Steps in the Payroll Cycle
Whether your payroll cycle is weekly, biweekly, semimonthly or monthly, you must perform certain duties to ensure your employees are properly compensated. The scope of these tasks varies by employer. In a large company, payroll processing can get complicated. In a small business, payroll tasks may be simpler and more routine.
You might need to perform certain tasks before processing the actual payroll. For example, if you have a new hire, you must establish a payroll record that shows her related information such as address, date of birth, Social Security number, pay rate, tax-withholding and, if applicable, employee benefits. If an existing employee received a pay raise that’s effective in a prior pay cycle, she’s due retroactive pay, which must be computed before it can be processed and paid. You may update employees' payroll records during this time as well, such as W-4 or address changes.
Review and calculate hourly employees’ work hours according to their timekeeping data. This process can be time-consuming if you calculate time cards by hand. Automated timekeeping systems simplify this process, as they record employees’ time card swipes and calculate hours based on those swipes. All you -- or the employees' manager -- have to do is verify that the time is correct and make the necessary edits. Thereafter, the time can be transported into payroll software for paycheck processing. If your timekeeping system does not have this ability, you may manually enter employees’ time into payroll software.
Payroll software calculates wages based inputted information. This includes salaries, pay rates, work hours and other types of compensation such as vacation and sick pay, bonuses, commission and car allowance. The system subtracts deductions from gross pay to arrive at take-home pay. Deductions such as retirement contributions; paycheck advances; health, life and disability insurance; wage garnishment and payroll taxes are all calculated so they comply with federal and state laws.
Before printing paychecks and sending the direct deposit file to the bank, print reports and double-check each employee’s data for the pay cycle to ensure everything is correct. Then, process direct deposit, paychecks and pay stubs and confirm they’re accurate. Place paychecks and pay stubs in envelopes and deliver them to the respective managers or employees by payday.
Payroll duties usually don’t end after paycheck printing. You may need to print payroll reports that enable the respective departments to perform related duties. This includes distributing reports to the accounting or finance department to perform payroll accounting duties, such as journal entries, tax payments and reporting and payroll reconciliation. All of this depends on how your payroll system is set up. Some companies process paychecks in-house and outsource payroll tax duties to a third-party.
You may also need to distribute employee benefits reports to the appropriate personnel for vacation, sick, personal and leave time tracking. Also, wage deduction payments must be made to the appropriate legal agencies and companies. This includes payments for wage garnishment, health insurance and retirement plans. These accounts and plans must be properly maintained, and in some cases, reports must be filed with the federal or state government. Some companies enlist the services of a third party for employee benefits. Accurate record-keeping of payroll data via software and/or hard copies must also be maintained.