11 Ways to Simplify the Payroll Process

Payroll: The total amount a company pays its employees for work done in a specified time period. That’s an accurate definition, but then so is saying space travel is getting a rocket beyond Earth’s atmosphere. The simplicity of both definitions belies the complexity of actually doing those things.

For payroll, the direct deposit (or check) to the employee is the last step in a process that includes classifying employees, tracking time worked, calculating withholdings, paying taxes, and much more. And it all must happen on time and in compliance with local, state, and federal laws. Left unchecked, the payroll process can consume ever-greater quantities of a business’s time and money—especially as head count grows. It’s also a process prone to errors that can damage the bottom line, erode employee morale, and draw unwanted attention from the government.

What Is Payroll?

Payroll is a broad label for anything related to the mechanics of paying employees; hence, payroll process or payroll department, for example. And that’s apt, because the days in which a business owner reached into the cash draw and handed an employee his weekly earnings are long gone. Employee compensation today is taxed and highly regulated, and must be timely and precise. To meet all those requirements, the process encompasses six steps:

1. Properly classify employees. Regarding compensation, the law does not consider all employees equal. Companies must pay most workers overtime for hours worked beyond a standard day or week, but many executives, managers, and professionals (such as teachers or engineers) are exempt from that requirement. For that reason, and others, all employees must be correctly classified before their pay can be calculated.
2. Calculate gross pay, either by tracking employees’ hours worked (including overtime) or by using exempt employees’ established salaries.
3. Apply deductions and withholdings, such as taxes, insurance premiums, retirement plan contributions, and garnishments, to determine net pay.
4. Distribute the net pay.
5. File and pay taxes that are the employer’s responsibility, such as payroll taxes.
6. Maintain accurate payroll records, starting with timesheets, pay stubs, and tax filings.

These steps must be done sequentially, and there are no shortcuts for any of them.

Key Takeaways

• An accurate, on-time payroll is vital to every organization’s financial health and legal compliance.
• Despite the importance of payroll accuracy, errors are still common.
• Payroll is inherently complex, but many mistakes happen only because employers don’t establish an effective process and/or do much of the work manually.
• Businesses can improve the efficiency and accuracy of their payroll processing by adopting 11 best practices.

Common Payroll Challenges

Ask any employee to identify an employer’s greatest responsibility to its people and they will likely say, “To get payroll right.” The government also holds employers responsible for getting payroll right, and imposes expensive fines when they don’t. Given this degree of pressure and scrutiny, one might reasonably think that payroll errors are rare. If only.

The payroll giant ADP found that global average payroll accuracy is only 78%. Meanwhile, a study by the National Association of Women Business Owners (NAWBO) reported that companies have an average payroll error rate of 1.2% each pay period. Businesses pay a high price for these mistakes: The IRS collected nearly $8.6 billion in employment-tax penalties in 2023. Employers also pay for payroll errors indirectly, through consequences such as employee turnover. For example, the NAWBO study found that half of employees will start looking for a new job after two paycheck errors.

Surely, no one wants to generate a flawed payroll. So why is it still so common? The answer is that processing payroll has many challenges. They include:

• Complying with the law: In the U.S., employee pay is regulated at all levels of government, resulting in layers of rules for work schedules, overtime earnings, tax withholdings, and more. The first step in complying is to classify employees correctly so that, for example, employers don’t fail to pay overtime to employees who are entitled to it. Determining the applicable law can also be challenging. For example, there is a federal minimum wage, but several states require a higher one—and even within a state, some cities require a still-higher minimum wage. Compliance is particularly difficult for companies that operate in more than one state and/or have locations outside the United States.
• Paying taxes correctly: Businesses must submit numerous payroll taxes to the government, including Social Security and Medicare payments, as well as employment and unemployment taxes. Companies must meet all these obligations accurately and on time. If they don’t, they face numerous potential penalties. For example, the IRS imposes a Failure to Deposit penalty when employers don’t make employment tax deposits on time, in the right amount, or in the right way; a Failure to File penalty if employers don’t file their tax return by the due date; and accuracy-related penalties when a company underpays the required tax. Employers may also face fines imposed by states—and the federal, state, and local tax laws all change frequently, so employers must keep current.
• Navigating the complexity of withholdings and deductions: Calculating the correct amount to withhold or deduct may be different for each and every employee. Employees can determine how much of their income is withheld for taxes, and may change their minds at any time during the year. Benefit deductions vary based on which benefit plan the employee chooses and whether the employee has dependents. Some employees choose to contribute to retirement plans, and some companies match a portion of those contributions. And a few employees may be subject to wage garnishment orders. Withholding and deduction errors not only may result in tax penalties, but also may violate insurance company or retirement plan requirements.
• Tracking time and attendance: The law requires that employees be paid for the time they work, which sounds straightforward enough. But tracking that time is not always easy. Even with automated systems in place, employees may forget to clock in before working, or end the day and forget to clock out. These errors have to be corrected, which often involves the cooperation of the employee, their supervisor, and the payroll team. The payroll process also must account for sick leave (sometimes used in partial days, as to attend a medical appointment), vacation time or other paid time off, holidays, military leave, jury duty, and more.
• Integrating payroll with other systems: Many businesses maintain separate systems for payroll, human resources (HR), and accounting. Payroll errors are inevitable if the information in those systems doesn’t match or the systems aren’t integrated well and, therefore, don’t share information effectively.
• Keeping data secure: Much of the data in payroll systems is sensitive—which makes it vulnerable. It includes pay rates, Social Security numbers, bank account numbers, home addresses, and more. Employers are responsible for protecting that data throughout the payroll process and beyond.

