The Complete Guide to Payroll Processing

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Running payroll is arguably the most important duty of any employer. But accurate payroll processing and payroll compliance aren’t always easy. This in-depth guide will cover everything you need to know about payroll processing for your business. 

Why Payroll Processing Is So Important

Efficient payroll processing is necessary to ensure your staff gets paid on time and your business fulfills its legal obligations. 

Delayed payments to your employees can create some severe short-term and long-term problems for your organization. You definitely don’t want to set that type of precedent for your employees. They expect to be paid on time and in full every pay cycle, deservedly so. 

Beyond maintaining strong relationships with your staff and keeping morale high, payroll compliance also needs to be a top priority when you’re running payroll. 

Many businesses run into compliance issues by misclassifying employees, not reporting payroll taxes, miscalculating withholdings, and more. Some organizations even run into FLSA (Fair Labor Standards Act) violations when it comes to overtime laws and recordkeeping. 

In short, lots can go wrong with each payroll cycle. Any inaccuracies can lead to unhappy employees and potential compliance violations, resulting in fines or penalties. 

On the flip side, accurate and efficient payroll processing has countless benefits for your business. Some of the top advantages include:

  • Happy employees
  • Tax compliance
  • Streamlined bookkeeping
  • Simplified pay runs
  • Lower chances of lawsuits for FLSA violations
  • Improved accounting accuracy
  • Less time spent on manual calculations

It’s a dream for businesses of all sizes to put payroll processing on autopilot and rest easy knowing that everything is accurate, compliant, and under control.

By taking the time to adopt modern payroll processing solutions, you can save time and offer your employees a more convenient experience. Who doesn’t want error-free paychecks, and pay stubs they can access themselves on-demand?

Quick Tips to Improve Payroll Processing Today

To help you achieve the benefits described above, we’ve identified some quick actions you can take right now to improve your payroll system. These tips are easy to implement, even for complete beginners. 

Tip #1 — Use Modern Payroll Software

The first thing you need to do is evaluate your existing payroll system. If you’re not using a modern payroll solution, you’ll need to switch ASAP. 

Payroll software can essentially make or break your success for payroll processing. The best tools out there help you automate manual tasks and ensure accuracy for each pay cycle. These tools typically come with time-tracking features, accounting integrations, employee benefits administration, and so much more. 

While there are lots of great options out there to consider, Gusto is an exceptional solution for small businesses. 

More than 100,000 businesses rely on Gusto for payroll. It’s an all-in-one payroll and HR solution that’s perfect for the vast majority of companies. We recommend Gusto because it’s easy to use, making it an ideal choice for beginners new to using payroll software. 

Gusto pricing starts at $40/month base price + $6/month per employee. You can access the platform from anywhere and process your payroll in minutes. Gusto also makes it easy to put payroll processing on autopilot.

The software comes with tools to simplify your hiring and onboarding process as well. Gusto even gives you the ability to administer and manage employee benefits.

If you’re not entirely sold on this solution, no problem. Check out our guide on the best online payroll services for businesses. There’s something for everyone on this list, regardless of your business size, industry, or unique payroll needs. 

Tip #2 — Leverage Employee Self-Service Tools

One of the top advantages of using a modern payroll solution is offering employee self-service features to your staff. This will instantly take a significant burden off your shoulders and save countless hours for your payroll and HR departments.

Think about your existing process for employee inquiries regarding payroll. It typically involves a call, email, or in-person visit to the payroll department, even for just updating an employee’s address.

Not only is this super inconvenient for your staff, but it also creates bottlenecks in HR. Overall, it’s inefficient for your entire operation. These inefficiencies are amplified if you have remote employees, field service workers, or staff working odd hours when nobody is around to answer their questions. 

Online payroll systems like Gusto give each employee their own unique login information and account to manage their preferences.

So if your employees want to view a paystub, update their address, change their primary direct deposit account, or access end-of-year tax forms, they can do all of it without contacting you or anyone else in the HR department. 

Employee self-service portals are available 24/7/365. If somebody wants to access a form on Friday night, they don’t have to wait until 9:00 am on Monday to do so. 

Tip #3 — Automate Payroll Taxes and Filings

As previously mentioned, payroll tax is one of the most important aspects of processing payroll. This is also an area where lots of businesses make critical errors, especially if they’re doing manual calculations.

The exact taxes you’ll need to pay depends on many factors, including the employee type and your location. In addition to federal taxes, many businesses are responsible for state and local payroll taxes as well. Examples include FUTA (Federal Unemployment Tax), FICA (Federal Insurance Contribution Act), medicare, social security tax, workers’ compensation, and more. 

If you’re using an online payroll system like Gusto, you’ll never need to worry about manually calculating these taxes again. 

