Payroll processing is a necessary part of business operations, but it’s often more complex than it seems. Between calculating wages, applying the right tax withholdings, and accounting for employee-specific details like benefits and deductions, even small errors can lead to compliance issues, lost trust, or decreased
employee morale.
Fortunately, modern payroll processing systems help businesses streamline the process and ensure employees are paid accurately and on time. In this guide, we’ll break down what
payroll processing is, how it works, and the key steps to getting it right.
What is payroll processing?
Payroll processing is the administrative task of calculating and distributing employee compensation during predefined
pay periods, such as weekly,
biweekly, or semimonthly. Along with calculating wages and salaries, payroll processing includes withholding deductions, distributing payments, and fulfilling all tax obligations. Employers may complete these tasks in-house or outsource them to a third-party payroll service.
Just as businesses rely on steady cash flow, employees depend on accurate and timely paychecks to manage their personal finances. When payroll runs smoothly, it can create a sense of security and trust. By contrast, when employees experience issues like incorrect paycheck amounts or delayed deposits, it can increase frustration and financial stress, potentially contributing to weaker morale and
lower productivity.
Why payroll processing matters
Effective payroll processing plays a key role in a company’s operations. From compliance and tax obligations to supporting a positive
employee experience, there are multiple reasons payroll accuracy is a top priority. These include:
Accurate and timely employee compensation. Disruptions in payroll make it harder for employees to manage their expenses, which could contribute to financial anxiety and disengagement.
Legal and tax compliance. Payroll processing ensures the correct withholding and remittance of federal, state, and local taxes. Failing to meet these legal obligations can result in audits, penalties, or legal action from tax authorities.
Financial accuracy and reporting. Accurate payroll records are essential for budgeting, cost analysis, and year-end reporting. Clean data supports informed decision-making and ensures transparency with internal stakeholders and external auditors.
Employee satisfaction and well-being. Beyond the immediate financial relief, consistent pay is a powerful driver of employee satisfaction. Studies show that financial worries can
increase levels of burnout and reduce job satisfaction, while timely and accurate pay can have the opposite effect.
How does payroll work? How to do payroll in 6 steps
Effective payroll processing follows a clear, repeatable workflow. By following a set of standardized payroll process steps, payroll professionals can reduce the risk of errors and delays. Here is a step-by-step overview of how to run payroll:
1. Collect employee data
Accurate payroll processing begins with gathering correct information for each employee. HR and payroll departments should implement routine checks to keep everything up to date. This data could include:
Personal information like an employee's full legal name, address, and Social Security number
Employment details that include each employee's start date, job title, department, and pay structure
Tax forms like
W-4 forms, plus any equivalent state tax forms if applicable
Bank information for direct deposits, including employees’ bank names, account numbers, and routing numbers
Time and attendance records to track hours employee hours, including regular hours, overtime, and any approved leave
2. Calculate gross pay
Gross pay refers to an employee's total earnings before deductions, and calculations vary depending on each employee's classification and an organization's pay structure.
The gross pay for hourly employees includes hours worked multiplied by the hourly rate. For salaried employees, divide the annual salary by the number of pay periods. Keep in mind that commission-based roles include commissions on top of their base pay rate, and any one-time or recurring bonuses are also part of an employee's gross pay for the relevant pay period.
3. Withhold deductions
After calculating gross pay, employers have to add in deductions withheld from an employee's paycheck. In some cases, deductions are mandatory per federal, state, or local laws, while others are at the employer's discretion.
A few of the most common deductions companies must factor into their payroll include federal income tax (based on an employee's W-4 form), state income taxes, and Federal Insurance Contributions Act (FICA) taxes for
Medicare and Social Security. A few optional but common payroll deductions include health insurance premiums, retirement plans, and union dues. The remaining amount is the employee's
net pay, or the amount they receive on payday.
4. Distribute employee pay
Once payroll is finalized, employers should distribute funds based on their pay frequency and distribution methods. Typical pay cycles include weekly, biweekly, semi-monthly (which is twice per month), or monthly. According to 2023 numbers,
biweekly pay is the most common.
One of the most common ways to pay employees is through direct deposit, where funds transfer electronically into a bank account. However, some employers may offer traditional paper checks or cash.
5. File and report taxes
Employers are responsible for depositing the federal, state, and local taxes withheld from employee paychecks — as well as the employer's share of FICA taxes — on a regular schedule based on their payroll size. Larger businesses have to file quarterly payroll taxes such as
IRS Form 941, detailing wages paid, taxes withheld, and liabilities.
At the end of the year, employers also have to file
IRS Form 940 per the
Federal Unemployment Tax Act and issue W-2 forms to employees summarizing annual wages and taxes withheld. In some cases, state and local governments may have similar or different reporting requirements that companies need to factor into their payroll processing.
Check the labor laws in the applicable state.
