How Does Payroll Processing Work? (2024)


February 23, 2024

Learn how Paylocity's payroll processing software automates the payroll payment process for small and large businesses.

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How Does Payroll Processing Work? (1)

"If nothing else, ensure your workers get paid." - Some payroll guru… probably.

Efficient and reliable payroll processing can be one of the most important factors of an organization's overall success. It not only shows employees that their time and work are valued but also influences their trust and engagement within the workplace more than any piece of swag they'll receive.

Moreover, paying employees accurately and on time can substantially help meet compliance requirements and even save the organization time and money.

So, if payroll processing is such a crucial component, how do you guarantee your organization not only gets it right the first time but every time?

In this guide, we'll answer questions like “What is the payroll process?” and “How does payroll work?”. We’ll also explore what documents are involved and then show why a modern solution like Paylocity is just what the payroll guru ordered.

Key Takeaways

  • Payroll processing is the method employers use to compensate your employees for the work they perform.
  • It includes tracking hours worked and attendance, calculating wages, withholding taxes and benefits, and delivering payments.
  • Automated payroll systems save time, reduce errors, and are easier to customize.

What is Payroll Processing?

Payroll processing is the method you use to compensate your employees for the work they perform. It includes calculating wages, withholding taxes and benefit premiums, and delivering payment—often through direct deposit.

Depending on the size of your business, this process can be quite time consuming, which is why organizations, both large and small, invest in processing software to automate the steps covered below.

Why is Payroll Processing Important?

Payroll processing is important for a variety of reasons一not least is that late or inaccurate payments are serious morale-killers.

To keep your employees happy, you need a solid payroll system to pay people what they've earned when they expect it. This isn’t only about being a good employer. Paid workers tend to be more productive!

In addition, if you don't pay your employees reliably, they may start to question your company’s financial stability. This could lead them to become less engaged and less motivated to perform.

Finally, a good payroll system ensures you fulfill your employer tax obligations at the federal, state, and even local level. It’s critical to stay compliant with employment laws. You'll not only avoid costly fines, but also maintain your reputation with employees.

What Are the Types of Payroll Processing?

Common payroll processes include paying by hour, salary, and commission. Employers must correctly classify employees under the Fair Labor Standards Act to determine their eligibility for overtime pay, breaks, and other employment benefits.

Wage Type Paid by Entitled to overtime
Hourly Hours worked Yes (non-exempt)
Salary Monthly or annual salary Sometimes (non-exempt and exempt)
Commission Straight commission or commission with base salary Sometimes (non-exempt and exempt)

Additionally, you’ll need to decide how to provide payment to employees (paper checks, direct deposit, or both) and the logistics of how you'll process payroll. Again, manual payroll processing can be tedious and error-prone, so most organizations use payroll processing software like Paylocity.

What is Needed to Process Payroll?

The payroll process involves several steps. First, you need to apply for a federal employer identification number (FEIN), a state tax identification number, and possibly a local identification number for your business. These allow you to file and pay payroll taxes.

Next, you need to collect and retain certain information and documents from your employees to have on file for their paychecks. This includes their:

  • Social Security Number
  • Form W-4 (federal income taxes)
  • Form I-9 (employment eligibility verification)
  • State withholding form (state income taxes)
    • Note, not all states require a withholding form. Check with your individual state's Department of Revenue for more information.
  • Bank account information
  • Benefits elections (insurance, retirement, etc.)

How Long Does Payroll Processing Take?

How long it takes to process payroll depends on whether you’re using manual or automated processes and how many employees you have. Businesses with payroll processing solutions typically finish internal processes in one to two days.

After payroll is submitted to the bank, it takes two to three days for wages to be deposited into employee bank accounts. So, employees receive their paychecks, on average, within five days of the pay period end date.

What Is a Typical Payroll Cycle?

When you hire employees, you’ll need to determine how often to pay them. The most common payroll cycles are weekly, bi-weekly, semi-monthly, and monthly:

Payroll Cycle Number of paychecks a year Common for
Weekly 52 Hourly employees
Bi-weekly 26 Hourly and salaried employees
Semi-monthly 24 Salaried employees
Monthly 12 Salaried employees

Again, review wage and hour laws in your state to ensure your payroll cycle meets compliance requirements.

