Xero is a great product.

It’s changed the landscape for accountants, bookkeepers and clients alike.

In fact, it is my recommended accounting software for those operating in the small and medium sized business arena.

While it is true that Xero does make bookkeeping easier, this can also lead to a false sense of confidence for those using the program.

What tends to happen is, people will do the set up work, and then go on auto-pilot for routine tasks.

This can lead to mistakes when the routine is no longer routine, or forgetting to consider the nuances that require a deviation from the way the Xero file has been set up.

It is easy to do the ‘same old same old’ without thinking about the repercussions, or assuming the program is taking care of things behind the scenes.

Payroll is an area where mistakes can be common. This isn’t a surprise, as payroll is complex, and the process is usually time sensitive and deadline driven.

Over the years, a number of similar issues continue to pop up, so I thought I would take the time to outline 5 common mistakes that are regularly made when paying wages through Xero.

1. Not establishing accruals from day one

When you’re starting a new business, it’s easy to want to hit the ground running.

But doing the work at the beginning can save you significant time later on.

One of the best things you can do is establish your employee’s leave accruals for your eligible staff.

That way, Xero is calculating the leave accruals from day one, saving you the hassle of manually calculating leave entitlements when the employee wants to take their holidays.

This is particularly important to ensure that your staff entitlements are accruing correctly.

In addition, Long Service Leave can be difficult to calculate over a 10 year period, especially for casual staff that have worked irregular hours. Having Xero automatically doing this behind the scenes is definitely easier than manually calculating the entitlement.

When you add a new employee to your Xero file, ensure you add (assign) the leave types that the employee is eligible for.

2. Forgetting the nuances of your leave accrual

When establishing your leave accruals, there are a multitude of options as displayed below.

I think for most people, they tend to be using either a ‘Fixed Amount Each Period' or ‘Based on Ordinary Earnings’.

If you are using the ‘Fixed Amount Each Period’, it is easy to fall into the trap of accepting the accrual that Xero automatically calculates each pay run.

However, a few examples where leave may not accrue for that pay cycle are when staff take leave without pay, when staff change their normal work hours, or when staff go on maternity leave.

In these cases, a manual adjustment may be required so that the leave accrues at the correct rate (i.e. not at the fixed amount).

The key here is to remember what your default settings are, and remembering to consider if the default settings are no longer working for a specific situation.

3. Not separately identifying paid overtime

When you have a policy of paying staff for overtime, it’s important to separately record the overtime hours in each pay run.

This is because leave entitlements and superannuation do not accrue on overtime.

Failure to separately identify the overtime component of wages can result in excess super being paid, as well as additional leave entitlements accruing (i.e. above and beyond the amount required by law).

4. Making super payments at the last minute

The rules around super are strict. For employers that don’t pay their super on time, they are required to lodged Superannuation Guarantee Charge forms, to compensate their employees for lost earnings. In addition, super that was paid late is not deductible, a real double whammy.

A common mistake is leaving the payment of super to the last minute. The problem here is that the payment of super through Xero is not instantaneous.

The payment needs to be withdrawn from your bank and pass through a Superannuation Clearing House, at which point it is then distributed to your employees’ super funds.

This is quite the journey, a journey that Xero indicates can take up to 5 days.

Unfortunately, when the ATO comes knocking, they don’t ask which date you pressed ‘process’ in Xero. They look at the date the funds were received by your employee’s super funds.

Accordingly, those that leave super payments to the last minute can receive a nasty sting.

Some recommendations we have suggested to clients are:

• Paying super monthly instead of quarterly

• Paying super at the same time as wages

• At the least, bringing super payments forward well ahead of the due date to minimize the risk of late payment

5. Not using the ‘Set as Final Pay’ feature

When a staff member is leaving, it’s good practice to use the ‘Set as Final Pay’ feature in Xero.

One of the great things about this feature is that it automatically calculates the final leave entitlements, and if you have set it up correctly, will automatically include any final entitlements in the pay run.

Those final entitlements are identified within Xero as not being ordinary earnings, therefore not attracting super.

Once the pay run is processed, Xero will also archive the departing employee.

Time and time again, I see business operators not taking advantage of this great feature.

In summary:

Most of these mistakes occur as a result of assuming the program does everything for you, or being unaware of the subtle nuances that can exist with payroll.

A good way to avoid these issues is to keep a checklist of potential manual adjustments that might be required with each pay run.

Xero is always tinkering behind the scenes and making frequent updates, so if you find any of the details in this article are no longer relevant, please feel free to reach out.