Payroll Processing Guide: How Businesses Manage Payroll Workflows

Whether your company has five employees or 500, it’s important to develop an efficient payroll system. Payroll processing can be a challenge, especially when team members work on a variety of different schedules and contracts. Each employee needs to receive their funds correctly and in a timely manner, as just one round of late paychecks can cause a metaphorical five-alarm fire. Payment timing, however, is only a small part of the overall payroll workflow.

Payroll processing is a complex system that operates both before and after a team member receives their paycheck. It requires clean input data, accurate calculations, coordinated approvals, timely disbursements, and meticulous recordkeeping. Finance departments that rely on manual procedures to complete these tasks may be overwhelmed by the sheer scale of the work. For that reason, some companies are turning to payroll software and automated banking solutions.

This guide covers how payroll processing works, the key steps involved, the challenges that can arise, and how to choose the right tools to manage it more effectively. We’ll also take a look at Slash, a business banking platform that gives teams the cash flow visibility and payment rails they need to run their payroll system more effectively.¹

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What Is Payroll Processing?

Payroll processing is the complete workflow behind the payment of employee salaries and wages. It typically encompasses everything from collecting and validating employee data to calculating gross pay, applying taxes and deductions, disbursing payments, and maintaining records. Ultimately, the payroll process ensures that your staff gets paid with the correct amounts on the correct day.

Small businesses and startups may be able to complete their biweekly payroll one employee at a time without breaking too much of a sweat. Companies with large teams, however, should develop a system or adopt a software that can help busy HR and finance departments stay on top of expanding payroll responsibilities.

The payroll process can be divided into three broad stages: pre-payroll, payroll execution, and post-payroll. Each stage includes several steps and actions that must be completed accurately and in the right sequence. Mistakes across these stages can lead to frustrated employees, compliance issues, and even legal consequences. For example, the state of Massachusetts has a "treble damages" law, which means late payments to employees incur a fine of triple the damages.

How Does Payroll Processing Work? The 3 Key Stages

Pre-Payroll

Each part of the pre-payroll stage happens before the first paycheck is even calculated. We’ll start by going over the work new businesses need to do to establish their payroll systems, then we’ll review some of the prep work that needs to be done on a recurring basis:

Set up a payroll structure: This often includes defining pay periods, classifying your workers, and configuring approved payment methods (direct deposit, check, or other means). You’ll also need to register your business as an employer with local tax authorities in order to obtain necessary documentation like your EIN (Employer Identification Number).
Implement and configure a payroll system: Whether you prefer to run payroll using manual spreadsheets or a dedicated payroll software, you should fully implement your system before your first paycheck is sent. A correctly configured payroll system should reflect your company’s specific compensation structure and the classification of your workers (1099 contractors or W-2 employees).
Collect and validate employee data: Now that your payroll processing system is set up, it’s time to get into the routine. Each pay period, data like hours worked, overtime, bonuses, commissions, benefit elections, and more need to be tracked accurately. You’ll also need your team’s banking and contact information to make sure they can get paid in the first place.

Payroll Execution

Payroll execution is the fun part (for employees), as this is when net pay is calculated and delivered. Here’s what you’ll need to do:

Calculate gross pay: Salaried employees will usually receive a consistent biweekly pay, while hourly employees are paid based on hours logged. Pay calculation is easily automated, especially when hourly employees track their own shifts by clocking in and out. However, variable pay like bonuses and commissions may require some extra math.
Apply taxes and deductions: Federal, state, and local income tax withholdings are calculated based on each employee’s IRS Form W-4. FICA contributions (Social Security and Medicare) are applied for both employee and employer. Finally, benefits like health insurance premiums and 401(k) contributions are deducted. You may also occasionally encounter a garnishment order, which is a court or government-ordered withholding of wages.
Determine net pay and review results: Net pay is a term for gross pay minus all taxes and deductions, and it's the amount your employees will be receiving on their paychecks. Before any payments are released, everything should be reviewed for anomalies or missing data.
Execute payroll payments: Lastly, you get to pay your staff. Approved payroll is usually disbursed via direct deposit or physical check. Methods can vary for employees in other countries, as their payment rails and currencies may require extra consideration.

Post-Payroll

Post-payroll largely centers around recordkeeping and remaining compliant. Mistakes in this stage won’t necessarily impact your team members, but they can certainly impact your business when the IRS catches errors during an audit.

