What is the limit for tracking options in Xero?

Xero recommends keeping each tracking category to no more than 100 options to maintain reporting performance.

How do I create an employee group in Xero?

In supported payroll configurations, open Payroll Settings and assign the appropriate tracking category to Employee Groups. Then open the relevant employee record and select the required tracking option under Employment Information.

Can Xero Payroll use two tracking categories?

In supported configurations, Xero allows employee groups and timesheet tracking to use separate tracking categories. However, this does not mean every individual payroll allocation can independently apply both tracking dimensions.

What is the difference between employee groups and timesheet tracking?

Employee groups categorize an employee's salary and wage expenses, while timesheet tracking categorizes hours and related expenses according to timesheet details.

Does Xero support tracking categories through its API?

Yes. Xero's Accounting API provides tracking category functionality. Payroll-related data access depends on the relevant regional Payroll API, connection capabilities, and permissions.

Can custom Xero integration automate payroll cost allocation?

A custom integration can retrieve available payroll information, apply predefined allocation rules, and generate detailed reporting data. Where accounting adjustments are required, proposed entries should be validated and approved before posting.

Xero Payroll Tracking Categories: Limits, Employee Groups & Dual Tracking

February 22, 2026 13 min read

Select Xero Payroll Guide: Add two tracking categories in employee salary & timesheet Xero Payroll Guide: Add two tracking categories in employee salary & timesheet

Introduction

Xero tracking categories help businesses organize financial data by department, location, project or cost centre.

An organization can have up to four tracking categories, but only two can be active simultaneously.

In payroll, employee groups and timesheet tracking serve different purposes, and supported configurations allow separate categories for each.

However, businesses requiring more detailed payroll-cost allocation may still encounter reporting limitations.

This guide explains how to configure tracking categories, create employee groups, understand payroll tracking restrictions and evaluate custom Xero integration options for more detailed reporting.

How Many Tracking Categories Can You Have in Xero?

Xero allows organizations to create a maximum of four tracking categories in total, but only two can be active simultaneously.

Each category can contain multiple tracking options. Xero recommends keeping each category to no more than 100 tracking options to maintain reporting performance.

For example, a digital agency might configure the following categories:

Tracking Category	Tracking Options
Department	Development, Design, Marketing
Project	Client A Website, Client B Campaign, Client C Application

This configuration helps the business categorize relevant accounting transactions by department and project.

Xero tracking categories dashboard for managing transaction categories and financial reporting

Tracking Categories vs Tracking Options

A tracking category represents the business dimension you want to analyze, while tracking options represent individual values within that category.

For example:

Tracking Category: Department

Tracking Options: Development, Marketing, Sales

Tracking Category: Project

Tracking Options: Project A, Project B, Project C

Understanding this distinction helps businesses structure their accounting data without creating unnecessary categories.

Active and Archived Tracking Categories

Xero permits a maximum of two active tracking categories at a time.

Categories that are no longer required can be archived while retaining historical tracking information.

Before changing an existing category, businesses should review its usage across transactions, reporting workflows, and connected applications.

For more information, refer to Xero’s official tracking category documentation.

What Are Tracking Categories in Xero Payroll?

Tracking categories allow businesses to categorize financial transactions according to different operational dimensions, including departments, projects, locations, and cost centres.

They help finance teams analyze income and expenses and generate reports for individual business units.

Within payroll, tracking categories help organizations understand how employee-related expenses are distributed across different areas of the business.

For example, an agency might use:

Department: To identify which team is responsible for employee payroll expenses.
Project: To understand how employee hours and related expenses are distributed across client projects.

This information supports financial reporting, resource allocation, cost analysis, and project profitability reporting.

However, the way tracking categories are configured and applied in payroll differs from their use in certain standard accounting transactions.

How to Create Tracking Categories in Xero

Before configuring payroll tracking, businesses must create the required tracking categories and options in Xero.

Follow these steps:

Log in to your Xero organization.
Navigate to Accounting and select Accounting Settings.
Open Tracking Categories.
Click Add Tracking Category.
Enter a category name, such as Department.
Add relevant tracking options, such as Development, Marketing, and Sales.
Save the category.

Repeat the process for a second category, such as Project, if required.

Once configured, these categories can be used in supported accounting and payroll workflows.

Before creating additional categories, check whether your organization has already reached Xero’s tracking category limit.

Configure Employee Group Tracking in Xero

Employee groups help businesses allocate an employee’s total salary and wage expenses to a selected tracking option.

For example, if an employee belongs to the Development department, their employee-group tracking can be configured accordingly.