These challenges are greater—sometimes exponentially so—if some or all of the process is done manually. Yet, the 2024 Payroll Complexity Report found that 51% of businesses surveyed still use spreadsheets, and 19% use outdated manual or paper processes within their payroll departments.

11 Best Practices to Simplify the Payroll Process

Some payroll challenges are baked into the system—taxes, for example, are inevitable. But all elements of the payroll process can be streamlined and implemented more easily. In using best practices to simplify the payroll process, companies can boost the bottom line, as well as reduce errors and improve employee satisfaction and morale.

Here are 11 particularly powerful practices.

1. Ensure Employees Are Classified Correctly

A great place to begin simplifying payroll is to make sure that jobs (not people) are properly classified. The legal intention here is to ensure that all employees within the same classification are treated fairly and equally. If they are not, it’s likely that every step that follows—calculating gross pay, figuring deductions, and so on—will be wrong. There are three broad classifications to consider: exempt, nonexempt, and independent contractor.

Exempt employees are paid a salary and are not eligible for overtime. Nonexempt employees are paid an hourly rate and do earn overtime. Independent contractors are self-employed individuals or businesses that provide services to the organization under specific terms. For example, a company might hire a freelance graphic designer to create packaging for a new product.

These are not merely labels; they are legal classifications defined by the Fair Labor Standards Act (FLSA). As such, they should not be assigned lightly. For example, the FLSA requires that a position must pass three tests before it qualifies as exempt: salary basis (must be paid a fixed, regular amount per pay period, regardless of hours worked, as opposed to an hourly rate), salary level (must earn more than a threshold amount that was $844 per week for the second half of 2024 but adjusts often), and duties (there are specific exemptions for executives, administrators, and professionals, among others). The law is intended to prevent employers from deliberately or inadvertently dodging their payroll responsibilities. The exemption tests just described help to ensure that employees aren’t unfairly denied overtime.

Misclassification is surprisingly common, despite the threat of local, state, and federal penalties. Sometimes the misclassification is deliberate, but more often it’s simply a mistake. Employers should consult a labor attorney if they are uncertain how to classify a job.

2. Set a Clear Payroll Schedule

Regular and predictable payroll helps to ensure that employees receive their earnings on time, which builds trust and improves their financial stability. Schedules also help organizations comply with applicable labor laws, minimizing the risk of penalties and legal issues. For example, Arizona requires that employees be paid no later than 16 days after their previous paycheck.

Payroll accuracy and efficiency normally improve, too, when payroll teams work within a set timeline. Plus, a consistent schedule allows other departments, such as HR and accounting, to coordinate their tasks more effectively. In addition, financial forecasting and cash flow management are more predictable when payroll is processed on a set schedule.

There are several common pay period schedules:

• Weekly: 52 pay periods annually
• Biweekly: every other week; 26 pay periods annually
• Semimonthly: twice each month; 24 pay periods per year
• Monthly: 12 pay periods per year

None of these schedules is inherently better or worse than the others. To determine which schedule suits a business best, consider the company’s receivables cash flow, supplier payment schedules, predictability of work shifts, any other responsibilities required of those who process the payroll, head count, applicable local or state payroll laws, and—last but by no means least—how often employees want to be paid.

Ultimately, the “right” schedule is the one that best balances these demands. Once the schedule is set, it can be published and distributed to all staff. Doing so allows people to establish a routine and minimizes employee questions. Employers should always adhere to the schedule unless something extraordinary (such as a natural disaster) interferes. One caveat: Numerous jurisdictions require that employees who resign or are terminated receive their final checks within a specific time frame. In such cases, employers must bypass the established schedule.

3. Standardize Payroll Procedures

Businesses will not be able to enjoy the full benefits of a set schedule if it isn’t bolstered by standardized procedures. Consider, for example, procedures related to hourly employees’ time records. Are supervisors required to review and approve the time records before the payroll team sees them? If so, what is the supervisors’ deadline for that approval? How is the supervisors’ approval recorded? What are the consequences for supervisors who miss that deadline? This is just one example of how a standardized procedure can transform a chaotic free-for-all into a predictable and orderly process.

