What is payroll processing? How to do it in 7 steps

Your employees work hard to ensure your business’s success. They deserve to be paid promptly and accurately. It not only shows you value their efforts, but it also supports a positive work environment and shines a light on your commitment to fairness and reliability.

Think of it this way: Without a dedicated staff, where would your company be?

Knowing how to process payroll effectively is vital to any organization’s success. It’s also key for your business to remain compliant and avoid penalties and legal issues.

In this guide, we’ll explore what payroll processing is, including the steps to calculate and distribute wages, manage deductions, and be in compliance with local tax laws.

What is payroll processing?

Payroll processing involves the comprehensive management of all aspects of employee compensation, including salaries, wages, bonuses, and deductions, as well as handling the tax obligations linked to these payments. This includes verifying timesheet accuracy, ensuring successful distribution and recording of payments, and completing all necessary tax reporting and payments.

Generally speaking, there are three types of payroll:

Hourly wages

Hourly payroll processing is common in sectors such as retail, hospitality, and agriculture, where employees track their hours worked and receive compensation based on an hourly rate. Particularly useful in businesses where employees' weekly hours vary significantly, it includes provisions for overtime and for working on weekends or holidays, usually at rates higher than the regular hourly pay. Such flexibility is key to adapting to the variable scheduling demands common to these industries.

Salaries

Typical to corporate environments, salaried employees receive a fixed amount that remains consistent across each pay period. Managing salary-based payroll tends to be straightforward because it does not require calculating the hours worked by each employee. This simplicity allows payroll administrators to focus more on other aspects of employee compensation management, like expense reimbursements and performance reviews.

Commission-based

In roles such as real estate or auto sales, employees often earn commissioned payments based on their performance, such as hitting sales targets or the number of units sold during a specific period. Commissions might be additional to a regular base salary or, in some cases, constitute the entire compensation. This method incentivizes staff to meet or exceed performance goals, directly linking pay to success rates.

7 steps to process payroll

Establishing and following a structured approach is essential to having a payroll process that’s efficient, accurate, and compliant. Here are seven steps to guide you through managing your payroll effectively:

1. Select a payroll system

Depending on your business's size and industry, you might dedicate resources to learning how to do payroll manually in-house, adopt automated payroll software, outsource the process to a specialized third party, or, if you operate internationally, use a global payroll service provider.

2. Develop a payroll policy

This document covers essential payroll components, including annual pay periods, employee benefits, and overtime and holiday pay calculations. It also outlines compliance regulations, processes for handling exceptions, and other relevant payroll considerations. Your payroll policy will guide you in choosing the payment schedule for your staff, whether monthly, semimonthly, biweekly, or another interval.

3. Collect employee information

The ideal time to gather all necessary employee information is during onboarding. This includes collecting their Social Security number, address, bank information (to set up direct deposit), and other relevant personal details. Be sure to verify all employee details. Accuracy is a must for a smooth payroll process.

4. Calculate gross pay

Calculate each staff member's total earnings, starting with their salary or by multiplying their total hours worked by their hourly rate. Then, add any commissions or bonuses that apply for the pay period.

5. Complete all deductions

Next, account for any necessary deductions from their gross earnings based on their employment contract and benefits packages. Common deductions include income taxes, Social Security and Medicare contributions, and employee contributions for benefits such as health insurance or retirement plans.

6. Process net pay

After applying the necessary deductions, compute each employee's net pay, which is the amount they will ultimately receive. While this process is typically automated and handled electronically, some businesses may also issue physical checks or use other payment methods.

7. Keep accurate records

Maintaining precise and organized records of all payroll activities is essential for resolving disputes or discrepancies, whether with an employee or during a tax audit. Because these records hold sensitive information, store them securely to protect their confidentiality. 

Tips to improve payroll processing 

Once you've set up your payroll policies and processes, navigating each pay period should be straightforward. However, it's important to periodically review and consider revising your payroll approach, especially if your company begins to experience rapid growth. Keep these tips in mind:

1. Embrace technology

New tools, particularly in artificial intelligence and machine learning, streamline complicated tasks. By automating routine operations, these advanced systems allow your HR team to devote more time to developing strategic initiatives and enhancing employee engagement.

2. Integrate your systems

Integrating your payroll processing system with other HR systems and databases enhances data control and allows for seamless data transfer between systems. This synchronization facilitates smoother collaboration across departments and generates more precise insights, bolstering your HR strategy.

3. Embrace continuous learning

Whether you opt for a manual approach or use payroll software, training your team to manage any potential issues is a must. Also, as payroll regulations may change, it's important to stay informed and update your payroll procedures accordingly to maintain compliance and efficiency.

Master payroll efficiency with Oyster

Navigating payroll processes is complex, no matter where in the world your staff happens to be. Nevertheless, staying up-to-date with local labor laws, tax regulations, and specific compliance requirements is vital to ensuring your employees are paid correctly and on time. 

Ready to enjoy the benefits of streamlining your global payroll operations? Oyster’s global payroll solution simplifies the process by managing payroll, expenses, and bonuses all in one place, offering payouts in over 180 countries and 140 currencies. Our comprehensive platform allows you to enjoy full transparency with detailed reports and seamlessly synchronize your payroll data with your ERP software.

Learn more about how Oyster can help streamline international payroll for your global team. 

About Oyster

‍Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.