Published: May 2025

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Payroll processing is essential for Australian businesses, ensuring accurate employee payments and compliance with Australian Taxation Office (ATO) requirements, including Single Touch Payroll (STP). Xero, a leading cloud-based accounting platform, offers robust payroll functionality tailored for Australian businesses, simplifying tasks like salary calculations, superannuation, and STP reporting. The cost of using Xero’s payroll features varies based on business volume, particularly the number of employees and pay runs.

This article provides a comprehensive guide on how to process payroll in Xero, detailing its functionality, pricing considerations, and practical examples for firms of varying sizes. Drawing on ATO guidelines and Xero’s resources, we’ll help you manage payroll efficiently.

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Why Use Xero for Payroll?

Xero’s payroll system is ideal for businesses like professional services firms amongst others due to its automation, compliance features, and integration with accounting processes. Key benefits include:

• Single Touch Payroll (STP) Compliance: Automatically submits salary, PAYG withholding, and superannuation data to the ATO per pay run, meeting STP Phase 2 requirements.
• Automated Calculations: Computes PAYG withholding, superannuation (11.5% in 2025), and leave entitlements, reducing manual errors.
• Employee Self-Service: Through Xero Me, employees access payslips, request leave, and submit timesheets, minimising administrative tasks for HR teams.
• Billable Hours Integration: Tracks employee hours for client billing, crucial for consulting and legal firms.
• Cloud Access: Enables remote payroll management, perfect for hybrid teams in professional services.
• Accounting Integration: Syncs payroll with Xero’s general ledger for seamless financial reporting and Business Activity Statement (BAS) preparation.

“Xero’s payroll streamlines compliance and frees up time for client-focused work,” per Xero’s official guide, making it a top choice for professional services firms.

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Xero Pricing and Business Volume

The cost of Xero’s payroll depends on the subscription plan, influenced by business volume (e.g., number of employees and pay run frequency). As of July 2025, Xero’s Australian plans (in AUD, including GST) include payroll across most tiers, with employee limits varying. Below is an overview based on 2025 pricing:

• Ignite ($35/month): No payroll included, requiring an upgrade or third-party app for payroll needs, as the standalone Payroll Only plan ($20/month) ended in March 2025.
• Grow ($70/month): Includes payroll for up to 5 employees, ideal for small firms with low employee volume.
• Comprehensive ($90/month): Supports payroll for up to 5 employees, with auto superannuation and advanced reporting, suited for mid-sized firms.
• Ultimate ($115–$245/month): Covers 10–100 employees, with features like Xero Expenses and Projects, for larger firms with high-volume payroll.

Additional Costs:

• Extra Employees: Beyond plan limits, additional payroll users incur usage charges (typically $5–$10/employee/month, confirm with Xero).
• Add-Ons: Apps like KeyPay for advanced rostering may add costs for complex payrolls.
• Migration Costs: Legacy plan users (e.g., Premium) were migrated to new plans by July 2025, potentially raising costs for firms needing payroll (e.g., from $32/month Starter to $70/month Grow).

Example: A Sydney engineering firm with 10 employees uses the Comprehensive plan ($90/month) for 5 employees, plus $20/month for 5 extra employees, totaling ~$110/month. A solo consultant with 1 employee, previously on Starter ($32/month), now pays $70/month for Grow, a significant increase due to payroll requirements.

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Step-by-Step Guide to Processing Payroll in Xero

Below, we outline how to set up and process payroll in Xero for businesses. This assumes a Xero account with a suitable plan (e.g., Grow or higher).

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Step 1: Set Up Payroll in Xero

Proper setup ensures accurate payroll and ATO compliance.

1. Configure Payroll Settings:
   • Go to Payroll > Payroll Settings.
   • Select the bank account for employee payments in the Organisation tab.
   • Set the payroll calendar (e.g., monthly for salaried staff, fortnightly for contractors).
   • Confirm STP settings to connect with the ATO.
2. Add Employee Details:
   • Navigate to Payroll > Employees > Add Employee.
   • Input personal details (name, email, TFN), bank details, employment type (e.g., permanent, contractor), and salary structure.
   • Set superannuation (11.5% for 2025) and leave entitlements (e.g., 20 days annual leave).
   • Attach employment contracts for ATO compliance.
3. Define Pay Items:
   • In Payroll Settings > Pay Items, create earnings (e.g., base salary, billable hours bonus), deductions (e.g., PAYG, professional fees), and allowances (e.g., travel).
   • Assign STP Phase 2 reporting categories (e.g., gross payments, allowances).