Each business is unique, so there is no single, correct payroll process. An effective way to develop standardized payroll procedures is to create a payroll map depicting every task that contributes to a successful payroll and who touches each of those tasks. Then, stakeholders can define (or create a new) a process for each of those tasks. For maximum effectiveness, the standard processes should apply throughout all of a business’s departments and locations. Note: Seize the opportunity to create the most efficient procedures possible, rather than codifying existing inefficiencies.

The final procedures should be documented and accessible to all employees. Another benefit of established procedures is that when employees have payroll issues, they know how to report those problems and how they will be resolved.

4. Identify and Remove Process Bottlenecks

As business leaders forge standard payroll procedures, they will likely spot issues that could derail them in practice. For example, suppose one standard process requires supervisors to approve time records by 9:00 a.m. on the first day after the end of the pay period. And also suppose that employees are currently recording their hours manually, on paper. It’s easy to see that even if employees record their time perfectly (which they won’t), extra steps will hobble the approval process. For starters, supervisors will have to collect all the paper records and then hope they can correctly interpret each employee’s handwriting. Then, they’ll have to resolve any questions before approving the time. And finally, they’ll have to get the approved paper to the payroll team. None of that is conducive to efficiency. This bottleneck can be eliminated by automating timecards so that supervisors can review them, approve them, and release them to payroll at any time.

Other bottlenecks are likely to surface only after the procedures are rolled out. It’s inevitable, for example, that there will be at least one supervisor who consistently misses approval deadlines. Perhaps it’s because the supervisor has too many people to manage. Or perhaps the issue is that the supervisor is struggling with how to make necessary adjustments in the payroll system. The solutions are different (one of those problems calls for reducing the supervisor’s head count, the other calls for additional system training), but in both cases the bottleneck can be identified and eliminated.

5. Eliminate Physical Checks and Pay Through Direct Deposit

Issuing paper paychecks (yes, it still happens) is one obvious potential bottleneck. Physical checks require the extra steps of completing, signing, and distributing paper documents. Checks are also not secure; they can be lost or stolen. And they add an element of uncertainty to cash flow, because employers have no control over when employees will deposit or cash them.

All of this points to simplifying payroll by ditching paper checks. Instead, employers can choose to deposit funds either directly into an employee’s bank account (or accounts; some employees prefer to split the funds between checking and savings accounts) or into a payroll card. Payroll cards are essentially prepaid debit cards and are a solution for employees who don’t have bank accounts.

For businesses, direct deposit is the least expensive and most secure payroll option. Direct deposit also is, increasingly, being regulated. At least 18 states require employers to offer direct deposit. Some states require employees to consent to direct deposit and still others prohibit employers from requiring direct deposit. Clearly, businesses should be familiar with the direct deposit laws that apply to them.

6. Regularly Review and Update Tax Documents

It’s standard practice for employers to deduct a portion of an employee’s wages or salary to cover estimated taxes owed to federal, state, or local governments. But the specific amount withheld varies based on the employee’s filing status, dependents, and other factors. For federal income tax, employees use Form W-4 to calculate and authorize the appropriate withholding. The District of Columbia and the 41 states that impose an additional income tax have comparable forms.

In many organizations, employees complete the W-4 when they’re hired and never again. But that’s a disservice to employees and inefficient for their employers. Instead, employees should review and update the forms regularly, such as annually. Doing so allows people to adjust their withholdings as circumstances change, such as due to promotions or raises, marriage, childbirth or adoption, and so on. This process is most effective when employers review with employees the purpose of a W-4 and each of the data points it requires.

In addition to boosting employee satisfaction, an annual review is usually much more efficient than adjusting withholding piecemeal throughout the year.

7. Set Clear Reminders for Important Dates

A published payroll schedule makes it easy to remember the key dates important to processing payroll. But there are other payroll-related tasks that also must be done within specified time frames to stay compliant and avoid penalties. For example, once payroll is issued, employers must report tax withholdings and payments. When that must happen depends on an employer’s location and size: In some instances, these reports must be filed a certain number of days after each pay period, while in others they need to be filed monthly.

Employers must also file and report the taxes for which they’re responsible, such as payroll taxes. Generally, those must be filed quarterly and annually. The few minutes it takes to set reminders for these events can be invaluable in meeting the deadlines.

8. Stay Current With Compliance and Regulations

Legally, employers are responsible for knowing and following the laws and regulations that govern payroll. Those laws change often, so it’s a good idea for employers to be proactive to help ensure that they don’t miss anything. Potential sources of compliance information include labor attorneys, compliance consultants, trade associations, business organizations (such as chambers of commerce), and business or industry publications and websites. Once payroll professionals obtain up-to-date compliance information, they should share it with other stakeholders.