Can Employers Delay Payroll Processing?

Employers must pay their employees according to their payroll schedule. Federal law requires employers to pay employees “promptly” for hours worked, while state law is more specific in many cases.

Subsequently, delaying payroll can lead to costly fines and penalties. Be sure to determine which payroll frequencies (weekly, bi-weekly, semi-monthly, monthly) are acceptable in all the states where you workers are located.

How Does Payroll Processing Work?

Payroll processing is a multi-step process for any company, which requires all the same components whether an organization is a small business or a large enterprise.

After you've obtained your federal and state ID numbers, established a payroll cycle, determined wage classifications and requirements, and collected all relevant employee information, you’re ready to run your first payroll:

Track Time & Attendance

Before you can calculate each employee's pay, you need to know how much they worked during that pay cycle. Most organizations track this information with time and attendance software, especially if they have complicated pay practices, such as shift differentials, weekend pay, overtime, critical shift pay, per-piece pay, etc.

Even if your pay structure has fewer categories, you can still benefit from a robust time tracking solution that makes it easy for employees to log and review their hours worked.

Review and Approve Time

A compliant payroll business process will include supervisor review and approval of timecards before the payroll is actually processed. Each employee’s timecard should be reviewed carefully, and corrections should be made where needed — before the checks are cut. Moreover, the supervisor's approval should also be documented and retained in case of a future audit.

Calculate Wages and Deductions

When an employee's timecard is approved, calculate their gross earnings.

Wage Type Gross Pay Calculation

[Hours Worked] x [Rate of Pay] = [Gross Pay]

40 x $18 = $720


[Annual Salary] ÷ [Number of Paychecks a year] = [Gross Pay]

$45,000 ÷ 26 = $1,730

Next, calculate each employee's taxes, benefits premiums, garnishments, and other authorized deductions and withholdings based on the documents and information you previously gathered from them (W-4, retirement elections, etc.). Deduct and withhold these amounts from the employee's gross pay to find their net pay.

Submit or Disburse Payroll

For any employees with direct deposit, you’ll next submit the finished payroll to your organization's banking agent for disbursem*nt. For any employees who receive paper checks, you’ll instead order printed checks with pay stubs and manually distribute them to each employee.

Most employers use a combination of these two methods, though some payroll providers offer additional options, such as on-demand payorpaycards, for when employees need quicker access to their earned wages.

Pay Taxes

After processing payroll, file and remit payments for all of your state and federal payroll taxes as well as any state or federal income taxes you withheld on behalf of each employee. Timely deposits can help you avoid penalties at quarter-end, so remember to track key deadlines.

Normally, the Internal Revenue Service (IRS) requires payroll tax deposits in the form of an Electronic Fund Transfer (EFT), on the Department of Treasury's Electronic Federal Tax Payment System (EFTPS).

Read More: Read More: Payroll Taxes & Form 941: How to File and Important Due Dates

Post to General Ledger

Be sure to log payroll expenses in your general ledger at the end of the payroll process after all payments to employees have been made.

This ensures that your financial records accurately reflect all payroll expenses and liabilities incurred during the payroll period. The posting process involves summarizing the payroll transactions (such as gross wages, taxes withheld, employer tax contributions, and other deductions) and recording them in the appropriate accounts within the general ledger.

If you use payroll software, you’ll likely be able to export a file to import the necessary entries into your accounting platform.

Retain Records

Businesses are required to retain payroll and tax records according to state and federal records retention laws. Per the Department of Labor, the Fair Labor Standards Act (FLSA) requires employers to maintain these records for at least three years. It’s also a good idea to retain these records to resolve any future legal or regulatory issues.

Three Advantages of an Automated Payroll Processing System

With so much riding on getting payroll right, investing in the right HR payroll processing system is an important business decision. Digital payroll processing systems offer several key advantages over manual payroll processing:

1. Saved time

The biggest advantage of a payroll system is the amount of time you save. Payroll software automates a variety of manual processes, letting you focus on more strategic tasks that grow your business.