Distribute pay slips to employees: Every employee should receive a pay stub that corresponds to the most recent pay period. This is typically done electronically nowadays, but some businesses may still hand-deliver pay slips. This step is a legal requirement in all states except eight.
Report payroll taxes: Withheld income taxes, FICA contributions, and employer payroll taxes must be reported to the IRS and respective authorities. Filing late can generate penalties and interest on the unpaid tax total.
Ensure ongoing compliance: This step is all about keeping up to date with regulations, such as tax rates and filing requirements. You’ll also usually run paid time off (PTO) reports and deduction reports here.
Maintain payroll records and complete accounting tasks: The data from each payroll run must be recorded in the general ledger, reconciled against bank statements, and maintained in records for a minimum of three years per the Fair Labor Standards Act. Legal requirement or not, it’s always helpful to retain payroll records for the sake of cross-referencing and potential audits.

What Are the Different Types of Payroll Processing?

There are three primary approaches to running payroll, each coming with different responsibilities. These approaches are:

Manual payroll processing

Some small businesses will keep things traditional by managing their payroll processing using spreadsheets and timesheets. If a company has a handful of employees and doesn’t plan on scaling, this can work smoothly. However, once a team begins to grow, manual procedures can lead to serious calculation errors and unnecessary stress. Additionally, this wasted time is costly; the saying, “time is money”, is true when it comes to tedious payroll work.

Outsourcing payroll to a managed provider

Outsourcing is sometimes considered a dirty word in the world of business, but outsourced payroll is quite common among modern companies. Finance teams have a wide array of third-party payroll providers to choose from, often coming in the form of HR companies or payroll bureaus.

These services can handle calculations, filings, and disbursements on their client’s behalf. Outsourcing these responsibilities reduces internal time businesses spend on their payroll and helps ensure tax and regulatory changes aren’t overlooked. However, these providers aren’t typically cheap, and finance leaders usually lose direct oversight into their payroll process.

Automated payroll processing

While outsourcing providers handle the process for you, some solutions offer automated tools that put you back in charge of your own payroll system. Automated payroll platforms often integrate with timekeeping, HR, and accounting systems to allow users to run payroll with minimal manual input. They tend to be accurate and scalable, but they won’t run themselves forever – teams should iterate upon these solutions and adjust when necessary.

Companies can enjoy certain benefits when they integrate their automated payroll system with their accounting software, but they’ll still run into some snags if their banking platform is disconnected. That's why Slash connects two-ways with popular accounting solutions like QuickBooks Online, Sage Intacct, and Xero, allowing data to flow seamlessly from one end to the other. This helps keep your numbers aligned and your mistakes to a minimum.

Common Payroll Challenges

Payroll’s a tricky thing. No matter the approach you take to payroll processing, you may run into some challenges, including:

Compliance complexity: Tax rates change, minimum wages update, and filing deadlines vary by jurisdiction. Keeping your payroll process compliant may require constant attention to regulatory changes. Missing a legal update or a filing deadline can incur penalties from the IRS.
Errors in calculations: When it comes to the issues of mistakes on timesheets and payment discrepancies, spreadsheet-based data entry is usually the culprit. However, if your payroll and accounting softwares aren’t connected to your banking stack, you can still make mistakes when manually transcribing data from one platform to the next. This is where Slash’s integrations can help.
Cash flow constraints: It’s very important for businesses to maintain sufficient liquidity ahead of each pay period, as the last thing you want is depleted cash reserves on pay day. This is usually a symptom of a larger issue within your organization as a whole; automated tools aren’t going to be able to fix poor cash management.
International payroll: Businesses with employees in multiple countries typically end up dealing with different local tax rates, regulations, and contract stipulations. Cross-border payments are another obstacle, as some rails lead to high fees and foreign exchange fluctuations that can end up changing the value of the paycheck. Slash offers several low-cost payment methods that can circumvent some of these issues, including global ACH and cryptocurrency.⁴

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How to Choose a Payroll Software: Key Features and Considerations

Unless you own a small business and you’re satisfied with your manual operations, you’ll probably want to adopt a payroll software to address the challenges above. Here are some capabilities and features you’ll want to evaluate when making your choice:

Automation of payroll processes: Your platform should be able to automate net pay calculations, tax withholdings, wage deductions, and payment scheduling based on pre-configured rules. The more smoothly your payroll process can run without human intervention, the better.
Built-in validation and error prevention: Traditionally, finance departments would have to comb through records before approving payroll to make sure there are no missed punches or incorrect numbers. Many modern systems can flag suspicious and missing data automatically before paychecks are sent and mistakes have to be fixed retroactively.
Employee self-service and verification: When employees can update their personal information, manage their tax documents, and request time off via a payroll platform, companies can save time on unnecessary back-and-forths between staff and HR. Many payroll providers also offer mobile apps that allow clock-ins and clock-outs inside a defined location tied to the workplace.
Visibility into payroll data: Transparency is key, especially when it comes to managing payroll and tax records. Some solutions come with dashboards and reporting tools that allow easy access to data, compliance status, and even employee insights.
Security and compliance infrastructure: As HR departments gather their team’s Social Security numbers and bank account details, strong data security becomes non-negotiable. Payroll services should maintain data protection standards and support role-based access controls. Some states come with their own data security regulations that payroll systems must adhere to, such as the California Consumer Privacy Act (CCPA).

Additional Payroll Software Considerations

Once you know what to look for in a payroll system, you should then weigh key features against your company’s needs and context. Some providers are tailored more towards mid-sized businesses, while others come with multi-entity support and sophisticated workflows that fit larger enterprises. These platforms may also come with multi-jurisdiction infrastructure that factors in payroll regulations across different states and countries.

Your business’s size could also help inform how much you need to automate. Some companies may want a system that runs payroll with minimal involvement, while others prefer more oversight and control. The right platform will match your preference and save your team significant time. Similarly, payroll software that integrates with your accounting and banking systems will often produce more consistent data and reduce reconciliation work.

Many companies manage teams who request a variety of different payment methods, both domestic and international. Your payroll platform should support the payment rails your business currently uses and the rails you may use in the future. For instance, if you’re expanding your team globally, you’ll likely want access to several different cross-border payment methods that reach as many countries as possible. Slash users can send money to more than 180 countries using the SWIFT network or local rails, meaning finance teams that pair Slash with their payroll software will be able to support just about any overseas team member.

Manage Payroll Payments with More Visibility with Slash

While payroll processing is a much more in-depth process than simply sending payments, paychecks are ultimately the most important part. Whether paying teammates down the street or across the globe, companies need a consistent way to send funds using different payment rails and track them alongside their overall cash flow. Slash is a business banking platform that can centralize payment execution and give busy payroll teams a live view of their disbursements, cash position, and transaction history.

Slash isn’t a payroll provider in itself, but its automated tools and financial dashboard work as a complementary piece to the payroll system you currently use. Our platform allows businesses to send global ACH payments, pay contractors in USD-pegged stablecoins like USDC and USDT, and deliver money near-instantly via RTP/FedNow. With a diverse set of payment methods, employees can choose to receive their funds through an avenue that settles more quickly or comes without high fees. Whether your team uses each of these rails or just basic direct deposit, all payments are trackable on the Slash platform in real time.

Our platform integrates with popular accounting systems like QuickBooks Online, Xero, and Sage Intacct, which may also connect to the payroll providers you partner with. This means all your data can be aligned and accessible through one three-part financial stack.

Other tools that can help busy finance teams include:

AI-powered finance: Our platform comes with Twin, a built-in AI agent that can be prompted with natural language to complete complex tasks. Users can ask it to create cards, pay invoices, review your cash flow, and much more.
Slash Visa® Platinum Card: The Slash Card allows you to set customizable spending controls and issue unlimited virtual cards for handling team expenses, vendor payments, subscriptions, and more. Users can also earn up to 2% cash back on business purchases.
Reimbursements: Instead of managing reimbursements across multiple tools, teams can now submit, review, and approve reimbursements directly inside the Slash dashboard. Connect your bank account, upload your receipt, and let Slash capture the details.
High-yield treasury: Earn up to 3.82% annualized yield on idle funds with money market investments from BlackRock and Morgan Stanley, managed directly within your Slash account.⁶

If you choose the right payroll provider, Slash can handle just about everything else. Check out Slash today and see how our financial dashboard can change the way you pay your team.

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Frequently Asked Questions

How long does payroll processing take?

It mostly depends on your payroll software and business size. Automated, modern systems can often process payroll in 1-2 days, while manual or in-house processes can take more than a week to fully run payroll.

How does payroll affect cash flow?

Payroll can have a significant effect on cash flow, but it's usually a predictable one. Each pay period, a given amount of money exits your organization's accounts. If your revenue is strong and your cash reserves are healthy, it's nothing to be scared of. If your business is in its early stages and money's tight, though, pay periods could be a biweekly hurdle.

What's the difference between gross pay and net pay?

Gross pay is the total amount an employee earns before taxes and deductions, while net pay is the final "take-home" amount after withholding all deductions.