9. Leverage Employee Self-Service

Anyone responsible for payroll can testify to how much time they spend answering employee questions and fulfilling employee requests. Employees want to know how much vacation time they’ve accrued, or whether their sick leave was properly applied to the previous payroll. They need copies of their W-2 to do their taxes, or they need copies of pay stubs to rent an apartment. And that’s just the tip of the iceberg.

Happily, information portals can now put all of that—and more—at employees’ fingertips and free up hours of the payroll department’s time. Employees can typically use these portals via desktop computers or mobile apps, giving them access to payroll data whenever they need it. Most portals also allow employees to download key documents.

10. Audit Payroll Procedures

Over time, even the best payroll process can decay. No one intends that but, as in life, things happen. For example, payroll processes created for a stable workforce may buckle as an organization grows, allows some staff to work remotely, or hires independent contractors. Tax laws, wage regulations, and reporting requirements change often, sometimes requiring a company’s payroll process to adapt or fall out of compliance. And payroll often relies on legacy systems that become outdated and/or aren’t compatible with new automation. Regular technology updates are essential, but they’re often overlooked, leaving processes increasingly prone to errors.

To preempt such problems, experts recommend that organizations conduct regular audits of their payroll processes. Thorough audits typically include testing software applications, including how well they integrate with other business systems; reviewing how well payroll processes operate in practice versus in theory; assessing payroll training materials to ensure that they’re still accurate and relevant; and reviewing employee classifications to make sure they are correct and consistent.

11. Automate the Payroll Process

Automation can improve the efficiency of payroll in many ways, from small (such as setting reminders for filing dates) to medium (permitting supervisors to approve time records online and then forward the approval to payroll) to huge (replacing manual time-tracking with digitized tracking). But payroll automation comes with trade-offs that businesses must navigate thoughtfully.

For example, although automation saves money over the long term, the initial investment may be substantial. Budgeting, financial planning, and cost-control measures can all help ensure that the investment pays off quickly. And while automating time-tracking and payroll records is faster, more accurate, and more cost-effective than doing them manually, automation introduces new data security concerns.

There are effective ways to balance each of these trade-offs. That’s why the U.S. market for payroll and HR software in 2023 was close to $20 billion. To achieve that balance, organizations should consider these questions when they automate:

• How secure is the system?
• Does the system integrate with existing HR and accounting systems?
• How frequently is the software updated for regulatory compliance?
• What is the full cost (e.g., including setup fees, monthly fees, additional charges for added services, and any fees for customer support)?
• Can the system handle the specific payroll needs of the organization’s workforce?
• What self-service features are available for employees?
• How does the system handle error correction?

Reduce Costly Errors With Payroll Software

Certainly, there’s value in automating an essential step—such as time-card approvals—that feeds into a business’s payroll process. But the greatest potential for simplifying payroll comes from automating the entire process, including such calculations as gross-to-net earnings, tax withholdings, and deductions for employee contributions to benefits. All those calculations are time-consuming and tedious, and, when done manually, they create opportunities for mistakes—mistakes that will only increase as a business grows and its payroll becomes more complex.

NetSuite’s SuitePeople Payroll addresses these challenges by automating critical payroll functions while maintaining accuracy and compliance. The system automates all those calculations, for example, significantly reducing the time required to run payroll and preventing costly mistakes. Through system tools, such as role-based dashboards, payroll teams can quickly spot variances and potential issues before they become problems. The solution’s configurable payment schedules help businesses avoid costly penalties, and its real-time general ledger updates provide teams with accurate, up-to-date information.

Getting payroll right is one of every employer’s most important responsibilities. Not only is it vital to employee morale and well-being, payroll accuracy is also important to the bottom line and to regulatory compliance. It’s possible to get to an accurate payroll doing much of the work manually, but doing so is costly and tedious—and makes errors far more likely. Generating an accurate payroll by relying on a proven process and automating much of that process is faster, less expensive, and far more accurate. Fortunately, that efficiency is just 11 best practices away.

Simplifying Payroll FAQs

How do companies do payroll effectively?

Companies with accurate and timely payroll processes consistently follow a structured process, automate whenever possible, and comply with regulatory requirements. These companies start by accurately classifying employees and ensuring that their payroll documentation is complete and accessible.

What are the five basic steps to calculating payroll?

The five basic steps of the payroll process are to determine each employee’s gross pay based on their work hours and pay rate; deduct federal, state, and local taxes; deduct other withholdings, such as employee contributions to health insurance and retirement plans, garnishments, or union dues; calculate net pay; and issue payment through direct deposit, check, or payroll card.

Can companies prepare payroll manually?

It’s certainly possible to do payroll manually; almost one in five companies do so. But manual payroll processes take longer, require more administrative support, and are considerably more likely to be inaccurate than a payroll process automated through software.