Payroll processing systems calculate wages automatically, so you don’t lose time doing it manually. Plus, they send automated reminders for managers to approve employees’ time, so no more chasing down timesheets and signatures.

Additionally, payroll software stores your information securely in one place, which means you don’t waste time searching for it. It’s right there when you need it.

2. Reduced errors

Automation also reduces the chances of costly payroll errors.

If you make an error that underpays your employees, it damages their trust and could lead to legal action.

If you overpay employees, you’ll lose valuable capital and have to spend time recouping it.

And, if you make a tax error, it could result in significant penalties — and more lost time.

A payroll system will accurately track your employees’ time and calculate wages automatically, so you’ll always pay them exactly what they’ve earned. It will also help prevent tax errors and keep you compliant with current employment regulations.

3. Easier customization

Simple customization is one of the must-have payroll software features that’s easy to overlook, but of crucial value.

You want a payroll system that’s simple to customize so you and your employees can quickly make changes without having to contact admin through an employee self-service portal. In fact, a cloud-based system like Paylocity lets you update information from anywhere as long as you have the right clearance.

You can customize payroll processing software according to employee count, payment structure, payment schedule, tax deductions, and more, letting you provide the best service to your employees.

Why Paylocity for Payroll Processing?

Taking all of these details and nuances into account, it's no surprise organizations of all sizes need help making sure all their employees receive the correct pay at the correct time. It's true, you can do all of the above steps manually, but working with Paylocity as your payroll processing provider includes extensive peace-of-mind perks like:

  • A menu of features to choose from in addition to payroll, including time and attendance, benefits administration, and more.
  • Pre-built interfaces with more than 300 third-party systems so you can receive and send data to the systems you’re already using.
  • Automated payroll tax filing and payment, including federal and state taxes, social security taxes, and Medicare taxes.
  • Exceptional technical support and customer service for all business sizes.
  • Employee self-service for quick access to pay stubs, W-4s, W-2s, and more.
  • A robust document library to store all employee forms and payroll records.

To explore Paylocity as a potential payroll service for your organization, request a payroll demo today.

How Does Payroll Processing Work? (2024)


How Does Payroll Processing Work? ›

Payroll processing is the method employers use to compensate your employees for the work they perform. It includes tracking hours worked and attendance, calculating wages, withholding taxes and benefits, and delivering payments. Automated payroll systems save time, reduce errors, and are easier to customize.

How does payroll processing work? ›

Processing payroll means compensating employees for their work. It involves calculating total wage earnings, withholding deductions, filing payroll taxes and delivering payment.

What is payroll processing for beginners? ›

How to process payroll
  • Gather time card information. ...
  • Compute gross pay. ...
  • Calculate payroll taxes. ...
  • Determine employee deductions. ...
  • Calculate net pay. ...
  • Approve payroll. ...
  • Pay employees. ...
  • Distribute pay stubs.
Dec 16, 2022

How hard is payroll processing? ›

The payroll process can be relatively straightforward overall but there are also many moving parts that can make it difficult. Even if you have a payroll system up and running, there can be a few things that make it more complicated. Some managers also get tripped by the tax deductions aspect of payroll.

What are the stages of processing payroll? ›

Payroll Processing in India
  • Step 1: Onboarding employees. ...
  • Step 2: Defining payroll policy. ...
  • Step 3: Gather employee inputs. ...
  • Step 4: Validate employee inputs. ...
  • Step 5: Calculation of payroll. ...
  • Step 6: Accounting. ...
  • Step 7: Pay employee salaries. ...
  • Step 8: Compliance and reporting.
Mar 29, 2022

What are the five basic steps of payroll? ›

To run payroll for employees, follow the steps listed below.
  • Step 1: Make Sure You Have the Information You Need. ...
  • Step 2: Calculate Gross Pay. ...
  • Step 3: Calculate Taxable Income. ...
  • Step 4: Make Necessary Deductions and Reimbursem*nts. ...
  • Step 5: Calculate Company Contributions and Taxes.