6. Maintain payroll records
The Department of Labor requires employers to retain
at least three years of payroll data. In addition to meeting federal recordkeeping requirements, maintaining detailed payroll records helps companies quickly resolve employee disputes and perform internal audits with greater accuracy. Key records should include employee personal and employment information, gross pay calculations, deduction authorizations, and net pay disbursements.
How to process payroll: 3 tips
Efficient and accurate payroll processing not only reduces administrative burden and legal risk. It also strengthens employee trust. Here are three key strategies to improve your payroll process:
Automate repetitive tasks. Payroll software and human resources information systems (HRIS) have time-saving features like automated hour tracking, direct deposit processing, and tax filing. Instead of taking hours or days to complete manual payroll processing,
automated systems process these reports in a matter of minutes, giving HR teams more time to focus on strategic initiatives. Many platforms also automatically update to reflect the latest tax laws and regulatory changes, helping organizations stay compliant without constant manual oversight.
Stay compliant. Payroll regulations are subject to frequent updates at the federal, state, and local levels. HR and payroll teams must stay informed about changes in minimum wage laws, overtime rules, tax rates, and withholding requirements. Subscribing to updates from the IRS, Department of Labor, and state labor agencies can help ensure you're always working with the most current information.
Conduct periodic audits. Establish a routine schedule for internal payroll audits to catch discrepancies early and confirm that calculations, deductions, and reporting are accurate. Regular audits help prevent costly errors from accumulating over time and ensure you’re prepared for any external review. They also provide clean, trustworthy documentation for internal stakeholders and financial reporting.
Help support employees beyond the paycheck with EarnIn
Payroll processing goes beyond accurate numbers and compliance reports. When pay is timely and consistent, it sends a clear message that business leaders value and support their teams. However, as more
Americans live paycheck to paycheck, a reliable payroll system isn't always enough to support
financial well-being. Employees want the flexibility to access their earnings when they need it, not just on a set payday. That’s when EarnIn comes in.
EarnIn's suite of financial wellness tools complements existing payroll processes by enabling employees to access a portion of their earned wages. With no payroll integrations or process disruptions, EarnIn's
Earned Wage Access (EWA) solution lets employees get up to $150/day, with a max of $750 between paydays,
in minutes, starting at $3.99 per transfer.
Employees can also choose to access their money at no cost in 1-3 business days. Tips are always optional.
EarnIn also provides
Credit Monitoring to help employees track their credit scores and
Balance Shield to help protect employees against overdrafts
Learn more about
how EarnIn enhances employee wellness beyond regular paychecks today.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
This Blog was sponsored by EarnIn. While the author received compensation, the information shared is grounded in independent research and intended to provide helpful and accurate guidance to readers.
EarnIn is a financial technology company, not a bank. Banking services are provided by our bank partners on certain products other than Cash Out.
A pay period is the time between your paychecks, such as weekly, biweekly, or monthly. EarnIn determines your daily and pay period limits (“Daily Max” and “Pay Period Max”) based on your income and financial risk factors as outlined in the Cash Out Maxes section of our Cash Out User Agreement. EarnIn reserves the right to adjust the Daily Max and Pay Period Max at its discretion. Your actual Daily Max will be displayed in your EarnIn account before each Cash Out. EarnIn does not charge interest on Cash Outs or mandatory fees for standard transfers, which usually take 1–2 business days. For faster transfers, you can choose the Lightning Speed option and pay a fee to receive funds within 30 minutes. Lightning Speed is not available in all states. Restrictions and terms apply; see the
Lightning Speed Fee Table and
Cash Out User Agreement for details and eligibility requirements. Tips are optional and do not affect the quality or availability of services.
Lightning Speed is an optional service that allows you to expedite the transfer of funds for a fee. Depending on the product, the fee may be charged by EarnIn or its banking partner. Lightning Speed is not available in all states. Restrictions and terms apply. See the
Lightning Speed Fee Table and
Cash Out User Agreement for details.
Tips go to EarnIn and help us provide tools such as Credit Monitoring for free and keep Lightning Speed fees low. Your service quality and availability aren’t affected by whether you tip or not
Calculated on the VantageScore® 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don’t be surprised if your lender uses a score that’s different from your VantageScore 3.0.
Learn more.
Balance Shield provides free alerts when your bank account balance drops below the threshold you set in your EarnIn account. You can also enable automatic transfers (up to $100/day -subject to your available earnings- with a limit of $750/pay period), if your bank account balance falls below your set threshold. You choose the speed of these automatic transfers. Standard speed is available at no cost and the transfer typically takes 1-2 business days. Lightning Speed is available for a fee [see LS Fee Table] and the transfer typically takes less than 30 minutes. You will also have the option to set a tip for automatic transfers. Tips are optional and can be $0; however, if you choose to set a tip, it will be applied to each automatic transfer. Whether you tip, how much, and how often you tip does not impact the quality and availability of services. You can cancel the alerts and/or transfers at any time in your EarnIn account settings. See the
Cash Out User Agreement for more details. While Balance Shield can help you avoid overdrafts, it does not guarantee protection from third-party fees, and its effectiveness depends on your usage and bank activity.