In Xero’s UK payroll configuration, employee groups and timesheet tracking can use different tracking categories.

Step 1: Configure Employee Group Tracking

Open Payroll in Xero.
Select Payroll Settings.
Navigate to the Organisation tab.
Locate Payroll Payments & Tracking.
Select the appropriate category under Employee Groups.
Save the configuration.

For example, select Department as the employee-group tracking category.

Step 2: Assign an Employee to a Tracking Group

Once the category is configured:

Navigate to Payroll and select Employees.
Open the relevant employee record.
Select Employment Information.
Locate the Employee Group field.
Choose the appropriate tracking option, such as Development.
Save the changes.

The selected group can then be used to categorize the employee’s salary and wage expenses.

The exact configuration steps may vary depending on the organization’s payroll region and Xero interface.

For additional guidance, refer to Xero’s payroll tracking documentation.

Why Businesses Need Dual Tracking Categories in Xero Payroll

Many businesses need to analyze payroll costs across more than one dimension.

While a single tracking category can group payroll expenses by one factor, organizations often require two levels of categorization to generate more detailed financial insights.

Using dual tracking categories allows finance teams to understand where payroll costs originate and how they are distributed across the business.

For example, companies may want to track payroll expenses by department and project, or location and client, at the same time.

Common Business Scenarios

Tracking Category 1	Tracking Category 2	Business Use Case
Department	Project	Understanding payroll cost per department for each project
Location	Department	Comparing staff expenses across multiple office locations
Client	Project	Agencies tracking payroll costs per client project
Cost Center	Grant	Nonprofits allocating payroll to different funding sources
Business Unit	Region	Multi-region companies analyzing workforce cost distribution

Example: Agency Payroll Tracking

Consider a digital agency where employees work on multiple client projects.

The finance team may want to track:

Department (Design, Development, Marketing)
Client Project (Client A Website, Client B Campaign)

This allows the company to determine:

Payroll cost for each project
Department-level profitability
Resource allocation efficiency

However, Xero payroll currently supports only one tracking category, which makes this type of analysis difficult without additional workarounds.

Why This Matters for Financial Reporting

Dual tracking categories help businesses generate more meaningful reports such as:

Project-level profitability reports
Department cost allocation
Client profitability analysis
Payroll cost breakdown by region or location

Without dual tracking, finance teams often need to rely on manual adjustments or additional journal entries to obtain the same level of reporting detail.

Understanding Xero Payroll Tracking Limitations

Xero Payroll provides separate tracking functionality for employee groups and timesheets in supported configurations.

Employee groups help allocate employee salary and wage expenses, while timesheet categories allocate hours and related expenses according to timesheet details.

Both features can be used together in supported payroll configurations when assigned different tracking categories.

However, this does not mean every payroll transaction or individual payroll allocation can independently use any two tracking dimensions in the same way as standard accounting transactions.

For example, an organization may need to distribute an employee’s payroll expenses across multiple projects while preserving its departmental classification.

The existing configuration may not provide the exact breakdown required for the organization’s reporting needs.

Before implementing a workaround, businesses should review:

Their payroll region and available tracking functionality.
Employee-group assignments.
Timesheet tracking configuration.
Required department and project reporting.
Available financial reports and allocation options.

Where native functionality does not meet these requirements, additional reporting logic or a custom Xero integration may be considered.

Employee Groups vs Timesheet Tracking Categories

Employee groups and timesheet tracking serve different purposes within Xero Payroll.

Feature	Employee Groups	Timesheet Tracking
Primary purpose	Categorize salary and wage expenses	Categorize hours and related expenses
Typical category	Department	Project
Example	Development	Client A Website
Assignment	Employee record	Timesheet entry
Reporting use	Employee-group payroll expenditure	Timesheet-based allocation

For example, an employee may belong to the Development department but work across multiple client projects during the same payroll period.

Employee-group tracking identifies the employee’s department, while timesheet tracking identifies the project associated with the recorded hours.

In supported configurations, these features can be used together when assigned different tracking categories.

However, businesses should verify whether the resulting payroll reports provide the specific department-by-project cost breakdown they require.

How Tracking Categories Work Across Xero Accounting and Payroll

Xero supports two active tracking categories for an organization.

In standard accounting workflows, these categories can be applied to supported transaction lines to provide more detailed reporting.

Payroll uses a different configuration involving employee groups and timesheet tracking.

For example, a business may use Department for employee-group tracking and Project for timesheet tracking.

However, the resulting allocation depends on the available payroll functionality and configuration.

Understanding this distinction is important before introducing additional reporting or journal-based adjustments.

