What is Payroll Processing? – Everything to Know

By Victoria Ellison - Last Updated on July 17, 2020
Payroll Processing Guide

Payroll processing is the task of managing the payment of wages by a company to its employees. Most companies utilize a payroll software system to ensure efficiency. In order to pay employees for their work, there first are steps that need to be taken for payroll processing to be set up.

How does payment processing work?

There are three ways to process payroll. Manually, through a software or through a service. Processing payroll manually has become a thing of the past because its tedious and time consuming and leaves a lot of room for mistakes. Although many small business utilize payroll processing manually.

To avoid keeping up with tax regulations and the meticulous payroll process, most businesses take advantage of a payroll software where paychecks are made quickly. Payroll service refers to IT or a payroll partner that help automate payroll services saving you more time to actually manage your business.

  1. Gathering Employee information

    The payroll process begins right after employee is hired. The first step is to collect personal information from employees. Obtain an employee’s EIN number and the following information.

    • Social security
    • Name and address
    • Pay information
    • Tax information that’s specific to each individual employee
    • W-4
    • I-9
    • Retirement
    • Payment method such as direct deposit, pay card, etc.
  1. Employee timekeeping

    Companies are then required to track time and attendance for the elected time period. Employers will use a time sheet, time clock or a HR timekeeping system to accurately record hours worked. Businesses should choose a pay schedule that would be communicated to their employees. Pay schedules range from monthly, semi-monthly, bi-weekly, and weekly. Although the most common is bi-weekly.

  1. Approvals for payroll

    Now that a payment schedule is set up, the next step is calculating the gross pay for each employee and verify hours for the specific pay cycle. You must approve payments including bonuses, overtime pay,  and determine and subtract deductions.

  1. Taxes and withholding

    Along with providing information, employees will file W-4, I-9, and W-2 so you can account for tax details. Deductions that can be withheld from an employee is individualized specific to that employee and can range from retirement contributions, medical insurance, child support, federal, state, and local taxes.

  1. Submitting payments

    After all deductions are made, employees are let with a net pay amount. Companies are then to distribute paychecks to employees, with the appropriate amounts withheld to entities, in a timely matter to avoid penalties.

  1. Payroll recording and reporting

    To ensure effective payroll, business must stay compliant and ensure reliable record keeping for all their employees. Companies should develop an accurate filing system to keep data and payroll paperwork stored efficiently. Quarterly reports are required to be sent and employee information needs to be safe and easily accessible.  After each pay period, to keep records for IRS documentation and be notified about any miscalculations or errors.

  1. Other considerations

    Working with an accountant or payroll services is beneficial in making sure payroll is processed efficiently and legally. Payroll platforms can be more convenient and take away the stress of record keeping and reporting guidelines for the IRS.

Why companies adopt technology to manage payroll

Performing payroll processing leaves room for human error. Manually controlling payroll requires great attention to detail for it to function efficiently. Digitizing payroll functions ensures accuracy and speedy payroll operations within an organization. Using technology to manage payroll can automate and integrate data and help and reduce compliance risk and meet regulations.

Making the payroll process run smoother, freeing up time for businesses to focus on important issues within their organization.

(Read More: What Are the Benefits of Implementing a Payroll Process in HR)

Risks to avoid when running your payroll process

  • Overtime miscalculations

    Employers should account for every hour worked whether it be in or out of office. Hours should be tracked and calculated accurately to make sure employees are being paid properly. To avoid fines or a payroll audit, businesses should ensure overtime pay is accounted for correctly.

  • Retroactive pay

    Because of human error, miscalculations of an employees compensation or forgetting to account for a raise will result in retroactive payment on the next pay cycle.

  • Paying employees too infrequently

    Employers should be aware of what the minimum payroll cycle is for their state to avoid fines form the department of Labor.

  • Misclassifying employees

    Employees must be classified the correct way, misclassifying employees can result in wrong tax status, withholding taxes or forgetting pay raises. Employers should be aware of all of the distinctions to classify employees for proper tax filing. You should always double check with human resources t ensure proper employee classification.

  • Pay stub violations

    You should avoid not documenting paystubs of employees. Payroll software’s make it convenient to review stubs and records at any time. There are state-by-state regulations and requirements for final paychecks and timing.

  • Mismanaging payroll records

    Avoid mismanaging records by utilizing payroll software. Records that are not stored effectively can lead to loss of data and make things difficult in the future when trying to process  raises and other operations.

  • Payroll audit-proof your practices

    To control the access to data ,you should conduct regular analysis by an auditor to ensure your payroll processes are working efficiently and what parts could be automated for optimization.

Best practices in payroll processing

The best things to practice is for one to keep track of important dates and deadlines to make sure you are complying with compliance regulations to avoid fees and penalties. Another important practice  is to exercise an electronic payroll processing system or software that takes care of end-of-year filing, payroll reporting, data storage and pay stubs in one system that allows for more convenience.

Final Thoughts

Its best to implement a variety of security measures in place. Payroll holds the nearest and dearest information of both your employees and the companies. It’s important that security and privacy measures are in place. In case of data loss, it is wise to have a backup place for payroll data to be stored and recovered.

If information is lost, the last problem you want to have is not being able to pay employees for their hard work. It’s also good to keep good communication between you and your workforce to avoid confusion frustration or errors about their pay.

Victoria Ellison

Victoria Ellison | Victoria Ellison is a copywriter intern at TechFunnel.com, a top B2B digital destination for C-level executives, technologists, and marketers. Previously, she worked as a copyeditor for PR Showdown, an academic competition in Lubbock, Texas. She studied at Texas Tech and graduated with a degree in public relations.

Victoria Ellison

Victoria Ellison | Victoria Ellison is a copywriter intern at TechFunnel.com, a top B2B digital destination for C-level executives, technologists, and marketers. Prev...

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