Example: XYZ Law, a Melbourne law firm with 15 employees, sets up payroll on the Ultimate 20 plan ($145/month). They configure a monthly payroll calendar for salaried lawyers and fortnightly for support staff, add employee details (TFNs, bank accounts), and define pay items: $120,000/year for associates, $50/hour for paralegals, and 11.5% superannuation. STP is verified for ATO reporting.

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Step 2: Process a Pay Run

Xero streamlines pay run creation and submission.

1. Create a Pay Run:
   • Go to Payroll > Pay Runs > New Pay Run.
   • Select the pay period (e.g., 1–31 May 2025) and calendar (monthly or fortnightly).
   • Xero pulls hours from timesheets (via Xero Me) or manual entries for salaried staff.
2. Calculate Pay and Deductions:
   • Enter hours worked, bonuses, or leave taken for each employee.
   • Xero calculates gross pay, PAYG withholding (per ATO tax tables), superannuation, and net pay.
   • Example: A lawyer with a $120,000/year salary has monthly gross pay of $10,000, PAYG of ~$2,800, super of $1,150, and net pay of ~$6,050.
3. Review and Post:
   • Verify the pay run summary (gross, deductions, super).
   • Click “Post” to record in Xero’s accounts. Funds must be transferred manually.
4. Generate Payments:
   • Download an ABA file from the pay run for bank uploads or manually transfer net pay.
   • Notify employees via Xero Me when payslips are available.
5. Submit STP Report:
   • Xero submits STP data to the ATO post-pay run, covering gross payments, PAYG, and super.
   • Check submission status in Payroll > Single Touch Payroll.

Example: XYZ Law processes a monthly pay run for 10 employees. Associate A (salaried) earns $10,000 gross, $2,800 PAYG, $1,150 super, $6,050 net. Paralegal B (hourly) works 80 hours at $50/hour ($4,000 gross, $900 PAYG, $460 super, $2,640 net). Support Staff C takes 2 days of sick leave ($800 gross, $150 PAYG, $92 super, $558 net). The firm posts the pay run, uploads an ABA file to Commonwealth Bank, and confirms STP submission to the ATO.

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Step 3: Reconcile Payroll

Reconciliation aligns payroll with bank and accounting records.

1. Reconcile Payments:
   • In Accounting > Bank Accounts > Reconcile, match the payroll payment (e.g., $20,000 total net pay for XYZ Law) to the bank statement.
   • Code it to the payroll expense account via a “Spend Money” transaction.
2. Check Reports:
   • Run the Payroll Activity Summary to verify gross earnings, deductions, and super.
   • Cross-check with the General Ledger for accuracy.

Example: XYZ Law reconciles a $20,000 payroll payment in their Westpac account, coding it to “Salaries Expense.” The Payroll Activity Summary shows $25,800 gross, $5,250 PAYG, $2,962 super, and $17,588 net, matching the General Ledger.

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Step 4: Finalise Year-End Payroll (EOFY)

End-of-financial-year (EOFY) tasks prepare employees for tax filing.

1. Review Employee Records:
   • Use the Employee Contact Details report to check TFNs, addresses, and employment types.
   • Update tax scales or contract details in Payroll > Employees.
2. Finalise STP:
   • Go to Payroll > Single Touch Payroll > Finalisation.
   • Review year-to-date summaries for all employees.
   • Add reportable fringe benefits (e.g., car allowances) and adjust lump sums (e.g., bonuses).
   • Submit finalisation to the ATO, enabling employees to access income statements via myGov.

Example: XYZ Law finalises STP for 2024–25. Associate A’s summary shows $120,000 gross, $33,600 PAYG, $13,800 super, plus $2,000 in reportable fringe benefits. The firm finalises all employees, and the ATO updates myGov within 72 hours.

