5 Basic Steps in Processing Payroll (Plus, Helpful Tips)

Paying your people accurately and on time is one of the most important functions of your business, so it’s critical to have a smooth process in place. But that responsibility can make running payroll feel like a daunting task.

If you handle a lot of your payroll operations manually, it can be time-consuming, cumbersome, and overwhelming.  

Luckily, once you’ve identified and streamlined the process that works for your organization and you identify the right tools, payroll can be a breeze. 

Here are the five basic steps in processing payroll, plus some helpful tools and tricks to simplify the process.

Five basic steps in processing payroll

Step 1: Do the prep work.

If this is the first time you’re running payroll, it’s important to make sure that you have a few important pieces of information up front.

• Employment Identification Number (EIN): An EIN, also known as a Federal Tax Identification Number, is a unique number that is assigned to each business by the IRS. Your company has its own EIN.
• All employee tax forms on file: Ensure you’ve collected all employee tax information including forms such as W-4s, I-9s, and 1099s, as well elected deductions. These will be needed later to calculate payroll. 

Tip: Make sure you have a clearly defined pay cycle. Pay cycles can be weekly, biweekly, semi-monthly/bi-monthly, or monthly. Each payroll cycle has its own benefits, so it is important to choose the right one for your organization (learn the pros and cons of each pay cycle).

Step 2: Collect timesheet data.

Once you have all the important company information gathered, it’s time to look at timesheets.

During this payroll process step, you should work closely with managers to ensure they have reviewed, approved, and submitted all their peoples’ timesheets. Make sure you’ve considered overtime, paid time off (PTO), sick time, and leave of absence.

Collecting this information and ensuring it’s accurate can be the most time-consuming step if you do not have a streamlined process in place. Incorrect timesheets can lead to overall payroll delays, errors, and hours of overtime to ensure the correct information is calculated.

Tip: The best way to confirm all timesheet information is accurate the first time is by using an all-in-one human capital management (HCM) solution that seamlessly combines time and pay. This ensures that timesheet data automatically flows into the payroll process each payroll cycle.

Step 3: Do the math: Calculate gross pay.

Once all the timesheet data has been reviewed, any errors corrected, and approved, you can begin calculating gross pay. The formula for calculating hourly workers is to multiply the number of hours an employee works by their hourly rate.

Remember to consider any overtime and the additional pay associated with these hours. While this step may sound straightforward, calculating this individually for each employee with pen and paper or in a spreadsheet can be time-consuming and leaves room for errors.

Tip: An all-in-one solution can help you reduce the administrative burden of processing employee changes and updates.

Step 4: Withhold income taxes and determine other deductions.  

Ensuring that you have withheld the correct taxes and completed the correct deductions is critical to a seamless payroll run. Since both come out of each employee’s gross pay and changes from person to person, it is important to know the difference. 

Withholdings: A withholding is the amount of taxes, including federal, local, and state income tax, Medicare, and Social Security, withheld from an employee’s paycheck. The amount that is taken from each person’s paycheck is dependent on the amount they make and the information they provided on their W-4. Individual employees can determine the amount of withholdings that come out of each paycheck, so it’s important to make sure that you have all tax files on record (reference step 1).

Deductions: Deductions are the additional items that come out of your people’s gross pay. These include items such as 401(k) contributions, workers’ compensation contributions, health insurance benefits, and other elected benefits. It will be important to keep track of where these need to be sent and make these deposits, such as directly to a 401(k) account or health insurance company, on time to ensure that benefits are not impacted.

Since the number of withholdings and deductions that come out of each paycheck are specific to each of your people, attempting to complete this step manually can be overwhelming and potentially lead to costly errors.

Tip: Implementing an HCM solution that acts as not only a single source of truth for all your people data, but also is constantly updating in the background with the latest tax rules and regulations, you can confidently move to step five knowing that all the correct information has been applied to your calculations. 

Step 5: The perfect paycheck: Pay your people.

You’ve completed all your tax calculations, and you’ve made it to the final step. Now you can take the total tax withholding and deductions calculated for each employee and subtract them from their gross pay. This will leave you with the net pay, which is the amount paid to each of your employees.

Depending on the process in place, paying your people can be done in a few different ways. These include direct deposit, when the money is deposited directly into the account they provided; physical checks; or through benefits such as earned wage access (EWA).

Tip: EWA is a payroll benefit option that allows employees to access a portion of their already earned wages ahead of the standard pay cycle. If you work with a solution that offers this capability, you’ll be able to provide your people with the financial freedom to access funds early and help cover unexpected expenses. 

In Summary: The right tools make all the difference

Processing payroll can be an overwhelming task due to the level of importance for your people, the amount of calculations and compliance involved, and the pressure of a set deadline.

Knowing the five basic steps in processing payroll and having the right tools in place makes all the difference, saving you time, headaches, and risk of payroll errors.

If you’re ready to move away from spreadsheets and streamline your manual payroll processes by using an all-in-one HCM solution, learn more about how UKG can help you and your organization.

Giving your employees the right paycheck on time is critical for your business’s success.