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by Jen Leigh on March 14, 2023

Tips and Best Practices for Payroll Process Documentation

Payroll process documentation is crucial to efficient payroll operations and compliance risk reduction. It enables businesses to keep payroll accurate and up to date. With well-executed payroll process documentation, companies avoid making mistakes that could lead to employee distrust, ruin brand reputation, or get them fined due to non-compliance.

Proper documentation ensures people responsible for handling the payroll understand and follow the correct procedures at all times. Moreover, onboarding new payroll department hires becomes easier when the process is well-documented. This post discusses the best practices for payroll process documentation and the benefits of automating payroll.

Table of Contents

Useful Tips and Best Practices for Payroll Process Documentation 

Without an accurate and up-to-date payroll process, HR specialists risk missing important regulation updates or making mistakes that would lead to non-compliance. Outlining the procedures clearly empowers the payroll team, ensuring they're well-equipped to manage the function while complying with the relevant labor laws. From structuring the data entry and payment processes to report handling and recordkeeping standards, having clear and concise payroll procedures guarantees accuracy.

Below are the top tips and best practices to guide your payroll process documentation.

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Conduct a Payroll Audit 

Before documenting the process, consider performing an audit to determine areas you can optimize. Find out whether there are manual processes that can be automated? Are the systems and policies up-to-date? Have you classified the workers correctly? Are the current processes exposing the company? For instance, you might realize manual processes increase the risk of errors during data input, time theft, etc., or outdated systems and policies expose you to security and compliance risks, and so forth.

Once you identify the areas that require improvement, you can then develop appropriate solutions to resolve them. For instance, if you have been having challenges with time theft, a possible solution would be investing in attendance and time clock software. Similarly, learning about the difference between the various categories of employees–full-time workers and independent contractors, exempt and non-exempt employees–would ensure you classify them correctly and avoid potential fines. 

Create a Payroll Calendar

A payroll calendar allows you to know what happens when and keep track of important deadlines. For example, preparing the calendar lets you outline the payroll processing dates for the entire year while factoring in public and other company holidays. It should outline dates and deadlines like paydays, IRS deadlines for tax payment and return filing, local bank holidays, and federal reserve closed dates, etc.

Maintain a Payroll Handbook

The next step is to create a payroll handbook that maps out the processes. Essentially, the booklet should outline the payroll timeline and provide detailed steps of the processes involved from the beginning of the pay period to the end. 

It should contain detailed steps or information on:New call-to-action

  • Pre-payroll preparations
  • Payroll procedure forms
  • Timekeeping procedures
  • Data entry processes
  • Wage and deduction processing
  • Payroll approval process
  • Report handling standards
  • Post-payroll procedures

Establish Payroll Policies

You should also establish standardized guidelines for the payroll process. The policies may cover areas such as benefits, payment schedules, payroll deductions, and payment methods. 

Automate Payroll Processing

Automating the payroll improves processing efficiency and reduces compliance risks. There are automation tools that can help with tasks such as timekeeping, calculating overtime, calculating deductions and taxes, and tax filing. Some solutions have self-service capabilities, further reducing the workload of the payroll team. For instance, employees can log in and submit timesheets and tax information or review pay stubs.  

Integrate HR and Payroll

When looking for a payroll software provider, consider a solution that can integrate with HR to increase efficiency. Integration eliminates repetitive manual processes, thereby minimizing errors and saving the payroll team time. 

Importance of Deadlines

Having a payroll calendar is crucial because, among other benefits, it enables you to keep track of important dates such as paydays and IRS tax and return filing deadlines

Companies should always strive to pay employees on time, as late payment can affect their morale and productivity. If you keep missing payment dates, it creates uncertainty and may cause financial-related stress among the employees ruining their productivity. 

Another downside of late payment is that it can ruin a company's reputation and downplay your efforts to secure quality talent. Missing tax payments and return filing dates exposes a company to fines and penalties for late submissions. It can also raise suspicion and trigger IRS to direct auditing of your processes, leading to additional costs. 

Benefits of Automated Payroll

Businesses are increasingly adopting technology to improve efficiency and scale their operations. Payroll processing is one of the functions that has benefited immensely from automation technology, enabling organizations to optimize workflows and deliver employee pay faster and easier. From reducing compliance risk to increasing payroll teams' efficiency, payroll automation has multiple benefits. 