Let’s Investigate in Xero Tracking Categories

Xero is powerful accounting software suitable for Small and Medium Businesses, allowing accountants to track transactions with features called tracking categories.

To find out if payroll tracking categories are limitations?

Screenshot of a tracking categories page in business software, similar to Xero Payroll, showing options to add new categories and configure existing ones. Includes sections for department management and the ability to archive them efficiently.

Xero allows a maximum of four tracking categories in total, with only two active simultaneously. Each category can contain multiple tracking options. Xero recommends keeping each category to no more than 100 options to maintain reporting performance.

However, Xero allows only 2 active tracking categories to be used within all transaction pages, including quotes, invoices, payments, bills, bill payments, and manual journals.

However, Xero doesn’t provide the same coverage of two tracking categories in payroll modules like payroll settings, timesheets, and pay runs.

Below is the Proof

How to Configure Timesheet Tracking in Xero Payroll

Timesheet tracking allows organizations to categorize employee hours according to a selected tracking category.

For example, a business may use Project as its timesheet tracking category to allocate employee hours across different client assignments.

Step 1: Open Payroll Settings

Screenshot of a company dashboard featuring Xero Payroll options, highlighting sections like primary checking, invoices, bills, accounts watchlist, and a handy dropdown menu for payroll management.

Step 2: Configure the Timesheet Category

Locate the tracking settings and select the category used for timesheet allocations.

For example, choose Project.

Where employee groups are also configured, ensure the timesheet category is different from the category assigned to employee groups, as required by the supported payroll configuration.

Screenshot of an organization settings page in Xero Payroll software, displaying options for bank accounts, payroll tracking, and payroll options.

Step 3: Assign Tracking Options to Timesheets

When creating or reviewing a timesheet, select the relevant tracking option for the recorded hours.

For example, an employee belonging to the Development department may record hours against Client A Website and Client B Application.

The resulting payroll allocation and reporting behavior should be verified against the organization’s requirements.

Understanding Tracking Differences Between Payroll and Accounting Transactions

The following screenshots illustrate how tracking-category selection differs across Xero’s payroll and accounting interfaces.

In the timesheet interface, users select the relevant tracking option from the category configured for timesheet tracking.

Employee-group tracking is configured separately within payroll settings.

In contrast, supported accounting transactions can use the organization’s two active tracking categories.

These differences are important when designing reports that combine employee information, timesheet allocations, and accounting data.

The available payroll configuration should be evaluated before deciding whether additional reporting functionality is necessary.

Screenshot of Xero Payroll's organization settings page displaying payroll tracking and pay slip options, complete with a dropdown menu open for timesheet categories.

Screenshot of a Xero Payroll timesheet page for February 2024, showing status as draft. It includes fields for ordinary hours and department, along with options to delete, save, or approve the timesheet.

The timesheet draft for February 2024 is displayed on the screen, featuring department selection options and an hours input grid, seamlessly integrated with Xero Payroll.

The invoice creation interface integrates seamlessly with Xero Payroll, displaying product details, quantity, price, and tax. It offers options to input department and client information. The total amount is conveniently shown at the bottom as 220.00.

Screenshot of an online invoicing system integrated with Xero Payroll, showcasing a new invoice template. Fields include issue date, due date, invoice number, reference, and line items. Total amount is 220.00.

A digital bill form from an accounting software interface, such as Xero Payroll, displays fields for vendor, date, due date, reference, item descriptions, quantity, unit price, account, and total amount.

Screenshot of a web application page for creating a new quote, seamlessly integrated with Xero Payroll. Includes fields for contact, date, currency, and items. Totals are displayed at the bottom.

Solution for Managing Two Tracking Categories in Xero Payroll

When Xero creates a pay run for an employee’s timesheets, which has only one tracking category, it generates a journal entry behind the scenes for the pay run.

Let’s understand this with an example of Alex Martin’s timesheet.

Below is a fictitious timesheet for Alex for one week. Note that one department has been assigned:

A timesheet for February 2024 in Xero Payroll shows the approved status for Alex Martin with 126 monthly hours, ending on 07 Feb 2024. Earnings detail reveals that 20 hours were dedicated to development work.

Let’s process a pay run in Xero for 1 employee for 1 week

Post the Pay Run: Once you post the pay run in Xero, you can view it in the “pay run journal” report.

This report shows the account, description, debit, and credit entries.

The Xero Payroll dashboard displays a draft for February 2024, featuring details like total earnings (5,280), taxes (1,184), and net pay (1,336) for one employee. The payment date is set for 01 Mar.

