Setting Up Employees in Xero

Preparing Xero to process your payroll requires time and attention to detail.
Employees mean success. The fact that you’ve been able to hire a staff at your small business indicates that your products and/or services are in demand, and you can’t handle all of the necessary work by yourself.
It also means that you have to deal with the most complex element of double-entry accounting: payroll. If you’re processing your payroll manually using paper and Excel, you already know that:
  • It’s time-consuming,
  • You need exceptional organizational skills to keep everything straight, and
  • Absolute accuracy is required.
Fortunately, Xero offers comprehensive payroll management. That means it supports the whole process, from entering information about deduction, taxes, time off, etc., all the way through to issuing paychecks and submitting payroll taxes. But before you can do an actual payroll run, you’ll have a lot of setup work to do. 
First, Xero needs to know all about your company’s payroll policies and structure. SO you’ll need to complete an organization setup. With Xero, it’s easy, but you’ll want to let us help to make sure all the details are covered.
Figure 1: Before you start entering employee information, we can help you with all of the minutiae required to set up your organization’s master settings.
Once you’ve completed that first step, you can start creating records for your employees. Like it did with your organization setup, Xero makes this easy by using familiar conventions like navigation links, fill-in-the-blank fields, drop-down lists, and checkboxes/buttons.
But it’s critical that you enter the exact information required in precisely the right places. If you don’t, several things can happen.
  • Your paychecks and direct deposits will not include the correct amounts, which will make for some unhappy employees and some long work hours trying to track back to your error(s).
  • Any benefits that you offer — like medical insurance and 401(k)s — may not be funded as they should be. Benefits providers will be displeased, and you risk actually putting those benefits in jeopardy.
  • Your company may not submit the correct amounts owed in payroll taxes to taxing agencies. This can lead to fines and other penalties — and worse.
Since a lot is at stake here, we strongly suggest that you bring us into this process. Once you start processing payrolls, you’ll find that the hard part is over. You may need to consult with us occasionally when unusual situations arise; but if you work with us closely through the setup steps, payday should generally go fairly smoothly.
We’ll give you a brief overview here of what’s involved in creating employee records. To get started, we’ll open the Payroll menu and select Employees, then click on Add Employee. After entering some basic contact information and clicking Save, you’ll see this navigation toolbar on the next screen:
Figure 2: Xero simplifies the mechanics of employee setup by presenting a lengthy series of setup screens.
As you click on each link, the screen will change to display the information needed in each section.
Employment. You’ll enter a few details here, like Social Security number and payroll schedule, as well as setting up the employee’s salary or hourly wages.
Taxes. What is the employee’s filing status and number of allowances? Any exemptions? What state?
Time Off. What type(s) will the employee be allowed to take (PTO, sick, vacation, unpaid)? You’ll be able to consult this screen later to view time off balances and requests.
Payment Method. Paper check or direct deposit?
Paystubs. This is information only. Once you start paying employees, you’ll be able to view current and historical paystubs here.
Pay Template. This one will take some time. It’s an accounting of each employee’s pay items: salary/wages, any additional earnings for which they may be eligible for (bonus, overtime, etc.), deductions, reimbursements, and benefits. You will have defined these items during company setup, but you’ll still have to make sure that each employee has the correct pay items assigned.
Opening Balances. This is historical time-off data.
Notes. You can enter miscellaneous information here.
When you’ve completed all of these sections, Xero will use all of this information as it calculates payrolls.


Figure 3: Once you’ve created comprehensive company and employee records, Xero does all of the calculations necessary for tax withholding and other items.
This probably sounds like a lot of exacting work — and it is. We hope you’ll talk to us before you take it on.