Payroll processing: 10 most frequently asked questions

The most common questions about payroll involve how long it takes to process, what specific terms related to the process mean and how to make it more efficient and accurate.

What makes payroll processing important?

Reliable payroll is critical to keeping a business functional and maintaining a positive workplace atmosphere. Nothing damages employee morale like late, inconsistent or inaccurate payroll.

It’s also critical to ensure that you file your taxes accurately: late payments to your workforce or inaccuracies in your tax information can lead to costly penalties. It’s worth dedicating any resources that are necessary to get the payroll process right.

What’s needed to process payroll?

There are several steps any American employer needs to complete to issue payroll. You will need:

• A federal EIN (employer identification number)
• Any state and local tax identification numbers that apply
• Employee tax documents (Forms I-9, W-4 and W-9)
• A bank account devoted to payroll and taxes
• A payroll manager (either you or someone hired or designated by you)
• A company payroll policy that’s clearly spelled out in your employee handbook
• A payroll schedule

Once you have all these things in place, you can determine what specific approach to payroll processing will work best for you.

What should a payroll policy include?

A payroll policy should make clear how your business is complying with regulations, what guidelines your employees can expect and what rules govern the payroll department. It should cover:

• Defining a workweek
• Time, attendance and how to log hours
• Break periods and rules (including whether breaks are paid or unpaid)
• Overtime eligibility and rates
• Pay periods
• Payroll deductions (mandatory and voluntary)
• Wage structure
• Recordkeeping (how long payroll records are kept according to state and federal rules)

How long does it take to do payroll?

The method you use for payroll will dictate the time commitment involved. As a rough guideline, manual payroll processing can take anywhere from hours to days, depending on the number of employees involved and the compliance requirements that need to be met.

Payroll software can usually run a similar process in minutes, and outsourcing payroll to a service provider effectively takes the process entirely off your plate. The applicability of each solution will depend on the size of your business and the scale of resources you have available to devote to payroll processing.

How can a business improve its payroll process?

There are several basic considerations and best practices, beyond what software tools you have access to, that can help make a business’ payroll process more efficient.

Use unified pay periods

If different kinds or categories of workers are getting paid on different schedules, it can needlessly complicate payroll. When choosing a pay schedule, it’s best to pick a unified solution that will be compliant with state law and can apply to the entire workforce.

Digital timekeeping

Time tracking software that automates the calculation of employee hours and incorporates fraud prevention measures, such as biometrics, can be useful in keeping accurate time records. Paper timesheets or separately-maintained electronic spreadsheets can often be subject to error.

Staying current with laws and regulations

Government regulations and laws at all levels are constantly changing. Keeping up with these changes is key to avoiding penalties for noncompliance.

Consider using payroll software or a managed payroll service provider

Quality payroll software or, if you can afford them, the full-spectrum services of a payroll service provider can make a huge difference in your ability to execute on the above suggestions. Overall, the more support you can have from automation or the talents of dedicated experts, the better off your payroll process is likely to be, particularly as a company grows.

What types of payroll processing are there?

There are several approaches you can take to the payroll process:

Do it yourself (DIY) by manual calculation

If you’re running a small business and have limited resources to dedicate to payroll, it might make sense to do it yourself. There are two ways to carry out DIY payroll: one is using manual calculations, and the other involves using payroll software.

The manual calculation method has the advantage of giving you full control and understanding of everything that’s going into your payroll. From tracking time (or having employees track their time to submit for your approval) to calculating the basic wages, subtracting deductions, paying your employees and filing your taxes, you’ll know intimately how all the moving parts work.

On the other hand, inaccuracies can easily creep into manual calculations, leading to penalties, and all of this takes up significant time that isn’t going into actually running your business.

Do it yourself (DIY) with payroll software

Payroll software is fairly inexpensive and can take a lot of the uncertainty out of your calculations since it handles the math automatically. It also requires less of a time commitment overall than manual calculation, aside from the learning curve of initially learning how to use the software. If you purchase tax filing software, you can save even more time and hassle, since that kind of package can automate your tax obligations.

