Australian small businesses are making a dramatic shift in how they handle one of their most critical functions—payroll. Recent industry data shows that outsourcing of payroll services has increased by over 60% since 2023, with small companies leading this transformation.
The changes being made are not for the sake of convenience nor catching up with the trends. They’re about survival. The combination of escalating compliance requirements, severe penalties for mistakes, and mounting operational costs has fundamentally changed the economics of managing payroll internally.
The Compliance Nightmare
Small business owners, who were once self-assured in handling their payroll by themselves, now are under a regulatory environment that they can’t figure out how to deal with.
Single Touch Payroll Phase 2 put into place detailed reporting that was not required before and this caught many businesses unprepared. It was demanding to report disaggregated tax information, along with the detailed payment classifications country codes and employment conditions which considerably increased the complexity beyond Phase One implementation.
A café owner from Parramatta dropped a hint that she had to spend more than 15 hours deciphering STP2 reporting requirements, only to find out through an ATO inquiry that she had been classifying some payments incorrectly for several months. The process of correction took another 20 hours and led to penalties that she had not counted on.
Superannuation Guarantee Increases
By July 2024, the superannuation guarantee rate will be raised to 11.5%, plus further increases will be made. The difference in percentage is not that significant, however, it has resulted in an unexpected and complicated situation for all types of business concerning superannuation due to their differentiated employee setup. Different factors such as casual loading, penalty rates, overtime, allowances, and salary-sacrifice arrangements, among others, affect superannuation calculations in different ways. Making a wrong superannuation calculation does not just mean the need for correction, but it also comes with the activation of SG Charge penalties which might even be more than the initial underpayment amount.
The costs of the rectification were over $23,000—comprising back payments, SGC penalties, and accounting fees to sort out the mess.
Award Complexity Multiplying
Over 120 different awards exist in the contemporary award system of Australia, with each award having different sets of rules regarding penalty rates, allowances, overtime, leave, and minimum salary. The complexity is not just theoretical; it is already resulting in costly mistakes.
Underpayment claims can also be made against businesses that think they are paying above the award rates if they have not properly followed the specific provisions of the award, for instance, regarding penalty rate calculations, anniversary leave loading, and allowances for certain duties, or shift penalties.
Small businesses that have been recently targeted by the Fair Work Ombudsman have ended up paying large sums of money for their inadvertent underpayment, which often includes six-figure penalties, even when the mistakes were unintentional and arose from a lack of understanding of the intricate award provisions.
The Cost of DIY Payroll
A lot of small business owners think that payroll costs will be very high if they control the process internally, but the opposite is the case. They calculate only the obvious expenses—software subscriptions, perhaps a bookkeeper’s time—whilst ignoring the substantial hidden costs.
Time represents the most significant hidden expense. Payroll tasks are reported by owners of small businesses as taking 5-10 hours a week on average: calculating wages, processing payments, managing leave, maintaining records, replying to employee queries, reporting compliance, and keeping up with regulatory changes.
Even if we consider the opportunity cost of $60 per hour very conservatively, it is still $300-600 per week that the owners could invest in activities that would generate revenue. This implies an annual cost of $15,600-$31,200 off opportunity cost—very often more than what professional payroll services would charge.
Error Correction Cascades
Payroll errors lead to additional costs which are then multiplied many times over the initial error. An underpayment needs to be settled back to the worker, superannuation guarantee charge if super was underpaid, interest on delayed superannuation payments, possible Fair Work penalties, accounting costs for recalculating and processing, and, lastly, time spent by management on employee relations issues.
A retailer in Melbourne had to pay $8,500 for correcting a payroll error that originally concerned $1,200 in underpayments. The whole process of correction, penalties, and administrative burden generated costs that were more than six times the value of the original mistake.
Technology Investment Requirements
Purchasing payroll software comes with a heavy and ongoing investment that is not limited to subscription costs. As regulations change, software requires updates and business owners need training to use new features correctly. Businesses must maintain data security and backup systems. Integration with other business systems needs management and maintenance. And compliance with digital record-keeping requirements must be ensured.
For businesses with 5-15 employees, annual technology costs for proper payroll management easily reach $4,000-6,000 when accounting for all these factors—not including the time investment to maintain expertise.
The Outsourcing Economics
The economics of payroll services for small companies have shifted dramatically. What had been an extravagant expense at one time is now a sign of good financial management.
Usually, professional payroll services are priced according to the number of employees and the frequency of pay periods, thus resulting in predictable and scalable costs. For an 8-member weekly payroll company, the total cost for professional payroll services could be in the range of $800 to $1,200 every month. That makes the costs of compliance risks and time spent on tasks less uncertain and easy to budget for as a fixed cost.
More importantly, reputable providers guarantee compliance and assume liability for errors—protection that business owners managing their own payroll simply don’t have. When a provider makes a mistake, they’re responsible for corrections and any resulting penalties.
Expertise Access
Professional payroll services for small companies employ specialists who maintain current knowledge of awards, tax regulations, superannuation requirements, and reporting obligations as their core function. They invest in ongoing training and enterprise-grade systems that would be prohibitively expensive for individual small businesses.
