How to Improve Your Payroll Process

Learn how to effectively improve your payroll process with these easy steps and frequently asked questions.

Updated on February 9th, 2023

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A business may want to improve its payroll process when its payroll is late, prone to errors, or overly complex. Frequent payroll errors can result in penalties or delayed payments, ultimately affecting the employer and employee relationship.

To help reduce frequent errors and improve the overall payroll process, we compiled a list of seven payroll processing best practices.

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How to Improve Your Payroll Process:

1. Create and maintain a monthly payroll schedule.

A monthly payroll schedule determines how often you plan on paying your employees. You can use a standard Excel calendar with a saved date for payroll processing. If your payroll takes a couple of days to complete, consider this delay when setting a processing date.

We suggest synchronizing your pay cycles. While most businesses have one payroll period that's either bi-weekly, semi-monthly, or monthly, some businesses have multiple pay periods. This is usually the case when businesses hire part-time workers or contractors. It's wise to consider minimizing your pay cycles because it helps reduce processing times and the risk of errors.

Once your payroll schedule is set up, make sure you always stick to your payroll date. You should also share the final schedule with all payroll stakeholders and relevant processing departments.

State Mandated Payroll Schedules

Depending on your location, industry, and the size of your business, you may have to abide by a state-governed pay schedule. Visit the U.S. Department of Labor website to check if your business is required to follow a payment schedule.

2. Study tax requirements.

It's imperative that you study and understand the state and federal tax laws that affect your business's payroll. The Internal Revenue Services (IRS) and other government agencies can penalize your business if you miscalculate payroll. In these cases, you would have to correct the errors while remitting penalties and any payments due to the IRS.

To avoid frequent penalties, stay up to date with the latest changes in state and federal payroll policies. Start by appointing an employee that regularly performs research on this subject, and update your company's payroll processes according to the new policies. In addition, make sure you always meet government deadlines, tax filings, and reporting requirements.

Areas of emphasis include:

  • Remittance.
  • Payroll deductions.
  • Pension contributions.
  • Employee insurance.
  • Bonuses and salary increases.

It’s especially important that management and HR employees thoroughly understand the employer’s payroll obligations.

3. Create clear and simple payroll policies.

Payroll errors often occur when employees don't understand a company's payroll system. This can be due to a lack of training or limited access to payroll policies. Clear and simple payroll policies can help avoid mistakes like underpaid taxes, employee misclassifications, and penalties.

Your policy should include:

  • A complete overview of how the payroll process works.
  • Employee classifications (full time, part-time, contractors).
  • Employee reporting requirements.
  • How salaries are set and calculated.
  • How promotions and benefits are calculated and processed.
  • How the company handles payroll errors.

All information about company policies should be readily available to all employees. You can do this by putting everything in writing and distributing it throughout the workplace. You should also encourage your employees to ask questions whenever they're confused about the policy.

Our Recommendation:

Involve your employees. Start by holding regular staff meetings to discuss changes and policy additions. In this meeting, take the time to hand out surveys, hold presentations, and invite ideas for policy improvement.

4. Conduct periodic audits.

Thorough and regular audits can help identify and track frequent mistakes made during payroll processes. The best way to do this is by conducting a detailed workflow analysis, which evaluates each step in your payroll process from start to finish.

Your audit should include:

  • The monitoring of all payroll processes.
  • The testing of payroll software, including integrations, updates, and feature add-ons.
  • Training programs.
  • The implementation of time and attendance software.

5. Invest in payroll software.

A general cause for mistakes in the payroll process is actually how a business chooses to perform payroll. If your business is conducting payroll manually or using outdated payroll software, you may need to consider investing in more modernized payroll software. The latest payroll features include integrated time and attendance, direct payments, and tax compliance.

Good payroll software can reduce the administrative time required to complete the payroll process. However, it's essential that you're prepared for the training, implementation process, and costs of installing payroll software.

Make sure your employees have uninterrupted online access. Payroll software can provide your employees with 24/7 access to current and previous digital paystubs, hours worked, vacation days used, available sick time, and much more.

6. Implement direct deposits.

The traditional method of cutting paper checks and mailing them out to employees once or twice a month can be a time-consuming and risky process. Consider going paperless and directly depositing salaries into employees' bank accounts. This way, you can save time on administrative tasks and spend less money on paper.

Best Direct Deposit Payroll Software:

7. Outsource your payroll.

Payroll outsourcing is when a business hires a third-party payroll service provider to perform payroll. Payroll service providers can include an accountant, a small payroll firm, or major payroll service providers like Intuit and Gusto. Depending on the size of your business, you might want to consider hiring a payroll specialist with in-depth knowledge of bookkeeping, accounting, and payroll processes.


What is an efficient payroll process?

An efficient payroll process does not have frequent errors, an overly complex administration process, and employees can expect their payroll on time every pay period.