How to Set Up Single Touch Payroll (STP) in Xero

What Is Single Touch Payroll?

Single Touch Payroll (STP) is an ATO reporting system that requires employers to report salary and wage information, PAYG withholding, and super information to the ATO every time they run payroll — in real time, directly from their payroll software. STP has been mandatory for all Australian employers since 2019 (Phase 1) and was upgraded to STP Phase 2 in 2022, which introduced more granular reporting including income types, disaggregated gross amounts, and child support deductions.

Before You Start: What You Need

Before setting up STP in Xero, make sure you have:

An active Xero account with the Payroll module enabled (Xero Standard or Premium, or a payroll add-on)
Your Australian Business Number (ABN)
Your business address and contact details
Tax File Numbers (TFNs) for all employees
Employee superannuation fund details

Step 1: Enable Payroll in Xero

Go to Payroll > Overview in Xero. If prompted, select Australia as your payroll region. Enter your organisation details including your ABN, payroll contact name, and business address. These details are transmitted to the ATO with every STP event, so accuracy matters.

Step 2: Set Up Your Pay Calendars

Navigate to Payroll > Pay Calendars. Create a pay calendar for each pay frequency you use — weekly, fortnightly, monthly. Assign the appropriate calendar to each employee in their employee record.

Step 3: Add Employee Records

For each employee, you need to enter:

Personal details: name, address, date of birth
Tax details: TFN, tax scale (resident, non-resident, working holiday maker, etc.)
Employment details: start date, employment type (full-time, part-time, casual), income type (STP Phase 2 requires this — salary and wages, closely held payee, labour hire, etc.)
Superannuation: fund name, USI, member number, contribution rates
Bank account for direct deposit

Step 4: Connect Xero to the ATO

Go to Payroll > Single Touch Payroll. Click Connect to ATO. Xero will guide you through the connection process, which involves confirming your ABN and authorising Xero as a sending software. Once connected, a green "Connected" status should appear.

If your business is a closely held entity (e.g., a family company paying directors or shareholders), you may need to use a separate reporting pathway — check the ATO's closely held payees guidance.

Step 5: Run Your First Pay Run and STP Submission

Process a pay run as normal. When you finalise the pay run, Xero will present an option to file via STP. Review the figures and click Submit. Xero sends the data to the ATO, and you'll receive a confirmation status (Accepted, Pending, or Error) within the Xero interface.

STP Phase 2: Key Changes

STP Phase 2 introduced several changes that many businesses found complex to implement:

Disaggregated gross: Gross wages must now be broken down into gross salary/wages, allowances (by type), overtime, bonuses, and directors' fees separately — rather than a single gross figure.
Income types: Each employee must be assigned an income type (SAW — salary and wages, CHP — closely held payees, etc.)
Child support: Deductions for child support garnishees must be reported separately.
Employment conditions: Basis of employment must be reported for each employee.

In Xero, most Phase 2 requirements are handled within the employee record and earnings rate setup. Xero has specific earnings rate categories that map to ATO STP Phase 2 codes — make sure your earnings rates (overtime, allowances, bonuses) are categorised correctly.

Fixing STP Errors

If a submission returns an error status, click into the STP filing in Xero to see the error codes. Common errors include invalid TFNs, missing super fund USIs, and mismatched ABNs. Fix the underlying employee record and resubmit.

Year-End EOFY Finalisation

At financial year-end (June 30), you need to submit an STP finalisation event. This confirms to the ATO that your payroll year is complete. It effectively replaces the old Payment Summary process. Employees can then access their income statement (equivalent to the old group certificate) through myGov.

If your STP setup is giving you trouble or your Phase 2 transition isn't complete, our Australian payroll team can review your Xero configuration and get you compliant. Book a call to get started.