What is payroll processing?

Any business owner or HR professional understands how time-consuming payroll processing can be. However, with so many laws governing it, employers can’t afford to make mistakes. Using an automated solution can help you avoid errors while saving you time and money in the process.

Payroll processing involves much more than paying your employees on time. Finding ways to streamline the payroll process is the key to success. With the right approach and tools, you can promote payroll tax compliance, save time, and protect your bottom line. 

Our guide unpacks how to streamline your payroll process. Use these tips to cut down on errors and maintain a clear view of your labor expenses. You’ll learn how to do payroll yourself by tracking hours, calculating wages, and maintaining complete records. 

Read on as our guide dives into questions like “What is payroll management?” and gives you best practices to help you along the way.

Key takeaways

• It’s important to follow federal, state, and local employment and tax laws.
• The law requires correct and timely payroll processing, and employees love it.
• Keeping good payroll records is as important as correct payment.
• Finding ways to streamline the payroll process is the key to success.
• Automated payroll platforms can save you time and keep you in good legal standing.

Table of contents

• What is payroll processing?
• How does payroll processing work?
• Common payroll processing mistakes
• Key considerations for payroll processing
  • Know the relevant regulations
  • Track necessary documentation
  • Consider implementing a payroll processing software
• Streamline your payroll process with When I Work
• What is payroll processing FAQs

What is payroll processing?

Payroll processing refers to how you pay your employees for the work they do. The process includes:

• Calculating the amount of payment owed
• Figuring out how much tax to withhold
• Designing a method of delivering payment, usually by cash, check, or direct deposit

Accurate payroll processing is an important part of your human resources function. By law, you must honor all agreements you made to pay your employees a certain wage or salary.

You must also document that you follow strict employment rules, such as minimum wage and tax laws. Your business can face hefty fines and penalties from the government if you don’t.

Ensuring smooth and accurate payroll processing also keeps your reputation intact. Paying employees incorrectly may cause investors to question your finances. It may also lead the public to lose trust in your brand.

The final reason to have accurate payroll processing is to keep employee morale high. Employees aren’t motivated to work hard or go above and beyond when their pay isn’t right. This can negatively impact culture, productivity, investor sentiment, and your strategic goals.

How does payroll processing work?

Generally speaking, there are three main ways to process payroll:

• Manual: Doing all payroll processing by hand
• Automated: Using computer software to automate payroll processing steps
• Full-service: Leaving your payroll processing to a firm that does everything

Some payroll processing methods are easier and more beneficial than others. Manual processing may be free. But this risks costly human error that a well-priced software platform avoids. 

Before you begin processing payroll, you will need to collect some important information from each employee, including:

• Social Security numbers
• Employment verification forms
• Federal and state withholding forms
• Benefits elections, such as health or dental insurance
• Bank account information if receiving direct deposit

You will also need to decide on a payroll processing cycle for your employees. For example, you may pay hourly employees on a weekly or biweekly basis. You might pay salaried employees on a semi-monthly or even monthly schedule. 

Related read: What Payroll Schedule Makes Sense For Your Business?

Federal law does not designate a particular schedule. Still, the Fair Labor Standards Act does require employers to pay employees promptly. Once you have the correct information and have decided on a schedule, you can take the following steps to process payroll:

1. Track time and attendance 

You should begin by tracking time and attendance using manual methods or employee scheduling software. Time tracking lets you know how many hours or days each employee worked during the cycle. You can use this information to calculate earnings and taxes.

Check out: Free Employee Timesheet For Excel

2. Adjust and approve employee time 

Next, it’s time to figure out employee time. Remember that the employee’s manager or supervisor needs to check for accuracy. They also need to sign off on the approval form.

3. Calculate wages and deductions

The third step is to calculate wages and deductions by first calculating an employee’s gross pay. Then, figure out all deductions and withholdings. Those should include taxes, monthly benefit premiums, and required wage garnishments.

4. Disperse the money for the employee’s net pay 

Then, order and distribute checks and submit payroll to the bank for direct deposit

5. File payroll and income taxes

Once the money is dispersed, you must file payroll and income taxes in the amount and frequency required of your business by the IRS.

6. Retain appropriate documentation and records 

The last step in the payroll process is to retain records. In case of an audit or discrepancy, you will have the information on hand to show to regulators.

How long the entire process takes depends on the number of employees and your processing method. Some business owners spend days on this process. Using an automated software solution can help you cut down that time, sometimes to less than an hour.

Add a payroll integration to save more time! Learn more about our available integrations and see how you can simplify scheduling and payroll for your team.

