What is payroll processing and how does it work?

Key takeaways:

• Payroll processing involves much more than paying employees. It can be a complex, multi-step process especially for businesses with an international workforce.

• Automation, integration, and compliance are key pillars of modern payroll management, especially for global teams.

• A business account can often help streamline and simplify your payroll workflow with API integrations.

Effective payroll management keeps employees satisfied and the organisation running smoothly. Recent studies reveal that payroll errors are alarmingly common. For instance, in Australia, 59% of employers admit to making mistakes in the past two years.¹ These errors can lead to issues like problems like underpayments and delayed salaries, which can affect employee morale and trust. 

However, the complexity of payroll regulations, the need for more efficient and accurate processing, and the desire to focus on core business activities, more businesses are outsourcing their payroll functions to specialised providers. The global payroll outsourcing market is expected to hit US19.9 billion by 2030.² As you expand and hire more international employees, the need to streamline payroll only intensifies.

What's payroll processing?

Payroll processing is the process of calculating, compensating your employees correctly, on time, and recording employees’ wages in full compliance with legal and financial obligations. It encompasses everything from tracking work hours and calculating gross pay to managing deductions, issuing payments, and ensuring adherence to regulatory requirements.

For growing businesses, especially those with a growing international workforce, payroll becomes more complex. Without a streamlined payroll system, you risk making costly mistakes, from overpaying staff to incurring penalties for incorrect tax filings. Even a simple error like a wrong tax identification number can have serious repercussions.

Global payroll processing is more than ensuring that each employee receives the right pay at the right time. It’s also about making sure your business stays compliant across jurisdictions. This not only enhances employee satisfaction but also protects your company from legal and financial headaches.

How does payroll processing work?

Payroll processing involves collecting employee data, calculating gross and net pay, applying deductions, and generating payments. It also ensures compliance with tax laws and generates reports. This process can be manual or automated, but as your workforce scales, automation becomes not just helpful but essential.

Manual processes often involve spreadsheets, calculators, and a degree of human error. Businesses who don't have in-house capabilities may choose to outsource their payroll processing. However, this can turn out to be an expensive affair, especially for businesses with limited budgets.

On the other hand, Human Resource Information Systems (HRIS) have transformed from a simple data storage solution into advanced tools that can even integrate into financial solutions. This allows businesses to streamline data flow such as payroll information, time and attendance records, and tax information with payroll processing and financial reporting. This integration ensures that all relevant data is consistent and up-to-date, improving accuracy, and lowering operational costs. 

What are the main parts of payroll processing?

Pre-payroll activities

Define payroll policy

Create a payroll policy that establishes the guidelines for payroll operations. In the policy, define how often employees will be paid (weekly, biweekly, monthly), the structure of overtime payments, bonus eligibility, leave encashment, and benefits packages. Clear payroll policies also dictate how new hires, terminations, and employee status changes are handled. These internal policies must align with national labour laws and be formally approved by management. A well-documented policy reduces ambiguity and provides the payroll team with clear guidelines for every pay cycle.

Gather inputs

Once you’ve determined the payroll policy, calculate each employee’s gross pay. Payroll data comes from multiple sources, such as HR departments, time-tracking tools, benefits platforms, and finance systems. Information may include attendance logs, approved leave, performance bonuses, salary revisions, commissions, and expense reimbursements. This determines the amount of each direct deposit and its data-based justification. In some organisations, gathering these inputs might be a manual task, in others it often requires automated data syncs from integrated HRIS platforms. 

Actual payroll process

Calculate net pay

The core of payroll processing is calculating salaries. This involves using validated data to determine each employee’s gross and net pay. Gross pay includes the employee’s base salary, allowances, bonuses, and any additional earnings. From this amount, various deductions are subtracted, such as taxes, social security contributions, health insurance premiums, and retirement fund payments, to arrive at the net salary.

Once calculations are completed, reconciliation is performed to ensure amounts are correct and consistent with expectations. Any discrepancies are flagged and corrected before proceeding. A small mistake like a single decimal error could result in overpayments, underpayments, or tax misfilings.

Payout

Disbursing salaries to employees is the most visible part of payroll processing. Companies need to ensure that sufficient funds are available in their business account, prepare salary bank advice reports, and initiate transfers according to the pay schedule. Most businesses today use electronic funds transfers (EFT) as they're quick and efficient, and can be automated, streamlining the payroll process and reducing the workload for HR and finance teams.

Post-payroll process

Statutory compliance

Statutory compliance varies by country and typically includes submitting required tax filings to government agencies, ensuring contributions are paid to relevant authorities for social security, and preparing and distributing year-end tax documents. Failing to comply with statutory obligations can trigger audits, penalties, and legal action, not to mention reputational damage.

Once payroll is finalised, it must be accurately recorded in your company’s accounting system. This involves logging payroll as an operating expense, allocating salary costs to specific departments, and tracking liabilities for future payouts like unpaid leave or bonuses. Accurate payroll accounting ensures clean financial statements and simplifies tasks like cash flow forecasting, tax filing, and audit preparation.

Reporting

After payments are made, you’ll need detailed reports for internal audits, cost analysis, and strategic planning. These reports can include department-level payroll expenses, year-to-date salary summaries, tax contributions, overtime costs, and leave accruals. Payroll systems offer automated report generation and data visualisation tools to make analysis quick and intuitive.  Increasingly, business accounts are integrating with payroll systems so that businesses can get a real-time overview of your entire cash position.

Understanding payroll processing regulations

Payroll processing regulations vary by country and can be complex, but here are a few key areas:

🟠 Tax withholding: ensuring the correct amount of income tax, social security and other taxes are withheld from employee paychecks.