How can I teach myself payroll? ›

Here are six ways to learn payroll and get started.
  1. Schedule a one-on-one with your accountants. ...
  2. Check out the resources offered by your payroll software provider. ...
  3. Consult the IRS website. ...
  4. Check out resources from your state. ...
  5. Find a trusted business mentor in your field. ...
  6. Take a class.
Oct 19, 2021

Is payroll easy to learn? ›

Even if your company is small, processing payroll can be challenging. It takes time to gather employees' information, calculate their gross and net pay, and ensure you're withholding the right amount for state and federal taxes each pay period.

How do you simplify payroll process? ›

How to simplify your company's payroll (whether you pay by the hour, salary, or somewhere in between)
  1. Set clear expectations with a payroll schedule. ...
  2. Avoid penalties by tracking important payroll dates. ...
  3. Automate your payroll process. ...
  4. Correctly categorize your employees. ...
  5. Create a digital filing system to stay organized.

How to process payroll manually? ›

  1. Obtain applicable tax ID numbers.
  2. Select a pay schedule.
  3. Gather your payroll information.
  4. Calculate each employee's paycheck.
  5. Calculate your tax contributions.
  6. Distribute paychecks.
  7. File paperwork and remit payroll taxes.
  8. Store payroll records.
Apr 30, 2024

How do you progress in payroll? ›

Career path and progression
  1. move into pensions management or human resources.
  2. train to qualify as an accountant.
  3. work in payroll software development.
  4. manage an agency that provides payroll services to businesses.

How can I improve my payroll process? ›

9 Ways to Improve Your Payroll Process
  1. Integrate HR and accounting with payroll. ...
  2. Be more transparent with employees. ...
  3. Keep on top of legalisation, always. ...
  4. Get feedback from employees. ...
  5. Improve employee access. ...
  6. Conduct payroll audits. ...
  7. Leverage payroll automation. ...
  8. Invest in automated payroll software.
Jul 3, 2023

Is payroll processing a skill? ›

Payroll is a skill that involves managing the process of paying employees for their work. It includes keeping track of hours worked, calculating wages, withholding taxes, and ensuring that employees receive their paychecks on time.

What is the formula for payroll? ›

Net Pay = Gross Salary – Gross Deduction

Where, Gross Salary = Basic salary + HRA + DA + Allowances + One-time payment/incentive (Reimbursem*nts, Arrears, Bonus, etc.)

How long should it take to process payroll? ›

Businesses with payroll processing solutions typically finish internal processes in one to two days. After payroll is submitted to the bank, it takes two to three days for wages to be deposited into employee bank accounts. So, employees receive their paychecks, on average, within five days of the pay period end date.

How long after payroll is processed do you get paid? ›

Businesses with payroll processing solutions typically finish internal processes in one to two days. After payroll is submitted to the bank, it takes two to three days for wages to be deposited into employee bank accounts. So, employees receive their paychecks, on average, within five days of the pay period end date.

What is the payroll process cycle? ›

The payroll cycle, sometimes also called pay cycle, is the time that passes between two payroll runs. In other words, it's the time span between two consecutive paydays. For example, if a business pays its employees on a weekly basis, every new 7-day period represents a new payroll cycle.

How do you calculate payroll processing? ›

How to Calculate Payroll: Everything Employers Need to Know
  1. Step 1: Determine Total Time Worked for the Period.
  2. Step 2: Calculate Gross Pay (Before Deductions & Taxes)
  3. Step 3: Determine Your Payroll Deductions.
  4. Step 4: Find the Sum of Payroll Taxes.
  5. Step 5: Subtract Deductions & Taxes From Gross Pay.
  6. Bottom Line.
Sep 13, 2022

How much should I pay for payroll processing? ›

This means that the more employees you have, the more the service will cost your business. In 2021, you can expect to pay an average of $20-$120 per month as a base fee for your payroll service, plus an additional $1-$5 per employee.

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