Common payroll processing mistakes

Even with payroll software, mistakes can happen. Many payroll errors start before you process payroll, especially if you rely on manual data entry and paper timesheets. The most common payroll issues to watch for include: 

Incorrect employee hours

If employees forget to clock in or out, or your managers approve entries that are inaccurate, you could overpay or underpay your team. Digital time tracking that connects to your payroll software helps you verify hours worked. 

Manual data entry errors

Every time you manually enter employee hours, pay rates, or overtime into another system, you increase the chance of making a mistake. Integrating your scheduling, time tracking, and payroll tools eliminates duplicate data entry. It also improves payroll accuracy. You can also take the hassle out of time tracking for employees. 

Overtime calculation mistakes

You must calculate overtime correctly based on applicable federal, state, and local labor laws. Payroll software that automatically calculates overtime helps you reduce payroll errors. 

Processing payroll with outdated employee information

It’s vital to promptly input any changes into your payroll system, such as new pay rates, when a person is transferred or promoted. Failing to keep your employee records current can lead to all sorts of payroll headaches.

Key considerations for payroll processing

Payroll processing is about more than just paying employees correctly. It’s also about keeping your business in good legal standing and keeping staff happy. Here are a few important things to consider as you engage in this important activity.

Know the relevant regulations

Payroll processing isn’t done purely at your company’s discretion. Federal and state laws govern just about every part of the process. 

First, it’s important to check federal and state laws on payroll processing cycles. The Fair Labor Standards Act doesn’t specify a required pay frequency. It does say that FLSA-covered wages are due on the “regular payday for the pay period covered.” Many states have more specific requirements.

Some states require weekly or biweekly pay. Others allow more infrequent cycles, such as semi-monthly or monthly. Certain states also have pay frequency requirements for different industries, job types, or workers who earn a certain amount of money. 

Identify the rules for payroll taxes

Federal, state, and local governments also have payroll tax laws that businesses must follow. Some of these laws are specific to the business entity type. They dictate how much you must withhold from each employee’s paycheck. Withholdings may include income taxes and FICA (Social Security and Medicare taxes). 

Additionally, the business itself must pay employment taxes, usually quarterly or annually. Note that laws govern how often you must pay these and the methods you must use to pay them.

Your payroll should also consider laws around how much you must pay employees. The Fair Labor Standards Act requires a federal minimum wage of $7.25 per hour for most workers. Some states require even more. The FLSA also includes rules about overtime pay for certain workers.

Track necessary documentation

Employers must keep accurate and complete payroll records for each employee. The payroll record includes a plethora of information, including:

• Personal information, including name, age, address, and SSN
• Employment forms, such as the I-9 and W-4
• Information related to their employment, including offer letters and positions held
• Banking details for direct deposit
• All employee timesheets or time clock records
• Details about wages and deductions, like the amount paid and payment type
• Information regarding garnishment orders, union dues, and benefit premiums
• Leave records, including PTO and FMLA requests
• Reimbursement agreements and forms like work travel, mileage, and supplies
• Federal, state, and local tax documents

If an agency audits you or someone sues the company, you may need to furnish this information. You only need to keep some documentation for one year. Agencies may ask you to hold on to others for at least six years. 

Each state also has specific guidelines about how long to keep documents. Some states want businesses to keep records longer than federal law requires.

Consider implementing a payroll processing software

Payroll processing software has many benefits for business owners and HR professionals, including:

• Enhancing productivity by cutting down the time it takes to process payroll
• Increasing efficiency by automating many different payroll tasks. 
• Integrating with other features like timekeeping and employee messaging apps
• Decreasing compliance risk exposure by ensuring greater accuracy in tax calculations and withholding
• Giving you an easy way to keep and organize records.
• Increasing employee independence due to the addition of self-service features

These solutions can save you a lot of time and money and help keep your business in good standing.  The right software will also help you adhere to established payroll best practices.

How When I Work can help

When I Work integrates seamlessly with payroll providers to save you even more time. Our payroll integrations, especially our preferred partner, Rippling, help you connect scheduling and payroll in one streamlined workflow, so you can focus on running your business, instead of reconciling timesheets.

What is payroll processing FAQs

What is a payroll service?

A payroll service is a solution that helps businesses calculate employee wages, withhold taxes, process direct deposits, and manage payroll tax filings.

What is payroll software?

Payroll software is a digital tool that automates payroll tasks. These can include calculating wages, tracking deductions, and processing employee payments. The main difference between payroll software vs. payroll services is whether you handle payroll or outsource it. 

What’s the difference between a PEO and payroll software?

A professional employer organization (PEO) provides outsourced HR services. These can include payroll processing and benefits administration. Payroll software enables you to manage payroll yourself.