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How Does Payroll Processing Work

March 05, 2021

Learn how Paylocity's payroll processing software automates the process of compensating your employees for the work they perform for small and large businesses.

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Your payroll process has a direct impact on the success of your organization. Timely and accurate payroll processing demonstrates that you value your employees’ contributions and care about their roles inside and outside of the workplace. A reliable payroll processing system can increase employee trust and engagement, save costs, and improve compliance with rules and regulations.

What is Payroll Processing?

Payroll process is the process of compensating your employees for the work they perform. It includes calculating their wages, withholding taxes and employee benefits premiums, and delivering payment – usually through direct deposit. Payroll processing software automates these steps for small and large businesses.

How Does Payroll Processing Work?

Payroll processing is a multistep process for any company. In fact, small business payroll processing requires all the same steps as large business payroll. Below are the steps you’ll have to take.

Gather information

Gather the information you need on an employee’s first day of work. This includes their social security number, form W-4, state withholding form if applicable, bank account information for direct deposit, and benefits elections.

Track time & attendance

Most organizations use time and attendance software to manage their workforce. This is especially important in organizations with complicated pay practices like shift differentials, weekend pay, overtime, critical shift pay, per-piece pay, and more.

Review and approve time

A compliant payroll process includes supervisor review and approval of timecards before payroll is processed. Each employee’s time card should be reviewed carefully and corrections should be made. Supervisor approval should be documented and retained.

Calculate wages and deductions

At the end of the pay period, calculate gross earnings by taking the employee’s hours times their rate of pay. Take shift differentials, overtime, and other pay practices into consideration.

Calculate and deduct taxes, benefits premiums, garnishments, and other authorized deductions and withholdings. Withhold from wages and calculate net pay.

Submit or process payroll

If you have employees who receive paper checks, you’ll print paper checks and distribute to employees with pay stubs. If all of your employees are paid through direct deposit, you’ll send the payroll file to the bank for processing. Most employers have a combination of the two.

Pay taxes

Once payroll is processed, file and pay state and federal payroll taxes. Timely deposits can help you avoid penalties at quarter-end.

Retain records

Retain payroll and tax records according to state and federal records retention laws.

How Long Does Payroll Take to Process?

How long it takes to process payroll depends on whether you’re using manual or automated processes and how many employees you have. Businesses that utilize payroll processing solutions typically complete their internal processes in 1-2 days. Once payroll is submitted, it takes 2-3 days for wages to be deposited into employee bank accounts. On average, employees receive their paychecks within five days of the pay period end date.

Can Employers Delay Payroll?

Employers must pay their employees according to their payroll schedule. Delaying payroll can lead to costly fines and penalties.

Federal law requires employers to pay their employees “promptly” for hours worked, but state law is more specific in many cases. Look at your state law to determine which payroll frequencies (weekly, biweekly, semi-monthly, monthly) are acceptable in your state and whether any other guidelines apply.

What is a Typical Payroll Cycle?

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

  • Weekly payroll results in 52 checks per year and is common for hourly employees.
  • Biweekly payroll results in 26 checks per year and is common for both hourly and salaried employees.
  • Semi-monthly payroll results in 24 checks per year and is usually reserved for salaried employees.
  • Monthly payroll results in 12 checks per year and is almost always used for salaried employees only.

Be sure to review wage and hour laws in your state to ensure your payroll schedule is compliant.

What is Needed to Process Payroll?

In order to process payroll, you need a federal employer identification number (FEIN), a state payroll tax identification number (TIN), and possibly a local tax identification number. These accounts allow you to file and pay payroll taxes. If you aren’t familiar with how to process payroll, consider partnering with a payroll processing company or using a payroll software that can help you achieve timely and compliant payroll.

What are the Types of Payroll Processing?

Common payroll processing methods include hourly, salary, and commission:

  • Hourly employees are paid by the hour and are typically non-exempt (entitled to overtime).
  • Salaried employees are paid a monthly or annual salary for their work and may be exempt (not entitled to overtime) or non-exempt.
  • Commissioned employees are paid either straight commission for their work (usually sales) or commission in addition to a base salary.

In addition, you’ll need to determine which employees are exempt and which are non-exempt based on federal wage and hour rules. Both hourly and salaried employees can technically be exempt or non-exempt. Complying with the Department of Labor’s guidelines is crucial to avoid costly fines and penalties.

You’ll also need to decide whether to offer paper checks, direct deposit, or both – all while keeping in mind that most employees will expect direct deposit when they join your organization.

Finally, you’ll need to determine how to process payroll logistically. Manual payroll processing can be tedious and error-prone, so most organizations use payroll processing solutions like Paylocity. Payroll providers can teach you how payroll processing works and how to process payroll using their solution.

Why Paylocity for Payroll Processing?

Paylocity provides a myriad of benefits when it comes to processing payroll:

  • A menu of features to choose from in addition to payroll, including time and attendance.
  • Pre-built interfaces with more than 300 other systems so it can receive and send data to the systems you’re already using.
  • Automated payroll tax filing and payment, including federal tax, social security tax, medicare tax, and state tax.
  • Technical support and customer service for large and small businesses.
  • Employee self service for quick access to pay stubs, W-4s, W-2s and more.

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

 

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