The Payroll Process

Steps

1. 1

   1. Collect and approve time and attendance

   Automatable

   At the end of the pay period, collect hours worked, overtime, paid time off and shift data from timekeeping, and have managers approve them. Under the FLSA, non-exempt employees must be paid at least minimum wage and 1.5x the regular rate for hours over 40 in a workweek, so accurate time capture is a legal requirement, not just a convenience. Handoff: employee/manager to payroll.

2. 2

   2. Capture changes and validate inputs

   Automatable

   Apply new hires, terminations, pay-rate changes, W-4 updates, benefit elections and garnishments, then validate against the employee master. Decision #1, exempt vs non-exempt: non-exempt employees route through hours/overtime calculation; exempt salaried employees skip overtime. Bad inputs here (a missed W-4 change, a wrong status) are a common, costly source of payroll corrections.

3. 3

   3. Calculate gross pay

   Automatable

   Compute gross pay from hours and salary plus variable pay (overtime, bonuses, commissions, shift differentials). For hourly workers, gross = rate x hours (with overtime at 1.5x); for salaried, gross = annual salary / pay periods. This is the start of the gross-to-net calculation.

4. 4

   4. Apply pre-tax deductions

   Automatable

   Subtract pre-tax deductions (401(k), HSA/FSA, Section 125 health premiums) to arrive at taxable wages. These reduce the wage base for federal and, often, state withholding, so the order of operations matters for compliance.

5. 5

   5. Calculate and withhold taxes

   Automatable

   Withhold federal income tax (per Form W-4 and IRS Pub 15 tables), state and local income tax, and FICA: Social Security at 6.2% and Medicare at 1.45% (employee and employer each). Employer-side payroll taxes (the matching FICA, FUTA/SUTA) are accrued here. Multi-state and local rules make this the highest-compliance-risk calculation step.

6. 6

   6. Apply post-tax deductions and arrive at net pay

   Automatable

   Subtract post-tax deductions (Roth contributions, wage garnishments, union dues, post-tax benefits) to reach net pay. Garnishments carry their own legal priority and caps, so they are validated separately. Net pay = gross minus pre-tax minus taxes minus post-tax.

7. 7

   7. Reconcile and approve the payroll run

   Automatable

   Reconcile the run: compare against the prior period, check for outliers and negative net pay, and confirm totals tie out before approval. Decision #2, reconciles and approved? Exceptions are corrected and the affected calculation is re-run; a clean run is approved. Independent review here is the key detective control. Handoff: payroll to controller/approver.

8. 8

   8. Disburse net pay

   Release net pay via direct deposit (ACH), cheque or pay card, and publish payslips. Funding and release should sit with someone other than whoever entered and approved the run (segregation of duties). Treasury/bank executes; the employee receives funds.

9. 9

   9. Deposit and file payroll taxes

   Automatable

   Deposit withheld and employer taxes on the IRS schedule (monthly or semiweekly per the lookback; next business day if $100,000+ accumulates), then file Form 941 quarterly, plus state filings, and W-2/W-3 annually. Late or short deposits draw penalties, so deadlines are non-negotiable. Handoff: payroll/treasury to IRS and state agencies.

10. 10

    10. Post to GL, reconcile and retain records

    Automatable

    Post the payroll journal to the general ledger, reconcile the payroll clearing/liability accounts and bank, and retain records: the FLSA requires payroll records be kept at least three years (and wage-computation records two years). Maps to the close and to audit evidence under SOC 1 / SOX.