When to Hire Your First Employee — The Financial Checklist for Australian Small Business

Hiring Feels Like Growth — But Numbers First

The decision to hire a first employee is one of the most financially significant steps a small business owner makes. It's not just a staffing decision — it's a commitment to a recurring cost structure that exists whether revenue is up or down. Done at the right time, it enables growth. Done too early, it compresses margin and creates cash flow pressure that can be difficult to recover from.

This checklist isn't designed to talk you out of hiring. It's designed to make sure you've done the numbers before you commit.

The True Cost of an Employee in Australia

This is where most first-time employers get caught. A salary of $75,000 does not cost $75,000.

• Superannuation: 11.5% of ordinary time earnings (current rate as at 2025). On $75,000, that's $8,625 per year — mandatory, not optional.
• WorkCover premium: Varies by industry. Trades businesses typically pay 1–3% of wages. On $75,000, expect $750–$2,250 annually. Allied health and professional services typically pay less.
• Annual leave: 4 weeks' annual leave per year, with 17.5% leave loading on top. An employee earning $75,000 accrues approximately $1,900 in leave loading on top of their leave pay.
• Personal/carer's leave: 10 days per year. This is a provision — not always taken — but a financial exposure that should be in your modelling.
• Total: A $75,000 salary employee costs approximately $88,000–$97,000 per year in direct employment costs before recruitment, onboarding, tools, uniforms, or supervision time.

The rule of thumb: multiply base salary by 1.2–1.3 to get total employment cost. That's the number you work with in your financial modelling.

Contractor vs Employee — The ATO Multi-Factor Test

Many small businesses try to engage workers as contractors to avoid the costs and obligations above. The ATO does not accept the label — it applies a multi-factor test based on the substance of the arrangement.

Key factors the ATO considers:

• Can the worker subcontract or delegate the work to someone else?
• Does the worker provide their own tools and equipment (or does the business provide them)?
• Can the worker work for other businesses simultaneously?
• Does the worker bear financial risk if the work is deficient or late?
• Is the worker integrated into the business's operations, or are they delivering a specific result?

A worker who consistently works for only your business, uses your tools and vehicles, and works standard hours under your direction is likely an employee under the ATO test — regardless of what the contract says. Misclassification exposes you to back-paid superannuation, PAYG withholding shortfalls, and penalties. The ATO has an employee/contractor decision tool at ato.gov.au — use it before structuring any engagement.

When the Numbers Work — The 3–4x Rule

A hire makes financial sense when the employee generates or frees up 3–4x their total employment cost in revenue or profit within 12 months.

What that looks like in practice:

• A trades employee costing $95,000 fully loaded should generate $285,000–$380,000 in billable revenue — at standard billing rates, roughly 1,500–1,900 billable hours per year, which is realistic for a productive trades employee
• An admin employee costing $65,000 fully loaded should free up enough owner time to generate at least $195,000 in additional billable revenue — meaning the owner must have genuinely constrained billable capacity before the hire makes sense

If you can't model the 3–4x return clearly, the hire may be premature or needs to be structured differently — part-time, or as a contractor until demand is confirmed.

The Revenue Stability Test

Before hiring, answer one question honestly: can you sustain this employee's total cost for six months if revenue drops by 20%?

This matters because revenue often softens in the months after a hire — onboarding takes time, the owner's attention is split, and the new employee is not yet at full productivity. If a 20% revenue dip would create cash flow stress before the employee is contributing fully, the hire is too early or needs to be funded differently.

If you pass the stability test and the value test, hire with confidence. If you fail either, address the constraint first.

Award Coverage — Which Award Applies?

Most employees in Australia are covered by a Modern Award, which sets minimum pay rates, penalty rates, overtime entitlements, and leave conditions. Getting this wrong — paying below Award or classifying a role at the wrong level — creates a liability that accrues from the first day of employment.

Common Awards for True Tally's client industries:

• Plumbers and electricians: Plumbing and Fire Sprinklers Award or Electrical, Electronic and Communications Contracting Award
• Carpenters and builders: Building and Construction General On-site Award
• Allied health practitioners: Health Professionals and Support Services Award
• Administration staff: Clerks — Private Sector Award

Fair Work's Pay and Conditions Tool at pay.fairwork.gov.au identifies the correct Award for any role and calculates minimum pay rates. Use it to check your intended pay rate against the Award minimum before making any offer.

STP Obligations from Day One

Single Touch Payroll (STP) requires you to report wages, PAYG withholding, and superannuation to the ATO each time you process a pay run. This happens automatically through STP-enabled payroll software — Xero payroll satisfies this requirement.

There is no grace period for STP compliance. The obligation applies from your first pay run. Manual or spreadsheet-based payroll is not STP compliant. If you're processing payroll in Xero, you're compliant — the reporting happens in the background when you finalise each pay run.

What Your Bookkeeper Needs to Set Up Before the First Pay Run

Before you can process a payroll, your bookkeeper needs to configure the following in Xero:

• Employee record with TFN, bank details, and super fund details
• Pay template matching their Award classification, ordinary hours, and any applicable allowances
• Leave entitlement accrual rates matching the Award
• Superannuation fund linked (or default fund enrolled if the employee has not nominated)
• WorkCover registration confirmed and premium rate applied

Getting this right from day one avoids retrospective corrections, which are time-consuming and can create payroll tax and super reporting issues. Have your bookkeeper review the setup before the first pay run — not after.

Payroll Tax Thresholds by State

Payroll tax is a state tax that applies when total annual wages exceed a state-specific threshold. It is frequently overlooked by growing small businesses:

• Victoria: $900,000 annual wages threshold. Rate: 4.85% on wages above the threshold (1.2125% for regional VIC employers)
• New South Wales: $1.2 million annual wages threshold. Rate: 5.45%
• Queensland: $1.3 million annual wages threshold. Rate: 4.75%
• Western Australia: $1 million annual wages threshold. Rate: 5.5%

If you have employees across multiple states, each state threshold is assessed separately — but grouping provisions can aggregate wages across related entities. If you're approaching the Victorian threshold of $900,000, talk to your bookkeeper before your next hire. Payroll tax is lodged and paid to the State Revenue Office Victoria, not the ATO.