Payroll Processing: What Happens During the Payroll Process

Payroll processing consists of the steps needed to pay employees each period, and involves tracking hours worked, deducting money for employee benefits, and remitting payroll taxes. Establishing a solid payroll process helps employers avoid penalties for breaking Department of Labor laws (minimum wage, unpaid overtime), and payroll software makes it easy.

The Payroll Process

The payroll process begins after you hire your first employee. Each pay period, employees work and must be paid based on a calculation of the hours they work and their pay rate. Before giving the employee a paycheck, however, you need to withhold money for expenses like state and federal taxes, unemployment, and insurance.

The result of subtracting an employee’s tax withholdings and benefit deductions from their gross pay (hours worked x hourly pay rate or salary per period) is net pay. Once net pay is calculated, you should pay your employees in the form of a paper check, direct deposit, or payroll card.

Be mindful that some states require you to document the payment information, including hours worked, earnings, and deductions on an employee pay stub. And if you violate state pay stub laws, you can be held liable for numerous penalties and fines—some are from $50 to $100 per infraction.

On the surface, payroll processing might seem complex; check out a simple payroll process flow shown below:

payroll processing flowchart
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