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What you need to know about the first stage of STP Phase 2 in Xero

April 12, 2022

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This year, the way you manage Single Touch Payroll (STP) will start to look a little different as we transition to STP Phase 2. This will expand how employers report details about their staff and their pay to the ATO. With a compliance deadline for Xero customers set for the end of this year, we’ve been busy working to get ready for the transition in Xero Payroll.

The changes will be rolled out in three stages throughout the year, with the first stage starting later this month via an opt-in limited release. So what’s coming and how can you get ready? Let’s take a deeper look.

Remind me, how are the STP Phase 2 changes being put in place this year?

The changes are being rolled out in stages to give you more time to adjust and get familiar with STP Phase 2. Here’s when you can expect to see them go live and what will be involved:

  • Stage one: The first stage will start becoming available within Xero from later this month (April) onwards via a limited release before being rolled out over the following months. This will include updates to the way new employee records are set up in payroll.
  • Stage two: The second stage will begin rolling out within Xero in the new financial year. This will extend the set up process to enable the transition of existing employee payroll records to STP Phase 2 compliance.
  • Stage three: The final stage will be available in the second half of this year. It will see the new pay items and leave from STP Phase 2 finalised within Xero, with product support to review existing pay items and leave that may need to be changed to those stipulated by STP Phase 2.

Will this change how I report to the ATO right now?

Not yet – it’s important to note that all Xero payroll customers will continue to report STP Phase 1 for the time being. The rollout of STP Phase 2 pay items and updates to the employee setup process in Xero Payroll will not affect reporting or any YTD values sent to the ATO.

Xero Payroll will continue to report pay as gross until customers have completed the full transition later this year. There are no impacts or changes to the STP finalisation process in July 2022. Meanwhile, many of these new pay items are already available in Xero Payroll, so you can get familiar with them before the compliance date.

Don’t worry – we’ll be providing support through each of the transition stages (both within your Xero account and through educational resources). If you run a small business, your advisor will be able to provide support at this time.

What changes are coming as part of stage one? And what does it mean for how I add new employees?

With stage one, the way you add new employees into Xero will be a little different. To be STP Phase 2 compliant, every new employee set up in payroll will need to have more detail on the components that make up their pay. These include:

Employment type – whether the individual is an employee or contractor.

Income type – elements of how the individual is paid. These include:

  • Salary and wages (this tends to be most employees, depending on your business)
  • Closely held payee
  • Working holiday maker
  • Non-employee (contractor)
  • Labour hire (contractor from a labour hire agency)

Employment basis – whether the individual is full-time, part-time or casual.

Tax scale – you will need to nominate the appropriate PAYG tax scale category that determines how much tax should be withheld for an employee. These tax scales include:

  • Regular
  • Actors, variety artists and other entertainers*
  • Horticulturalists and shearers*
  • Seniors and pensioners
  • Working Holiday Maker

*Withholding tax for seniors and pensioners, actors, variety artists and other entertainers, as well as horticulturalists and shearers will need to be calculated manually (as is the current process). Xero does not currently support the unique withholding tax rules for these tax scales.

In this video, we show you how to add an employee with the new Single Touch Payroll Phase 2 employee set up:

You mentioned closely held payees – what are those again?

Good question. Closely held payees (otherwise known as a closely held employee) are individuals directly related to the entity from which they receive payments. For example, this would include relatives in a family business or beneficiaries of a trust fund.

Last year, STP guidelines were updated so that all businesses must include closely held payees salaries or wages through STP – no matter how infrequently they’re included in a pay run.

With STP Phase 2, you’ll have to indicate whether an employee is closely held or one of the other income types. This means that if you’ve just hired your child or other relative, like a nephew, for a part-time job, you’ll have to select them as closely held when setting them up in Xero once stage one kicks in.

What is a limited release and how do I opt in?

STP Phase 2 is important and we want to get it right. Which is why we’re starting with a limited release for stage one and allowing time to test and refine the payroll experience. This means a limited number of Xero customers will be able to sign up and use the new STP Phase 2 employee setup process before we roll it out more broadly. Why? All so that we can make the entire experience better for everyone involved.

This is an opt-in process – meaning you have to sign up to access it. Head to the employee section of our STP Phase 2 Information hub and follow the instructions and it will let you know if you’re eligible.

How will I know when I’ll be able to use the STP Phase 2 new employee set up?

If you meet the criteria, you can register and your account will switch over in the following weeks. For everyone else, we’ll start to move you across over the next few months. This process will happen gradually and you’ll know it’s time when the new fields are available in your employee set up process.

Will there be a deadline for opting in?

No, you can register at any time, up until the broader release of stage one.

What if I’m not planning on adding a new employee any time soon though?

No need to worry – if you’re not adding any new employees, you might not even notice the change. It’s useful to be aware of this updated process, however, for when you do have someone new joining the team.

I’m confused about adding contractors into my payroll. What should I be doing?

There are a few different ways to manage contractors in Xero. First, a quick refresher on what counts as a contractor. They run their own business and sell their time and skill as a service to others, unlike employees who work within a business.

Contractors – sometimes called independent contractors, sub-contractors or subbies – generally use their own processes, tools and methods to complete the work. They usually negotiate their own fees and working arrangements, and can work for more than one client at a time.

Within Xero, contractors can be set up as a payee at your discretion. For example, you might do this if they submit timesheets or are entitled to be paid superannuation. If they’re set up as a payee in Xero Payroll, you’ll need to follow the new STP Phase 2 process.

For more information on how contractors are defined, visit the Fairwork website. If you’re after advice specific to your business, please reach out to your advisor.

What STP Phase 2 updates are already available in Xero?

Many of the pay items from STP Phase 2 are already live and ready to go in Xero, like bonuses and commissions, new allowance types and a variety of lump sum payments. While you don’t need to use these just yet, they’re available if you’d like to get a head start on your STP Phase 2 compliance.

For the full details, visit the STP Phase 2 Information Hub via the Single Touch Payroll section of your Xero account. We’ll continue to share the status of new functions as they are added.

Where can I find more information on STP Phase 2?

We’ve got you covered. You can take a look at the Xero guide to STP Phase 2 and this handy checklist. You can also visit Xero Central, or refer to the ATO’s employer reporting guidelines.

Keep an eye out for more updates from us – we’ll let you know what’s changing at every step of the way. And, of course, don’t hesitate to ask if you have any questions – we’re always here to help.

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