What are the stages of payroll processing?

Organizations have different options for how they process their payroll. They can either outsource it to an external service provider, use payroll software, or process it manually—although the latter is not a recommended option.

In order to choose the payroll method that works best for them, businesses need a sound understanding of how payroll processing works and what the different tasks are. Let’s take a closer look at the different steps to process 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 different steps and activities, which we’ll now analyze in more detail.

Pre-payroll activities are the tasks that must be completed before the actual payroll processing takes place. They include basic payroll management decisions and registration with local authorities as well as the preparations businesses need to undertake 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 payrol

nce 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

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 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 in 25% of the cases.

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.

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Businesses can significantly reduce the time needed for time and attendance management and the actual payroll calculations with the help of time tracking and payroll software. But there’s a second element in the equation that businesses shouldn’t forget about when working out how much time to allow for processing payroll, and that’s the timespan that passes between issuing the payment and the moment when the money hits the employee’s bank account.

The reason why many people complain about payroll being too slow is that direct deposit, which is the most commonly used way of paying employees, usually takes 2–3 days to go through. However, there are alternative pay methods which are a lot faster than traditional bank transfers and through which employees can gain access to their pay almost instantly. These pay methods include digital wallets and paying employees in Bitcoin.