Managing payroll isn’t just about crunching numbers and cutting checks; it’s a cornerstone of employee trust, legal compliance, and operational efficiency.
For small and mid-size businesses — where resources are generally stretched — the stakes are even higher. A misstep in your payroll procedures can result in costly penalties, dissatisfied employees, or worse, reputational damage.
So what exactly does the payroll process consist of? In this article, we’ll walk you through everything you need to know to get started, from foundational steps to best practices. Whether you're handling payroll in-house or partnering with a provider, you’ll find actionable insights to streamline your processes, avoid pitfalls, and stay compliant — so let’s jump right in.
What are payroll procedures?
Payroll procedures refer to the end-to-end process of calculating employee compensation, withholding deductions, disbursing payments, and reporting taxes and contributions to authorities. This includes everything from collecting timesheets and issuing payslips, to filing year-end tax documents.
A well-defined payroll procedure ensures:
- Your employees are paid correctly and on time
- Your business complies with local (and, where relevant, international) labor laws
- Your payroll data is secure, accurate, and audit-ready
Why do payroll procedures matter?
For HR leaders, payroll procedures are not just an administrative task; they’re a strategic function. If you follow the procedures correctly, you help ensure:
Trust and morale among your people. Timely and accurate pay is one of the most tangible expressions of your company’s respect for its employees.
Compliance. Every jurisdiction has its own rules on tax, social contributions, and employment classifications. Sloppy payroll procedures can lead to sizable fines and penalties, as well as ongoing audits.
Scalability. As your company grows — especially across state and/or national borders — standardized procedures help prevent chaos and reduce manual work.
Financial accuracy. Payroll often represents your company’s largest expense. Following procedure helps ensure reliable financial reporting and forecasting.
What are the core payroll procedures?
To build or improve your payroll procedures, it's essential to understand each step in the payroll cycle. Here’s a breakdown of the core components:
1. Employee data collection
Every payroll cycle starts with data, and you’ll need to have the most up-to-date information at hand, including:
- New hires
- Work status changes (such as promotions, raises, location changes, and terminations)
- Time and attendance data (such as lock-ins, PTO, sick leave, overtime, and public holidays)
Remember: accurate data input is critical. Automate it where possible, and ensure you regularly audit your records.
2. Payroll classification
Misclassifying employees (such as contractors, or as exempt vs non-exempt) can have significant legal and financial consequences. Make sure:
- All job roles are clearly defined
- Your people are classified according to local labor laws
- Any international employees are classified in accordance with local employment frameworks
3. Gross pay calculation
Gross pay includes:
- Base salary or hourly wages
- Bonuses and commissions
- Overtime pay
- Allowances (such as travel, housing, or meals)
Ensure your calculations are consistent with your employment contracts — as well as all local labor standards and regulations.
4. Deductions and contributions
Deductions typically include:
- Taxes (federal, state, and local)
- Social insurance contributions (such as Social Security and Medicare)
- Health insurance premiums
- Pension or retirement plan contributions
- Wage garnishments
Many of these vary by jurisdiction, and it’s important to ensure that you are fully compliant in the locations where your employees are based.
5. Net pay distribution
Once you’ve calculated the gross pay and the deductions, you have the net pay. To pay out net pay, ensure that:
- Funds are available in your payroll account(s)
- Direct deposits are scheduled correctly
- Pay slips are sent securely and contain the required details (e.g., the pay period, deductions, and tax information)
6. Payroll tax filing and reporting
Again, this can vary depending on location, but typically you, as the employer, need to:
- Submit your employees’ tax withholdings
- File monthly, quarterly, or annual payroll reports
- Provide year-end forms (such as Form W-2)
See also: How to manage payroll taxes as an employer in the US
7. Recordkeeping
The final core procedure is ensuring that you maintain payroll records for the legally required duration — typically 3 to 7 years. Your records should include:
- Time and attendance logs
- Payslips
- Tax filings
- Employee contracts
How to set up your payroll procedures
If you're starting from scratch or revisiting your existing process, follow these steps:
Step 1: Choose your payroll method
Depending on your circumstances, there are several ways to run payroll, including:
In-house. This may be suitable for very small teams with consistent salaries and limited complexity.
Outsourced to an accountant or payroll bureau. This can reduce your administrative burdens, but may lack integration with your HR systems.
Payroll software. This is the most recommended approach, as you can automate many of the procedures described above. Payroll software also offers reporting, compliance checks, and employee self-service.
EOR. If you have team members in different locations — especially abroad — it may be more simple and cost-effective to use an employer of record (EOR).
Step 2: Establish a payroll calendar
You’ll need to set up a payroll calendar, which should include:
- The pay frequency (e.g., weekly, bi-weekly, semi-monthly, or monthly). Note that different states and countries may have different rules around how often someone should be paid, and you will need to comply with these.
- Deadlines for data submission.
- Cut-off times for changes (e.g., raises or terminations).
- Tax filing dates.
Consistency prevents missed payments, and helps employees plan their finances.
Step 3: Create a payroll policy
Document and share your payroll procedures with your employees and managers, and include:
- Payment schedules
- How to report time worked or PTO
- How bonuses or commissions are calculated
- Whom to contact for payroll questions
A clear policy helps to build transparency and trust, and decreases the risk of any potential conflicts.
Step 4: Ensure compliance
Rules can change frequently, so make sure you stay up to date with changes and updates in:
- Minimum wage laws
- Payroll tax rates
- Leave entitlements
- Anti-discrimination and equal pay legislation
This is another reason to work with a payroll partner like Remote, which handles all of this for you — especially if you’re hiring (or plan to hire) across state lines or international borders.
Step 5: Audit regularly
Perform internal or third-party payroll audits to:
- Spot errors or overpayments
- Detect misclassifications
- Ensure tax filings match payments
- Improve data accuracy
See also: How to conduct a payroll audit
Best practices for efficient payroll procedures
To make things easier from the start, there are a few best practices you can adopt, such as the following:
Automate everything you can. From tax calculations to payslip generation, automation reduces errors and frees up time.
Integrate with your HR system. Payroll should sync seamlessly with time tracking, performance reviews, and benefits systems.
Enable employee self-service. Let employees update their details, download payslips, and request PTO from a central platform.
Establish checks and balances. Use approval workflows and audit trails to prevent fraud and ensure accountability.
Train your team. Keep HR and finance staff up to date on payroll tools, tax changes, and compliance requirements.
Plan for offboarding. Have a clear process for issuing final pay, benefits termination, and final tax documents.
Using centralized payroll software like Remote enables you to do this quickly and easily, with full automation, an all-in-one platform, self-serve, and countless integrations. Learn more.
How Remote can help
Payroll procedures aren’t glamorous — but they’re essential. Get them wrong, and the consequences ripple across your team and bottom line. Get them right, and you’ll create a foundation of trust, compliance, and operational excellence.
Having the right payroll partner makes all the difference to this. Remote Payroll helps ensure that:
- You are fully compliant with all relevant labor and payroll tax laws at all times — wherever you hire
- The process is fully automated, saving you immeasurable time and resources
- Everything is securely handled in one system, saving you additional software costs
- You’re compliant with filing and reporting requirements
- Your team is paid accurately and on-time
To learn more about how Remote removes your payroll headaches and makes the entire process quick and painless, speak to one of our friendly experts today.