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How Does Payroll Processing Work?

January 23, 2023

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

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"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 toward an organization's overall success. It not only shows employees 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, it 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? Well, you can start by reading articles exactly like this one! Because when it comes to implementing dependable, streamlined payroll processing, the more information you have, the better off you'll be.

In this guide we'll tackle the fundamentals of what payroll processing is, explain how it works and what documents are involved, and then show why a modern solution like Paylocity is just what the payroll guru ordered.

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 – usually 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.

What are the Types of Payroll Processing?

Common payroll processes include paying by hour, salary, and commission:

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)

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

What is Needed to Process Payroll?

To process payroll, you first 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 accounts 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 1-2 days, and after payroll is submitted to the bank, it takes 2-3 days for wages to be deposited into employee bank accounts. Thus, 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 for the first time, you’ll need to determine how often to pay them. The most common payroll cycles are weekly, biweekly, 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, as federal law requires employers to pay employees “promptly” for hours worked, while state law is more specific in many cases.

As such, delaying payroll can lead to costly fines and penalties. Look at your state's law(s) to determine which payroll frequencies (weekly, biweekly, semi-monthly, monthly) are acceptable and whether any other guidelines apply.

How Does Payroll Processing Work?

Payroll processing is a multi-step process for any company, requiring all the same pieces 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 and wage classifications (hourly, salary, commission), and collected all relevant employee information, you are 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 you don't have such complications, 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 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. 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 her or his gross earnings:

Wage Type Gross Pay Calculation
Hourly

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

40 x $18 = $720

Salaried

[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 her or his net pay.

Submit or Disburse Payroll

For any employees with direct deposit, you will next submit the finished payroll to your organization's banking agent for disbursement. For any employees who receive paper checks, you will 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 payroll options, such as on-demand pay, for when employees need their paychecks faster.

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).

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. Moreover, it's also smart to retain these records to resolve any future legal or regulatory issues.

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 of 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 affords a myriad of benefits:

  • 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.

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