Xero generates accounting journal entries when payroll is processed. These entries can be reviewed to understand how payroll costs are distributed across tracking categories.

Before creating additional journals, businesses should evaluate whether Xero’s native employee-group and timesheet tracking functionality meets their reporting requirements.

This is a screenshot of a Pay Run Journal report from a demo company using Xero Payroll. It displays wages, windings, and wages payable in a table with account, debit, and credit columns. The total debits and credits both tally up to 2,530.00.

Where additional allocation is required, a custom integration can retrieve relevant payroll information, apply predefined allocation rules, and prepare reporting adjustments.

Any journal-based adjustments should be reviewed and approved by the organization’s accountant to prevent duplicate payroll expenses, incorrect liabilities, and reconciliation discrepancies.

A screenshot of a Xero Payroll manual journal entry displays earnings, taxes, and wages with corresponding accounts and amounts, totaling 2,520.00 AUD.

Also Read: Bank Revaluation in XERO

High-Level Technical Solution for Managing Payroll Tracking Categories

A controlled integration workflow can help organizations apply additional payroll allocation rules without automatically replacing original payroll records.

The recommended process includes the following steps.

1. Review Existing Payroll Tracking

Evaluate employee groups, timesheet categories, and available native reporting functionality.

Identify the specific reporting requirement that cannot be satisfied through the existing configuration.

2. Retrieve Relevant Payroll Information

Retrieve available payroll and accounting data through supported Xero APIs or approved exports.

Confirm the payroll region, required permissions, and available data fields.

3. Define Allocation Rules

Establish business rules for distributing payroll expenses across departments, projects, or clients.

These rules may use employee assignments, recorded hours, allocation percentages, or other approved information.

4. Calculate and Validate Allocations

Generate the required allocation breakdown and reconcile the results against the original payroll information.

5. Generate Reports or Proposed Adjustments

Prepare the required allocation report. If accounting adjustments are necessary, generate proposed entries for accountant review.

6. Obtain Approval and Preserve Records

Ensure that adjustments are approved, reconciled, and documented.

Original payroll records should remain available for audit and compliance purposes.

Solution 1: Make.com

Make.com provides workflow automation capabilities that can connect business applications and exchange information through supported integrations and API requests.

For payroll tracking requirements, businesses should first check whether the required Xero Payroll endpoints, authentication permissions, and data fields are available through the proposed workflow.

Where the native connector does not expose the required functionality, additional API-based development may be necessary.

The implementation should be tested against the organization’s payroll region before it is selected for production use.

Solution 2: Zapier

Zapier can be evaluated for workflows involving Xero and other business applications.

However, the availability of particular payroll actions and triggers should be verified before relying on the platform for payroll allocation.

For example, a workflow requiring detailed pay-run information may need functionality beyond the available native connector actions.

Businesses should evaluate the required endpoints, API permissions, error handling, and reconciliation requirements.

For more complex allocation and accounting workflows, a custom integration may provide additional control over the business logic.

Solution 3: Custom Xero Integration

For businesses requiring more detailed payroll cost allocation, a custom Xero integration can connect payroll data with predefined tracking rules to support department-level, project-level, and client-level financial reporting.

Before implementing a custom solution, businesses should evaluate whether Xero’s existing employee-group and timesheet tracking functionality meets their reporting requirements.

Where additional allocation is necessary, the following approach can be implemented.

Step 1: Retrieve Payroll and Journal Data

Use the relevant Xero Payroll API to retrieve available pay-run information.

For Australian payroll, refer to the GET Pay Runs API.

Where access is available, the Xero Accounting API’s GET Journals endpoint may also be used to retrieve accounting journal information.

The integration should validate available data, API permissions, connection capabilities, and regional payroll support before processing.

The original payroll information provides the starting point for calculating additional allocations.

Original payroll information used as the source for additional tracking allocation.

Step 2: Define Payroll Tracking and Allocation Rules

Create a rules spreadsheet defining how payroll costs should be allocated across the required tracking categories.

Rules can be configured based on:

Employee or employee group.
Existing tracking category.
Department.
Project or client.
Applicable allocation percentage.

For example, payroll expenses associated with an employee in the Development department may need to be distributed across multiple projects.

Table illustrating Xero Payroll rules for assigning a second tracking category to employees, based on their first tracking category and department. — Example allocation rules for distributing payroll expenses across departments and projects.

Step 3: Apply Allocation Rules Through a Custom Xero App

Develop a custom Xero integration that retrieves the relevant payroll information and applies the predefined allocation rules.