Let's look at a few of them. 

  • Reduces errors – Manual payroll processing is susceptible to mistakes, especially during data capture. Automating the process eliminates the risk of errors ensuring accurate computation of the workers' pay. 
  • Saves time – Automating payroll replaces repetitive and time-consuming tasks (e.g., filling timesheets and inputting the data) that employees typically handle manually, thereby saving time. 
  • Enhances record accessibility – Automation ensures the information is available in one place and easier to retrieve for analysis, reporting, and tax filing purposes.
  • Increases data security – Automation increases security as the data is password-protected and encrypted.
  • Saves money – While acquiring payroll software costs money, it saves you more in the long-run thanks to improved efficiency. In addition to cutting down labor costs, it eliminates the risks of errors that would lead to losses. 
  • Reduces compliance risks – Good payroll software is automatically updated with regulation changes (e.g., changes to healthcare or tax laws). This enables you to remain up-to-date and minimizes the risk of non-compliance.
  • Improves employee satisfaction – Automating the payroll reduces the risk of timesheet errors and other miscalculations that would possibly occur when recognizing deductions, overtime pay, commissions, etc., leading to employee satisfaction. It also reduces the workload of the payroll team, saving them from potential burnout. 
  • Simplifies tax filing – Payroll software is automatically updated with tax laws, eliminating the need to track changes manually. In addition, it calculates taxes and keeps track of the tax payment and returns filing deadlines.  

Payroll Documentation Checklist

With so much employee paperwork, knowing which records are required for payroll documentation can be challenging. Below is a checklist of the documents and records you need per the Fair Labor Standards Act (FLSA).

Employee's:New call-to-action

  • Full name and social security number
  • Address
  • Date of birth 
  • Sex
  • Occupation
  • Hours worked each day 
  • Hours worked each workweek
  • Pay rate
  • Daily and weekly straight-time earnings 
  • Daily and weekly overtime earnings
  • Deductions 
  • Total wages for each pay period 
  • Payment date 
  • Pay period covered

Other vital payroll records include:

  • Tax forms (Form W-4, Form 1099-NEC, Form W-9, Form W-2, etc.)
  • Employer contribution
  • Additional wages (commission, bonus, etc.)
  • Pay stubs, among others

How Long Should You Keep Payroll Records

According to the U.S. Fair Labor Standards Act (FLSA), you should keep payroll records for at least three years. In addition, records containing wage computations, e.g., time cards, work and time schedules, etc., should be retained for two years. 

Keeping up with Legal Compliance 

Issues such as misclassifying employees, failing to report all taxable compensation, not paying overtime, and late filing are possible mistakes that can attract non-compliance fines. Your payroll practices should align with the Fair Labor Standards Act and other relevant state and local laws to reduce compliance risks. 

Get Help with Your Payroll Process Documentation

If you aim to run an efficient payroll while minimizing compliance risks, you should consider payroll process documentation. To achieve this, you need to conduct a payroll audit to determine areas that require improvement or automation, then create a payroll calendar to keep track of important dates and deadlines and avoid missing paydays and late filing. You should maintain a payroll handbook detailing all the relevant processes, such as timekeeping procedures, wage and deduction processing, payroll approval processes, and post-payroll procedures. In addition, you should establish payroll policies for standardized guidance. 

Finally, you should consider automating the payroll and integrating it with HR. Automating payroll is beneficial in many ways, including reducing errors, saving time, enhancing record accessibility, increasing data security, saving money, reducing compliance risks, improving employee satisfaction, and simplifying tax filing. 

Generally, with cloud-based payroll software, you can streamline all your payroll processing thanks to integrated benefits administration, time and labor, and tax deductions, among other features. It can also provide paycheck analysis, assess compliance risks, and support self-service conveniently via mobile app or website.

For more information, contact us or let us connect you with an expert if you need help rolling out your payroll process documentation.

Jen Leigh

Jen Leigh is a Senior Product Specialist with Inflection HR's Cloud Based HR and Workforce Management Solutions. Connect with Jenni and the rest of the Inflection HR Team on Twitter, Facebook, or LinkedIn.