What is payroll processing?

Payroll processing is a recurring task that every business needs to carry out. The process involves several steps which all need to be completed before payments can be issued to employees.

What is payroll processing? How does it work? How much does payroll processing cost? Read on to learn more about the different steps and options for processing payroll.

Payroll processing refers to the entire process behind the payment of salaries and wages. It describes the process all businesses with employees must undertake on a regular basis (i.e. monthly, bi-weekly, weekly, etc.) to make sure their staff gets paid.

The payroll process can be divided into three different stages, which are the pre-payroll, the post-payroll and the actual payroll processing stage. Each of these stages can be broken down into several substeps and activities.

To make sure that they complete all the necessary steps, businesses should develop a detailed payroll processing system that can support payroll professionals in their daily work. Ideally, there should be a high level of automation in the payroll process to increase efficiency and accuracy.

Processing payroll might not be hard, but it involves various subtasks which must be completed accurately. In fact, payroll processing includes three different stages which are pre-payroll, actual payroll, and post-payroll. Here’s an overview of what needs to happen during each stage to ensure an accurate and timely payroll.

Pre-payroll activities

Pre-payroll activities are the tasks that must be completed before the actual payroll processing takes place. They include basic payroll management decisions, registration with local authorities, and a fair amount of prep work businesses need to do for each payroll run.

• Employer registration with local tax authorities and social security bodies to obtain the necessary identification numbers and register new hires

• Developing a payroll policy, outlining the basic principles governing the payroll process, such as pay periods (weekly, monthly, etc.), payment method (direct deposit, cheque, pay card etc.), and more

• Implementing a payroll system, which can either be a payroll software used in house or a contractual arrangement with a payroll outsourcing service

• Collecting the necessary data to process payroll, which includes basic and financial employee information, tax documentation, compensation elements, hours worked, PTO, and more

• Validating the collected data, which is crucial to ensure the accuracy of the payroll

Actual payroll process

Once all the pre-payroll activities are completed, it’s time to start the actual payroll calculation. How time-consuming or quick this part of payroll processing is, depends on whether the business uses a payroll software or not.

Here is an overview of the different payroll steps needed to calculate employee net wages and salaries for businesses that process payroll manually—and also an overview of the processes taking place once the collected data has been fed into the payroll software.

• Calculating gross pay, taking into account hours worked, PTO, overtime, and additional pay elements

• Computing payroll taxes and other deductions (garnishments, additional insurances, etc.)

• Determining net pay by offsetting the sum of the deductions against gross earnings

• Checking payroll results for accuracy

• Issuing payments to employees via the chosen payment method

Post-payroll activities

The issuance of the payment order for the salaries and wages is the crucial moment of the payroll process. However, it isn’t the last action that needs to be taken in payroll processing. There are several additional payroll-related tasks to be completed. Post-payroll activities include: 

• Issuing payslips, which can usually be done either electronically or in paper form

• Reporting and submitting withheld payroll taxes (income tax and social security contributions) to the respective authorities

• Ensuring payroll compliance by filing other mandatory reports for which payroll data is required, such as gender pay gap reporting

• Keeping payroll records and fulfilling other payroll accounting tasks

The easiest way to navigate payroll processing is to use a detailed checklist and work through it. Here are the most important to-dos that shouldn’t be missing on a payroll processing checklist.

• Define a payroll schedule that also includes public holidays.

• Verify employee personal, salary and tax information.

• Check for pending payroll changes.

• Implement legal changes that affect payroll processing.

• Gather employee timesheets or information on employee hours in due time.

• Validate your payroll data input.

• Calculate gross and net pay.

• Review payroll results and reconcile payroll to detect potential payroll errors.

• Disburse payments to employees.

• File and pay payroll taxes.

• Update your payroll records with the new data.

Additionally, businesses should consider the following tips to make their payroll process more efficient, frictionless, and compliant.

• Create a detailed payroll policy.

• Adjust payroll cycle and frequency to suit business needs and processes.

• Use time-tracking and payroll software to maximize efficiency.