🟠 Wage and hour laws: compliance with minimum wage, overtime, and working hour regulations.

🟠 Benefits and deductions: managing health insurance, retirement plans, and other benefits, and ensuring proper deductions or contributions.

If you employ in  markets outside your own,  you must ensure your payroll processing also adheres local laws. This can become increasingly difficult to manage due to varying regulations, tax laws, and labour standards. A business account can serve as a centralised repository for the funds used to pay employees globally, making it easier to manage cash flow and ensure there are funds for payroll in all locations.

Some business accounts offer multi-currency capabilities, allowing you to hold and manage funds in different currencies, which can be helpful for international payroll. Many business accounts also offer APIs that can integrate with payroll software, automating the process of transferring funds to employee accounts.  Additionally, a business account can provide a detailed transaction history, allowing you easily track and report on all payroll-related transactions.

6 essential steps for processing payroll

There are several steps to ensure employees are paid accurately and on time, and that all legal and regulatory requirements are met. Here’s a breakdown of the typical steps involved in processing payroll.

Step 1: Define the workweek

A workweek is a fixed, recurring period that serves as the standard frame for calculating hours worked. While it can begin on any day and at any hour, it must remain consistent. Defining this timeframe ensures your business adheres to wage and hour laws, such as calculating overtime based on a consistent cycle.

Step 2: Track time & attendance

Accurately record employee start and end times, break durations, and any paid or unpaid leave. Use reliable methods like manual timesheets, swipe cards, biometric systems, or HRIS platforms to ensure transparency and legal adherence.

Step 3: Calculate wages

Determine the wages owed by multiplying hours worked by the agreed rate, calculating overtime premiums, shift differentials, and accounting for paid or unpaid breaks. Ensure this aligns with labour regulations for overtime, minimum wage, and mandatory breaks.

Step 4: Apply deductions

Before issuing net pay, apply mandatory and voluntary deductions, such as income tax, Social Security, Medicare, and employer-sponsored benefits. Proper calculation and categorisation ensure compliance with tax authorities.

Step 5: Set pay structures

Create a consistent and fair pay structure with salary bands, pay grades, performance bonuses, overtime rates, and role-specific compensation rules. Align this with company policy and market standards to avoid wage inequality and maintain internal equity.

Step 6: Bookkeeping and compliance

Document payroll calculations in the company’s financial records, logging gross wages, taxes withheld, employer contributions, and net pay. Maintain records for audits, generate payslips, and submit statutory filings on time to ensure compliance and support financial planning.

Tips to improve payroll processing

Laying a strong foundation for payroll processing brings long-term benefits. It enhances accuracy, reduces error, and builds employee trust. Compliance with legal requirements minimises fines and legal issues. Here are a few tips that can improve your payroll processing. 

Leverage payroll technology

Modern payroll processing demands modern infrastructure. Ditch disconnected systems and manual spreadsheets in favour of a platform that integrates with your HR tools, accounting software, and banking services.

Drive operational efficiency

Automate wherever possible: from tax calculations and FX conversions to payslip generation and year-end summaries. Map out your current payroll cycle from start to finish, then identify bottlenecks and redundant tasks. Automate what you can, delegate what you should, and eliminate what you don’t need.

Centralise your system

A centralised global payroll system streamlines the management of multiple currencies, tax codes, and compliance requirements. This system provides a single, unified platform for processing payroll across different regions, reducing the complexity and potential for errors. It also facilitates better data management and reporting, making it easier to monitor and manage payroll operations globally.

An all-in-one solution like Airwallex that supports multiple currencies is essential for managing international payroll. It ensures smooth cash flow and reduces the risk of currency conversion errors. Multi-currency accounts can also help manage exchange rates and minimise transaction fees, making international payments more efficient and cost-effective.

How Airwallex streamlines your payroll processing

Airwallex empowers businesses to run global payroll on their terms by connecting existing payroll systems and HRIS platforms to Airwallex’s global financial solution. That means you can calculate pay, and trigger bulk payouts for your global workforce all from one place. No disconnected and fragmented systems, just seamless automation from start to finish.

Additionally, with Airwallex’s all-in-one solution offers you an Airwallex Business Account with multi-currency capabilities, allowing you to collect payments from both domestic and international customers in their preferred currency. You can pay employees globally from those balances and save on unnecessary bank charges since you can pay in the same currencies you receive payments in.

With Airwallex’s open APIs, you can integrate your existing payroll software and automate the process of transferring funds to employee accounts and reduce manual processes. You can also simplify bookkeeping with accounting software integrations with Xero and QuickBooks, saving time with automatic reconciliation and reducing the risk of human error.

Payroll processing FAQs

What are the basic steps in payroll processing?

The basic steps of payroll processing include gathering employee data, calculating gross pay, applying deductions, processing payroll, generating payslips, maintaining records, and filing tax reports.

Can I process payroll myself?

Yes, but it’s not recommended once your team scales or you operate globally. Mistakes in tax or compliance can be costly.

Is payroll processing difficult?

It’s only difficult when done manually. With integrated, automated systems, especially ones built for global businesses, it becomes a streamlined, error-proof function.

Sources: 

1. ​​https://www.heraldsun.com.au/careers/wage-theft-pain-rife-with-shocking-number-of-employers-making-payroll-mistakes/news-story/bb511d10fdf2814fbfe290699b2f5aa6 

2. https://www.einpresswire.com/article/726591918/payroll-outsourcing-market-to-garner-19-5-bn-globally-by-2030-at-7-2-cagr-allied-market-research