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Xero Payroll Functionality: Key Features for Professional Services

Xero’s payroll tools are tailored for professional services firms:

• Billable Hours Tracking: Links timesheets to client projects for accurate billing, vital for consulting and legal firms.
• Auto Superannuation: SuperStream-compliant, automating payments to funds like UniSuper at 11.5% (2025 rate).
• Leave Management: Manages complex leave types (e.g., study leave for accountants) with automatic accruals.
• Payroll Reports: Includes Payroll Activity Summary, Payment Summary Details, and Superannuation Report for BAS and audits.
• Error Alerts: Flags issues like incorrect TFNs or exceeded employee limits, prompting plan upgrades.

Example: A Sydney consulting firm with 20 employees on the Ultimate 20 plan ($145/month) uses timesheets to track billable hours for client projects, allocating them to “Consulting Revenue.” Auto super payments go to AustralianSuper, and the Payroll Activity Summary confirms $300,000 gross wages for the quarter, syncing with BAS.

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Pricing Examples by Business Volume

Payroll costs scale with employee volume and pay run frequency:

• Micro-Business (1–2 Employees):
  • Scenario: A Brisbane solo accountant with 1 assistant, monthly pay runs.
  • Plan: Grow ($70/month, covers 2 employees).
  • Tasks: Salary payments, STP reporting, super calculations.
  • Cost: $70/month ($840/year).
  • Example: Cost-effective for low-volume payroll needs.
• Small Business (5–10 Employees):
  • Scenario: A Perth law firm with 7 employees, monthly pay runs.
  • Plan: Comprehensive ($90/month, 5 employees) + $10/month for 2 extra employees.
  • Tasks: Billable hours tracking, payroll reconciliation, BAS integration.
  • Cost: ~$100/month ($1,200/year).
  • Example: Saves $75–$150/month compared to outsourcing payroll at $175–$250/month.
• Medium Business (20+ Employees):
  • Scenario: A Sydney consulting firm with 25 employees, fortnightly pay runs.
  • Plan: Ultimate 50 ($200/month, covers 25 employees).
  • Tasks: Complex leave tracking, multi-client billing, EOFY finalisation.
  • Cost: $200/month ($2,400/year), plus potential add-ons like KeyPay (~$50/month).
  • Example: More affordable than in-house payroll staff at $6,000+/month.

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Tips for Efficient Payroll in Xero

• Validate Employee Data: Ensure TFNs, bank details, and STP categories are correct to avoid ATO penalties.
• Maximise Automation: Use timesheets and auto super to streamline processes.
• Track Plan Limits: Monitor employee numbers to manage usage charges or plan upgrades.
• Reconcile Weekly: Match payroll transactions to prevent EOFY errors.
• Consult Experts: For complex payrolls (e.g., multi-jurisdiction taxes), engage a Xero-certified accountant or BAS agent such as Scale Suite.
• Stay Informed: Monitor Xero’s blog for pricing or feature updates, especially post-2025 plan changes.

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FAQs on Xero Payroll

Q: Can Xero handle contractor payments for professional services?
A: Yes, Xero supports contractor payments with custom pay rates and STP reporting, ensuring compliance for non-employee payments.

Q: What if I exceed my plan’s employee limit?
A: Xero charges usage fees for extra employees (~$5–$10/employee/month) or prompts an upgrade (e.g., Comprehensive to Ultimate 10).

Q: How do I correct payroll mistakes in Xero?
A: Use “Remove and Redo” in Payroll > Pay Runs to fix errors, updating pay items or accounts as needed.

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Conclusion

Xero’s payroll functionality empowers Australian companies to manage employee payments, ATO compliance, and financial integration efficiently. By automating STP, superannuation, and salary calculations, Xero reduces errors and saves time. Pricing scales with business volume, with Grow ($70/month) suiting small firms and Ultimate ($115–$245/month) supporting larger teams.

Whether you’re a small engineer, law firm, or consulting agency, this guide, with its tailored examples, equips you to master payroll in Xero. For complex needs, consult a Xero-certified advisor to optimise your payroll processes and ensure compliance.

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