• Implement alternative payment methods for quick and easy salary payments.

• Pick the right talent for your payroll team.

• Keep up to date with legal changes affecting payroll.

Download the complete checklist for global payroll managers.

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The more manual work involved, the slower the payroll process. But what is fast and what is slow when it comes to payroll? It’s commonly estimated that payroll processing takes 1–2 days when the business uses a payroll solution that replaces manual processes.

Calculating 2–3 days for the payment to go through via direct deposit means that the employee would receive his or her pay within 5 days after the end of the pay period the payment relates to.

However, payroll processing times are not the same in every country. According to the 2020 Deloitte Global Payroll Benchmarking Survey, there is a distinct geographic variation in how long it takes businesses to process payroll. 

For instance, the study found payroll processes to take 2–3 days for 50% of businesses surveyed in North America, compared to only 37% of businesses in EMEA and even fewer businesses in LATAM, where payroll processes even take between 6 and 9 days for 25% of businesses.

In short, there is no final answer to the question of how long it takes for payroll to process. Instead, there is a multitude of factors that need to be taken into consideration. One of these factors is the chosen payment method.

For instance, direct deposit, which is the most commonly used way of paying employees, usually takes 2–3 days to go through. Alternative pay methods, on the other hand, are a lot faster than traditional bank transfers. These pay methods include digital wallets and paying employees in Bitcoin.

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There are three different approaches to processing payroll. They are:

• Manual payroll processing based on spreadsheets,

• Using external payroll processing services, and

• Automated payroll processing with the help of software.

Let’s look at the pros and cons of the different approaches.

Manual payroll processing

Manual payroll processing systems are still the norm in many companies, especially in small businesses that only have a handful of employees to pay.

While manually processing payroll is far cheaper than using payroll software or external payroll services, it has one major drawback, which is that it is highly prone to error. When processing payroll manually, there is a high risk of double data entry or missed data entries, which then leads to calculation errors and inaccurate payroll results.

Benefits of automated payroll processing

In terms of cost, working with payroll processing software ranges between manual payroll processing and payroll process outsourcing. An advanced payroll management system leverages automation to eliminate the need for manual intervention, simplifies data input and payroll output validation, and streamlines processes to maximize efficiency.

The only drawback is that it still requires an in-house payroll team (or at least a qualified payroll professional) who knows how to operate the software and is familiar with the legal regulations surrounding payroll.

Why outsource payroll processing services?

Compared to in-house payroll processing, outsourcing payroll to an external service provider involves additional costs. It is up to the business to decide if they only want to outsource payroll processing or if they want a fully managed payroll.

The main advantage of payroll outsourcing is that it takes the compliance burden off the business’s shoulders and provides peace of mind. Payroll processing services have in-depth knowledge of all things payroll and can offer additional advice, which significantly enhances payroll compliance.

Payroll processing costs can vary greatly and largely depend on how the business processes its payroll. The cost of in-house payroll management typically includes the wages and salaries of the payroll team and the fees for using payroll software. Depending on the level of expertise of the in-house payroll team, there may be additional fees for legal and compliance advice.

The cost of payroll outsourcing mainly covers payroll processing fees. There are different pricing models in payroll outsourcing services. Payroll providers can either fix their pricing based on payroll frequency or based on the number of employees for whom payroll needs to be processed each month. Another pricing model is to just charge a fixed service fee.

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As more and more businesses harness the benefits of a global workforce, international payroll processing is becoming the new normal. Running payroll for a global team, however, requires a different approach than a single-country payroll.

A multi-country payroll must consider and adhere to the rules and regulations of every single country. Different countries levy different payroll taxes on employee wages and salaries, and there sometimes are additional country-specific pay elements. In Colombia, for instance, employers are required to provide a monthly transportation and connectivity allowance to their employees.

But it’s not just country-specific legislation that makes global payroll processing difficult and complex. Other challenges in global payroll management include:

• Multi-vendor management,

• Lack of transparency and visibility,

• Data protection and security,

• Cross-border payments,

• Payroll performance management, and

• Non-standardized processes.

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