Payroll

The payroll cycle, step by step

1. Collect time and changes. Pull approved hours from the time and attendance system, plus new hires, terminations, rate changes, benefit elections and garnishment orders since the last run.
2. Calculate gross pay. Regular hours, overtime at 1.5 times the regular rate for non-exempt employees under the FLSA, shift differentials, bonuses and commissions.
3. Apply deductions in the correct order: pre-tax, then taxes, then post-tax.
4. Review. Compare the register to the previous period. Investigate any employee whose net pay moved more than about 20% and any total that moved more than a few percent.
5. Fund and pay. Transfer funds for direct deposit (usually one to two banking days before payday), pay cards and any live checks.
6. Remit taxes and deductions. Deposit withheld taxes on the IRS schedule, send 401(k) deferrals to the plan, and pay garnishments to the right agencies.
7. Post to the general ledger and file reports.

At a high-volume employer, steps 1 and 4 cause most problems. A 300-person hiring wave means 300 new records with bank details, tax forms and benefit setups that all have to be right on the first check.

Pay frequency

• Weekly: 52 pay periods. Common in warehousing, construction, staffing and hourly frontline work. Employees like it; it costs more to run.
• Biweekly: 26 pay periods. The most common choice in the US. Two months a year have three paydays.
• Semimonthly: 24 pay periods, usually the 15th and the last day. Common for salaried staff; awkward for hourly overtime because periods do not line up with workweeks.
• Monthly: 12 pay periods. Rare in the US for hourly staff and restricted in many states.

Most states set a minimum pay frequency, and some require weekly or biweekly pay for certain workers. Check each state you operate in. See pay period for how periods interact with overtime and holidays.

Employer tax obligations and filings

The employer matches Social Security and Medicare (7.65% in total on wages up to the Social Security wage base, then 1.45%), pays federal unemployment tax (FUTA) on the first $7,000 of each employee's wages, and pays state unemployment insurance at a rate based on the employer's claims history. Some states add disability or paid family leave contributions.

Core federal filings: Form 941 each quarter, Form 940 each year for FUTA, and Forms W-2 and W-3 by January 31. Withheld income and FICA taxes are trust fund taxes. If they are not paid over to the IRS, the people responsible for payroll decisions can be held personally liable, which is why payroll leaders are careful about who has authority to delay a deposit.

Read more about payroll deductions and how gross pay is built. Tax rates and wage bases change every year, and state rules vary, so confirm current figures before each year starts.

Payroll in high-volume and multi-state hiring

A company hiring hundreds of hourly people a month runs into problems a small business never sees:

• First-check accuracy. A new hire whose first paycheck is wrong or late is a flight risk. Many contact centers see a turnover spike right after the first pay date when this goes wrong.
• Remote agents in many states. Each work-from-home agent creates withholding, unemployment registration and sometimes local tax obligations in their own state.
• Pay cards and earned wage access. Unbanked employees need a no-fee option. Pay card rules vary by state, and many require the employee's consent.
• Final pay deadlines. Some states require final wages on the last day of work for involuntary terminations. High turnover makes this a weekly task, not an occasional one.

Common payroll errors

• Wrong regular rate for overtime. Under the FLSA, non-discretionary bonuses and shift differentials must be included in the regular rate used to calculate overtime. This is one of the most common wage-and-hour violations.
• Unpaid pre-shift work. Agents logging into systems before clocking in is compensable time.
• Misclassifying employees as exempt or workers as contractors.
• Missed deduction changes. A benefit election not loaded before the first payroll of the plan year leads to retroactive deductions that frustrate employees.
• Late tax deposits, which carry penalties that grow quickly.

If you are hiring the people who run this, our payroll specialist interview questions cover the technical and judgment skills to test.