It’s important, however, to make sure you research which provider you’re getting the software from, so you know they’ll keep it up to date and provide reliable customer service. If you run into problems implementing their product, the level of service they provide will definitely matter.

Hiring an accountant

Having access to an in-house accountant or even a consulting accountant can free up even more time than a DIY payroll software solution. The accountant can manage your payroll and taxes, keep your company up to date and compliant with government regulations and handle decisions about which kinds of software to use and how best to use them. Any accountant you hire should have a CPA certification.

Using a managed payroll provider

Managed payroll services refer to outsourcing your company’s payroll processing to a third-party provider. The idea is to take payroll concerns and questions about how to optimize the process completely off your plate and entrust them to experts who manage all its aspects.

This can be an attractive solution provided that the time it saves is worth the wide range of outsourcing fees that can be involved. For example, a small company using a managed payroll service can pay up to $1,500 per month just for basic services.

What does “full-cycle payroll processing” mean?

“Full-cycle” refers to the period of time between each payday. During this time, anywhere from a week to a month, a series of repeatable steps form the cycle: employees work and keep track of their time, their gross pay is calculated (usually based on an hourly wage), taxes and other deductions are withheld from that gross total and their pay is issued by cheque, direct deposit or a pay card. Full-cycle payroll is also sometimes called normal payroll.

What is “off-cycle payroll”?

Sometimes, it’s necessary to issue payments, such as bonuses or reimbursements for expense claims, that aren’t part of the normal payroll. These are called “off-cycle” payments and they’re processed separately.

Typically, these kinds of off-cycle payments will happen between the usual payday and releasing the control record for a new payroll run. Off-cycle payroll runs, bank transfers and accounting all need to meet the same standards and requirements as normal payroll.

What is “retroactive payroll”?

Sometimes, the payments from prior payroll periods will need to be adjusted to reflect new developments or the discovery of errors. For example, if an incorrect compensation amount was issued or if an employee gets a pay raise that’s back-dated into a prior pay period. While it’s sometimes necessary, retroactive adjustments can also introduce a lot of confusion into your accounts, so it’s generally best to keep them to a minimum.

What does “end-to-end payroll processing” mean?

An end-to-end payroll process integrates payroll management with a number of other aspects of workforce management. The idea is to improve communication and record-keeping, to make the big picture easier to analyze and to improve overall efficiency. In some estimations, end-to-end processing should be expected as a standard feature of any managed payroll service or payroll software.

In addition to providing electronic forms for data submission and a central place for employees to submit timesheets, there are other areas that an end-to-end payroll process can encompass.

Onboarding

You’ll need all necessary payroll details for new hires. End-to-end payroll software might help by providing them with a self-serve portal to enter this information and a dashboard from which to access further needed details about your business and its policies.

Training and development

Training for the basic aspects of the job and engaging in further professional development to maintain and update their skill set are necessary parts of most employee life cycles. A system designed with end-to-end processing in mind makes it easy for the management to see skills gaps and certification needs at a glance, schedule any needed classes or seminars and keep track of the results and factor training time into their payroll.

Talent and workforce management

Planning how to build the workforce and manage the transition of talent between positions, including succession planning, is a common challenge for any growing business. This process can be made easier by having systems focused on this type of planning integrated with payroll software that can forecast the costs of a suggested update to your organizational structure.

Leave management

Leave management has obvious implications for payroll. Automating the process of applying for and granting leave, ruling on and granting extensions and tracking leave-related reports and payments can save a tremendous amount of time and energy.

Managing HR documents

Keeping track of needed HR documents and making them easily accessible can be a boon for payroll management. The larger an organization is, the more employee data will need managing, and having an integrated document tracking system can prevent key data from getting lost.

Offboarding

Just as critical as the onboarding process is orderly offboarding that covers all the needed policies and procedures and provides data on the specific factors that are driving staff turnover.