Tax Obligations You Must Sort Before Hiring Your First Employee

1. Register for PAYG Withholding

Pay As You Go (PAYG) withholding is the system under which you collect income tax from your employees' wages and remit it to the ATO on their behalf. This must be registered before your first payment.

If you're already registered for GST, you may be able to add PAYG withholding to your existing registration through the ATO's Business Portal or via a registered agent. Once registered, you'll report withheld amounts on your BAS (at W1 and W2) each quarter and pay them to the ATO with your BAS.

The amount you withhold depends on the employee's income, tax file number (TFN) declaration, and any tax offsets they've claimed. Your payroll software (Xero) calculates this automatically once set up correctly.

2. Superannuation: Rate, Timing, and Stapled Funds

For 2025–26, the Superannuation Guarantee (SG) rate is 12% of ordinary time earnings (OTE). This increased from 11.5% in 2024–25.

Key super obligations:

• Quarterly due dates: 28 October, 28 January, 28 April, and 28 July. Super paid late — even one day late — is not tax deductible and attracts the Superannuation Guarantee Charge (SGC), which is significantly worse than the original obligation
• Complying fund: You must pay into a complying super fund. If your employee nominates a fund, use it. If they don't, you use their "stapled super fund" — their existing fund that follows them from job to job
• Stapled super: Since November 2021, employers must request the employee's stapled fund from the ATO (via the ATO's Online services for business) if the employee doesn't nominate a fund. Only if there's no stapled fund do you use your default fund
• Super on contractors: Some contractors — particularly those who are natural persons (not companies) providing mainly labour — may also be entitled to super under the extended SG definition. Don't assume all contractor payments are exempt

3. Single Touch Payroll (STP)

Single Touch Payroll is the ATO's real-time payroll reporting system. Every time you run payroll, the payment information — gross wages, tax withheld, and super — is automatically reported to the ATO through your payroll software.

STP has been mandatory for all employers since 1 July 2021, regardless of how many employees you have. You must have STP set up before your first pay run.

STP Phase 2 (now in effect) requires more granular reporting: pay is reported as disaggregated amounts (salary and wages, paid leave, allowances, deductions, etc.) rather than as a single gross figure. Xero handles STP Phase 2 automatically for compliant payroll setups.

At year end, employees receive their Income Statement through myGov instead of a payment summary — you no longer produce group certificates.

4. Tax File Number Declarations

Before or on the date of the first payment, your new employee must complete a TFN declaration form. If they don't provide a TFN within 28 days of starting, you are legally required to withhold tax at the highest marginal rate (currently 47%).

TFN declarations are lodged with the ATO — your payroll software can submit these electronically.

5. Fair Work and Award Obligations

Most trades employees in Victoria are covered by a Modern Award. Before you set a wage, you must confirm the applicable award and minimum pay rates for your employee's classification:

• Building and Construction General On-site Award 2020 — builders, carpenters, concreters, general construction
• Plumbing and Fire Sprinklers Award 2020 — plumbers and gas fitters
• Electrical, Electronic and Communications Contracting Award 2020 — electricians

Each award includes minimum hourly rates, penalty rates (weekends, public holidays), allowances (tool allowance, travel allowance, dirty work allowance), and overtime provisions. Paying below the award rate is a serious compliance failure with significant back-pay liability.

Check current minimum rates at the Fair Work Commission's Pay and Conditions Tool.

6. Workers Compensation Insurance

In Victoria, you must register for workers compensation insurance with WorkSafe Victoria before you employ anyone. This is not optional and cannot be backdated if an injury occurs before registration.

Your premium is based on your remuneration (wages, super, and some contractor payments) and your industry's claims experience. For most trades, the premium is between 1.5% and 4% of remuneration, depending on the specific trade category.

WorkSafe registration is done online and typically takes one business day. You'll receive a policy number to provide to employees.

7. Payroll Tax in Victoria

Payroll tax is a state tax on wages. In Victoria, it applies when your total annual wages bill — including some contractor payments — exceeds the $700,000 threshold.

Most small trades businesses won't hit this threshold immediately. But it's important to know it exists, particularly as you grow. Once you exceed the threshold, you're paying 4.85% on the excess (1.2125% for eligible regional businesses). Registration with the State Revenue Office Victoria is required.

8. The Contractor vs Employee Distinction

This is the most consequential compliance area for trades businesses, and the one that creates the most expensive surprises.

Simply calling someone a contractor — or having them provide an ABN — does not make them a contractor for tax and super purposes. The ATO applies a multi-factor test based on:

• Control over how and when work is done
• Ability to subcontract or delegate the work
• Who provides the tools and equipment
• Whether the worker bears financial risk
• Whether the worker is integrated into the business

Getting this wrong means you may owe PAYG withholding, super, and potentially payroll tax on payments you treated as contractor invoices — with interest and penalties back to when the relationship started. Use the ATO's employee/contractor decision tool if you're unsure.

Also note: if you pay contractors over $100 in a financial year, you likely have Taxable Payments Annual Report (TPAR) obligations. TPAR is due 28 August each year.

9. Setting Up Xero Payroll

Before the first pay run, your Xero payroll setup needs:

• Business bank account details for payment processing
• Employee's super fund details (or stapled super fund requested from ATO)
• Pay template: hourly rate or salary, correct award classification, allowances
• Leave accrual setup: annual leave (4 weeks per year for most full-time employees), personal/carer's leave (10 days), and any additional leave under the applicable award
• STP connection: Xero connects directly to the ATO for STP reporting — this needs to be activated before the first pay event