The application can calculate department-level and project-level payroll allocations and prepare the required reporting data.

Where additional accounting adjustments are necessary, the application should prepare proposed journal entries for review rather than automatically duplicating the original payroll journal.

This allows finance teams to review the allocation results before changes are made to accounting records.

Step 4: Validate Payroll Allocations and Accounting Entries

Before posting any adjustments, verify that:

Total allocated payroll expenses match the source amounts.
Debit and credit balances reconcile.
Payroll liabilities remain accurate.
Duplicate expenses are not introduced.
Original payroll records and supporting audit trails are preserved.

The validation process should also identify unmatched employees, missing allocation rules, and discrepancies between source payroll information and calculated amounts.

Any discrepancies should be resolved before proposed adjustments are approved.

Step 5: Review and Approve Accounting Adjustments

Any proposed manual journal adjustments should be reviewed and approved by the organization’s accountant before posting.

The original pay run should not be deleted merely to accommodate additional tracking categories.

The approved allocation information can then support department-level reporting, project cost analysis, and more detailed financial reporting.

This approach helps organizations extend their payroll reporting capabilities while maintaining financial accuracy, traceability, and appropriate accounting controls.

For businesses with complex payroll allocation requirements, Satva Solutions provides custom Xero integration services to develop tailored accounting and reporting workflows.

Tracking Category Support Across Xero Modules

Tracking category functionality varies depending on how information is entered and processed within Xero.

Standard accounting transactions can generally use the organization’s two active tracking categories.

Payroll uses a different configuration involving employee groups and timesheets.

Xero Functionality	Tracking Category Support	Important Consideration
Invoices	Up to two active categories	Tracking can be assigned to relevant transaction lines.
Bills	Up to two active categories	Supports expense categorization.
Manual Journals	Up to two active categories	Subject to available functionality and permissions.
Employee Groups	One selected category	Used for employee salary and wage tracking.
Timesheet Tracking	One selected category	Used for tracking hours and related expenses.

In supported payroll configurations, employee groups and timesheet tracking can use different categories.

Businesses should verify how these configurations affect the resulting payroll entries and financial reports before implementing additional allocation logic.

Conclusion

Xero tracking categories provide businesses with a useful way to analyze financial information across departments, projects, locations, and other operational dimensions.

While Xero supports two active tracking categories, payroll tracking has its own configuration and reporting behavior.

Employee groups and timesheet tracking can meet many requirements in supported configurations. However, businesses requiring more detailed cost distribution may need additional reporting or integration functionality.

Before implementing a workaround, evaluate the existing payroll configuration and identify the exact reporting gap.

Where additional functionality is necessary, custom Xero integration can help retrieve payroll information, apply allocation rules, validate calculations, and prepare the required reporting outputs.

Need Help with Complex Xero Payroll Reporting?

Satva Solutions helps businesses develop custom Xero integrations for accounting automation, payroll-related data workflows, and financial reporting.

If your existing Xero configuration does not provide the allocation details your finance team requires, our team can help evaluate the requirements and develop an appropriate solution.

Explore Our Xero Integration Services

Frequently Asked Questions

How many tracking categories can I have in Xero?: Xero allows a maximum of four tracking categories in total, with only two active simultaneously. Each category can contain multiple tracking options.
What is the limit for tracking options in Xero?: Xero recommends keeping each tracking category to no more than 100 options to maintain reporting performance.
How do I create an employee group in Xero?: In supported payroll configurations, open Payroll Settings and assign the appropriate tracking category to Employee Groups. Then open the relevant employee record and select the required tracking option under Employment Information.
Can Xero Payroll use two tracking categories?: In supported configurations, Xero allows employee groups and timesheet tracking to use separate tracking categories. However, this does not mean every individual payroll allocation can independently apply both tracking dimensions.
What is the difference between employee groups and timesheet tracking?: Employee groups categorize an employee’s salary and wage expenses, while timesheet tracking categorizes hours and related expenses according to timesheet details.
Can I track payroll expenses by department and project in Xero?: Supported configurations allow businesses to use different tracking categories for employee groups and timesheets. If the resulting reports do not provide the required department-by-project breakdown, additional allocation or reporting functionality may be necessary.
Does Xero support tracking categories through its API?: Yes. Xero’s Accounting API provides tracking category functionality. Payroll-related data access depends on the relevant regional Payroll API, connection capabilities, and permissions.
Can custom Xero integration automate payroll cost allocation?: A custom integration can retrieve available payroll information, apply predefined allocation rules, and generate detailed reporting data. Where accounting adjustments are required, proposed entries should be validated and approved before posting.