The Payroll Processing Checklist to Avoid Errors & Delays

by Corey Philip //  December 19, 2022

As a business owner with employees, payroll processing is a daunting task. After all, you know your business but little about payroll processing. The last thing your business can afford is to be fined for late payments or incorrect payroll calculations. You might wonder if there is a checklist to use when processing your payroll to avoid errors and delays.

Payroll processing involves six basic steps: from confirming employee details to the payment of amounts deducted. Each of these steps can be further broken down into smaller tasks, which, if completed, will limit the risk of errors and delays in payroll processing.

Suppose you need to learn how to go about payroll processing and are worried that you might make mistakes. In that case, several payroll specialists can take over your payroll processing. However, not all businesses can afford to appoint an external payroll specialist. For those business owners who would like to run their own payroll, following a few basic steps will help.

Payroll Processing: What to do to Avoid Errors & Delays

The business owner should decide whether to use payroll software or a manual payroll system. Although the latter would save costs, good payroll software would decrease the risk of errors.

Once the payroll system is in place and all legal requirements are met, processing your payroll, whether manual or software-based, would involve six steps.

1. Confirm the Accuracy of Employee Information

Before you start actively processing the payroll, it is crucial to confirm the correctness of employee information. This is essential to ensure that you avoid errors and that payroll processing can be completed timeously.

There are several things to consider in this step.

If there are newly appointed employees, they need to be added to the payroll. Except for the basic information, like name, surname, address, and social security number, a few things need to be checked for a new employee.

  • The start date for the employee is vital, as this would influence the total salary or wage the employee would receive.
  • The employee's salary scale or hourly rate would also be vital. Ensure this information is captured correctly from the employee's contract or appointment letter.
  • Make sure that any employee benefits are correctly captured and any deductions, other than the standard taxes, that might need to be deducted. This includes retirement funding, savings, and garnishments.

Employees leaving the employer's service must be terminated on the payroll system. Removing employees on time is essential to ensure they receive what they have earned. There may be additional payments or deductions that must be made with their last wage as well, which needs to be taken into account during processing.

Verifying employee information for all current employees is also essential, as their personal information might have changed. Some employees may have been promoted, or their salaries or wages have increased. New garnishments against employees' wages must also be captured on the payroll.

2. Calculate the Gross Pay of Employees

Several factors must be considered when calculating the employees' gross pay or earnings before deductions.

  • Timesheets are vital for employees who get paid an hourly rate. The actual hours worked need to be calculated, then multiplied by their hourly rate to determine their gross wages.
  • Overtime can apply to any employee. Where overtime is paid, this needs to be calculated in line with the legal requirements in your state, as different overtime rates are determined by various states.
  • Other sources of taxable income, like commissions and leave paid out, should also be included in the gross earnings.
  • Lastly, it might be necessary to pay an employee reimbursement for traveling or expenses incurred on behalf of the organization. Although refunds are non-taxable, they should also be included in the employee's gross earnings.

3. Calculate the Total Deductions for all Employees

Before wages can be paid out, the employer must deduct certain deductions or withholdings from the gross earnings. Some of these deductions are statutory, while others are voluntary.

  • Medical insurance is another standard deduction that might apply to your employees. This is handled in a similar way to retirement funding.
  • Garnishments are another standard deduction the employer might have to withhold and then pay over to the claimant.
  • Many employers would allow their employees to have other amounts voluntarily deducted from their salaries. Any such deductions should also be captured on the payroll.
  • Retirement funding is sometimes part of the package that employers offer, and some employers require their employees to contribute to retirement funding. This amount is deducted from salaries and wages and then paid to the applicable retirement fund.
  • Taxes are statutory deductions. The employer is legally obliged to deduct certain taxes from their employees' earnings, which must be paid to the relevant authorities. Each employer needs to ensure which taxes must be withheld in their state. A payroll system would make this easy, as it automatically calculates taxes to be withheld.

4. Calculate the Net Earnings and Review for Correctness

Net Earnings are also sometimes referred to as take-home pay. It is the amount that would be paid over to the employee. This is calculated by deducting the total deductions from the gross earnings.

Once the Net Earnings have been calculated, the employer should review the payroll once more to ensure that all the amounts and calculations are correct. Having a second person look at these figures is advisable, as the person who did the calculations in the first place regularly misses mistakes. One should, however, remember that payroll information is confidential and cannot be given to anyone.

5. Pay the Net Earnings to the Employees

After checking the payroll and verifying its correctness, the employer may pay the net earnings to the employees. Many businesses give their employees a choice of the method they would like to receive their pay.

  • Paper Check
  • Cash
  • Electronic payment into their Bank Account

6. Pay all Deductions to the Relevant Third Parties

The last step in the payroll process is to pay the amounts deducted for taxes, retirement funding, medical insurance, and garnishments to the relevant third parties. Each of these recipients would have a specific due date by which the payment of withholdings must be made. It is vital to ensure that these payments are made on time, as the business could incur penalties and interest on late payments.

Final Thoughts

There are six basic steps to the processing of any payroll. This includes confirming employee information, calculating gross earnings, deductions, and net earnings, and paying the employees and third parties for whom deductions were made. If these steps are followed correctly, it would significantly decrease the risk of payroll errors and delays.

Considering a "PEO" for the Human Resources and payroll needs of your business? Read this article: Is a Professional Employer Organization (PEO) Right For Your Small Business?

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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