The best part about using Gusto to automate your tax calculations is that they go above and beyond to ensure compliance. Gusto also files the payroll tax reports with the appropriate government agencies as well, so there’s literally nothing you need to do here.

This quick tip will save you from endless headaches and time spent trying to accurately calculate these taxes manually. 

The days of filling out forms for quarterly and annual reports will be long behind you after making the switch. 

Tip #4 — Take Advantage of Payroll Integrations

Aside from accuracy and compliance, payroll processing should be as convenient as possible for you and your staff. Manually inputting numbers from other tools you’re using doesn’t fit this description. It’s time-consuming and susceptible to human error. 

But if your payroll system integrates with other third-party tools and software, all of your data will sync automatically for fast and accurate pay runs and reporting. 

For example, let’s say you’re using a third-party tool like QuickBooks or Xero for accounting. You can sync Gusto with those tools to automate bookkeeping tasks. 

Or maybe you’re using time-tracking software or a POS (point of sale) system for employees to clock in. Gusto can automatically pull the data from those tools and use it to process your payroll.

Once you set up these integrations, you can put the rest on autopilot without worrying about accuracy. Depending on the size of your business, this tip alone could save you hundreds, if not thousands, of hours on payroll processing throughout the year.

Long-Term Strategies For Payroll Processing

The tips mentioned above are great quick wins that you can typically handle in one sitting. But there are some additional payroll best practices and strategies that will take you a bit longer to implement and then see results. We’ll cover those in greater detail below.

Strategy #1 — Payroll Audits

Even after you’ve put payroll processing on autopilot, you should still run audits regularly to ensure accuracy. Things like miscalculating withholdings or underpaying employees likely won’t happen too often if you’re using a reliable payroll system. But mistakes still happen, and an audit will help you catch those errors.

Audits can also help clean up your payroll records by removing former employees from your payroll system and other miscellaneous actions. 

Things like employee bonuses and raises typically need to be inputted manually, even if you’re using payroll software. So these are a few areas that you should check for inaccuracies during the audit. 

We recommend running payroll audits at least once per year. But you can do this quarterly as well if you’re finding errors and inefficiencies in your process.

Avoid using biased employees or people who currently work on payroll to run your audits. You should run audits on your own or potentially hire an outside CPA to handle it for you. 

Strategy #2 — Payroll Reconciliations

Payroll reconciliations can be a pain, but they’re essential to run. This process involves comparing your payroll records to your company’s general ledger. 

If you’re using one system for payroll and a separate software for accounting, then the reconciliation process involves comparing each transaction line-by-line across both systems. Obviously, this isn’t ideal. But it’s necessary to ensure accurate reporting. 

You’ll also want to compare your pay cycles to bank statements. Here, you’ll verify that the amount listed for each pay run matches the amount that’s been withdrawn from your bank account. 

Having a separate business checking account specifically for payroll will make this easier for you. You won’t have to filter through all of the other transactions that aren’t associated with payroll processing. 

Using an integrated payroll system like Gusto makes the first half of reconciliations much easier. As discussed, the software can integrate with different accounting tools, eliminating the need to check each transaction line-by-line manually. 

But there will still be the need for some manual review on your end during the payroll reconciliation process. 

Strategy #3 — Evaluate Your Employee Onboarding Process

HR and payroll go hand-in-hand. You can set yourself up for success with timely and accurate pay runs by improving your company’s new employee onboarding process. 

Some of this relates to what we discussed earlier in terms of employee self-service. 

You should create an employee onboarding process that simplifies things for your new hires and your HR staff alike. Things like sending the initial offer letter, having them fill out an I-9 form, and adding them to payroll should be seamless. 

Gusto has employee hiring and onboarding features built into the software.

These capabilities will make your life much easier. 

Simplifying the onboarding process ensures that new hires are added to payroll on day one, so they’re eligible to receive payments as soon as they start working. The last thing you want to do is delay payments to a new hire—that sets a bad precedent for the future of their employment. 

Even with payroll and HR software, onboarding employees still takes a decent amount of work. You might ultimately decide to make some tweaks in your process over time. So this isn’t really a “set it and forget it” initiative. 

Next Steps

Once you’ve implemented the tips and strategies covered in this guide, you should have lots of free time to focus on other areas of your business. 

As payroll processing is directly tied to time-tracking, you might want to evaluate your existing solutions in this category, too. Check out our guide on the best time clock software to see if you can find a more efficient alternative. 

If your business is growing or you don’t have a dedicated HR department, the idea of managing payroll on your own can be a bit intimidating—even if you’re following the advice in this guide. In this scenario, you might benefit from a professional employer organization (PEO) provider. 

PEO providers take over responsibility for HR tasks, payroll, tax filings, and more. Our guide on the best PEO companies can help you find the best option for your unique needs. 

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