.au.
Super Guarantee in Xero â How It Works
Superannuation is non-negotiable. Employers who fail to pay the correct super guarantee on time face the Superannuation Guarantee Charge (SGC), which includes the unpaid super, an interest component, and an administration fee â and, critically, is not tax deductible.
Here is how Xero handles super guarantee obligations:
Calculation
Xero calculates super automatically on each pay run based on the employee’s ordinary time earnings (OTE). Not all payments form part of OTE â overtime pay, for example, is generally excluded. Xero’s default configuration handles most standard scenarios, but if you pay complex allowances or irregular earnings, it is worth having a specialist confirm your OTE calculations are correct.
Quarterly Due Dates
Super contributions must be received by the employee’s fund by the following quarterly deadlines:
- Q1 (July to September): 28 October
- Q2 (October to December): 28 January
- Q3 (January to March): 28 April
- Q4 (April to June): 28 July
Allow processing time â clearing houses can take several business days to pass payments through to funds. Submitting on the due date is risky. We recommend processing super payments at least five business days before each deadline.
Sending Super Through Xero
Xero integrates with superannuation clearing houses to batch and submit contributions electronically. You can pay multiple employees across multiple funds in a single transaction. Once submitted, Xero marks the contributions as paid and records the payment in your accounts. You can also use the ATO’s Small Business Superannuation Clearing House (SBSCH), which is free for businesses with fewer than 20 employees or an annual turnover below $10 million.
The ATO’s super guarantee employer guide is at ato.gov.au.
Common Xero Payroll Mistakes â and How to Avoid Them
After working with dozens of Melbourne businesses on their Xero setups, these are the payroll mistakes we see most often.
1. Incorrect Pay Item Categorisation Under STP Phase 2
Many businesses set up pay items before Phase 2 came into effect and never updated them. If your allowances, bonuses, or leave loading are categorised under the wrong income type or gross disaggregation code, your STP reports will be inaccurate. The fix requires updating each pay item’s settings and, in some cases, submitting an update event for prior pay runs.
2. Including Overtime in Super Calculations
Overtime is generally not part of ordinary time earnings, meaning super guarantee does not apply to it. Xero’s default overtime pay item excludes super, but if you have created custom pay items for shift penalties or overtime loading and checked the super box by mistake, you will be over-paying super â and misreporting to the ATO.
3. Not Reconciling STP Reports to Payroll Totals
At year end, the total wages, PAYG withholding, and super reported via STP should match your payroll expense accounts in Xero. Many business owners skip this reconciliation and only discover discrepancies when the ATO raises a query or an employee’s income statement looks wrong. Run a payroll activity summary report in Xero at the end of each quarter to catch issues early.
4. Late or Missing Super Payments
Processing super late â even by a day â triggers the SGC. Many businesses get caught in the last week of each quarter when cash flow is tight. Planning your super payments to land several days before the due date, and building the obligation into your cash flow forecast, is a simple discipline that avoids a costly and non-deductible penalty.
5. Not Completing the Annual Finalisation
The STP finalisation declaration is required by 14 July each year. Without it, employees cannot access verified income statements on myGov, which may delay their tax returns. If you are working with a registered tax or BAS agent, they have an extended deadline â but it still needs to be done. Our team at Pinnacle manages finalisation for all of our bookkeeping clients as part of year-end process.
6. Setting Up the Wrong Pay Calendar
Starting a payroll with an incorrect pay period start date or the wrong pay frequency means every subsequent pay run aligns to the wrong dates. This is particularly problematic for accrual-based leave calculations. If you notice your pay periods do not match your actual pay dates, fix this before running more pay events â it gets harder to correct over time.
When Should You Outsource Payroll to Your Accountant?
Xero makes payroll significantly more manageable for small business owners, but there are situations where handling it yourself carries more risk than it is worth.
You should consider outsourcing payroll if you employ staff across multiple awards or agreements with complex structures, have had ATO queries, are growing quickly, have not completed an STP Phase 2 review, are behind on super, or are setting up payroll for the first time.
At Pinnacle Accounting & Advisory, we run payroll for Melbourne businesses of all sizes. Our bookkeeping and payroll service covers the full cycle: setup, weekly or fortnightly pay runs, super payments, STP submissions, and year-end finalisation.
If you are not sure whether your current payroll setup is compliant, a payroll health check is a good starting point. Book a consultation and we will take a look.
Frequently Asked Questions
Is Xero Payroll included in my Xero subscription?
Xero Payroll is included in Xero’s Business and Payroll plan tiers for a defined number of employees. If you are on a starter plan or need to pay more employees than your plan allows, you may need to upgrade. The number of employees included varies by plan â check Xero’s current pricing for the detail relevant to your business size.
Do I need to notify the ATO separately that I am using STP?
No. When you connect Xero to the ATO’s STP system and submit your first pay event, this acts as your registration. You do not need to complete a separate STP notification form. However, if you are switching from another STP-enabled software to Xero, you should ensure the previous software’s STP connection is deactivated to avoid duplicate reporting.
How do I correct a mistake in a pay run I have already posted?
In Xero, you cannot edit a posted pay run directly. Instead, you create an unscheduled pay run to make a correction, which Xero then reports to the ATO as an update event. For significant errors â particularly those affecting PAYG withholding or super â it is worth speaking to your accountant before submitting a correction.
What happens if I miss a super payment deadline?
If super contributions are not received by the employee’s fund by the quarterly due date, you must lodge a Superannuation Guarantee Charge (SGC) statement with the ATO and pay the SGC, which includes the unpaid super, a nominal interest charge of 10 per cent per annum, and a $20 per employee per quarter administration fee. The SGC is not tax deductible.
Final Thoughts
Xero Payroll is one of the most capable payroll tools available to Australian small businesses. When it is set up correctly â with the right pay items, accurate employee details, proper STP Phase 2 categorisation, and a consistent pay run process â it handles the vast majority of your payroll compliance automatically.
At Pinnacle Accounting & Advisory, we work with Melbourne businesses every day to get Xero Payroll set up correctly, keep it compliant, and take the whole thing off the owner’s plate. Whether you need a one-off setup review or an ongoing payroll management service, we can help.
Book a consultation today and let’s make sure your payroll is working the way it should â for your team, your business, and the ATO.
Frequently Asked Questions
Does Xero payroll handle Single Touch Payroll?
Yes. Xero is STP-enabled, so each time you process a pay run it reports salaries, PAYG withholding and super to the ATO. You connect Xero to the ATO once during setup, then Single Touch Payroll filing happens automatically as part of every pay run.
Does Xero calculate super automatically?
Yes. Xero calculates super guarantee at the current rate of 12% for 2025-26 on ordinary time earnings, and can lodge and pay super to funds through auto super. You must set up each employee’s fund correctly and confirm the right rate applies to each pay item.
How do I set up payroll in Xero?
Set your organisation’s payroll details, connect to the ATO for STP, create pay items and pay calendars, then add employees with their TFN, super fund and bank details, and enter any opening balances. It is worth having an accountant review the setup before your first live pay run.
Can I fix a payroll mistake in Xero?
Yes. You can unpost or reverse a pay run, correct it and refile through STP, or make an adjustment in a later pay run. Because STP reporting is year-to-date based, corrections update the ATO record. Fix errors promptly to keep your reporting accurate.
This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.
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