Organizational Wellness

How to Do Payroll — Basics for Beginners

Last Updated Mar 24, 2025

Time to read: 12 minutes

It’s Friday afternoon, and the office hums with anticipation. Payday isn’t just about money — it’s a symbol of trust. It tells employees, We see your effort. We value you. We’ve got your back.

Now imagine that trust shattered: a late paycheck, an incorrect amount, or a compliance error spiraling into legal trouble. For HR leaders, these aren’t distant hypotheticals — they’re risks that demand attention. Payroll, often invisible when flawless, becomes glaringly obvious when it falters, bringing missed deadlines, strained relationships, fines, and reputational damage.

As an HR leader, you’re not just issuing paychecks — you’re safeguarding trust and compliance. How do you ensure payroll builds confidence at every level?

Explore essential strategies, optimize your processes, and make payroll a foundation for trust and success. It starts with you.

Payroll Basics, Explained

Payroll: It's on everyone's mind every Friday, but issuing checks correctly starts long before the end of the week.Here's what any HR leader needs to know about the basics of payroll: what it is, the process, and the importance of complying with payroll and labor laws.

What Is Payroll, Exactly?

Payroll is the administrative process by which a company calculates and distributes employee wages, tracks work hours, withholds taxes, and manages deductions for benefits. It serves as a comprehensive system encompassing the following elements:

Employee Compensation: The total earnings an employee receives, including salary, hourly wages, commissions, bonuses, or overtime pay.
Tax Withholding and Compliance: The process of withholding federal, state, and local taxes from employee earnings, as well as complying with payroll tax laws (e.g., Social Security, Medicare, and unemployment taxes).
Benefits Management: Deducting contributions for employee benefits such as health insurance, retirement plans, and flexible spending accounts.
Record-Keeping: Maintaining accurate and compliant records of employee hours worked, salaries, tax filings, and deductions.
Legal Compliance: Adhering to wage and hour laws, including minimum wage requirements, overtime pay, and employee classification (exempt vs. non-exempt).

Payroll is not just about paying employees—it’s a critical business operation that ensures financial accuracy, legal compliance, and employee trust. It acts as a bridge between employers and employees, reflecting the organization’s commitment to fairness and professionalism.

Payroll Process

Now that you’ve nailed down what payroll is, let’s explore how it all comes together with a streamlined process!

Payroll management, like other key company workflows, thrives on structure. With clear steps and a focus on compliance with labor and tax laws, you can meet deadlines and ensure every paycheck is right on the money.

Here’s a quick breakdown of the payroll process:

Collect Employee Data: Record work hours or salaries.
Calculate Gross Pay: Add up wages, overtime, and bonuses.
Withhold Taxes and Deductions: Account for taxes, benefits, and other withholdings.
Issue Payments: Deliver paychecks via direct deposit, checks, or pay cards.
File Payroll Taxes: Stay compliant by filing taxes with the right authorities.
Maintain Records: Keep detailed records for audits and reporting.

A well-structured payroll checklist can help ensure every step is completed accurately.

From weekly to biweekly or monthly pay, your payroll schedule should align with your business needs. Whether you manage payroll in-house or partner with external providers, today’s advanced software solutions make handling payroll easier, faster, and more reliable. Because when payroll runs smoothly, so does your business!

Payroll Compliance

Maintaining a structured payroll process is just the start: Staying compliant with federal, state, and local labor standards is where the real work begins. Laws like the Fair Labor Standards Act (FLSA) provide clear guidelines to help businesses navigate regulated situations like:

Minimum Wage
Tax Withholding
Sick Pay
Maternity Leave
Payroll Record-Keeping
Overtime

These laws aren’t static—they’re updated regularly, and missing the mark can come with steep consequences. Think hefty fines, back wages, or even lawsuits. For example, misclassifying employees as independent contractors instead of employees could lead to significant financial and legal fallout. Case in point: California’s Attorney General secured a $13 million judgment against businesses that misclassified 300 janitors.

Don’t let your company become a compliance cautionary tale. Stay ahead of changing legislation to keep your payroll practices airtight and your team thriving. Your business—and your peace of mind—depend on it.

How to Do Payroll

Starting a payroll process for the first time can feel overwhelming, especially if you're navigating it as a new business. But fear not! By following six straightforward steps, you can set up a solid foundation for managing payroll with confidence.

Step 1: Gather Employee Information

First, you should set up accurate employee records. You can do this by gathering the following essential documents and inputting data into your payroll system:

Form W-4, Employee's Withholding Certificate, is the Internal Revenue Service (IRS) document employees fill out for you. It determines how much should be withheld from their paycheck for federal income taxes.
Form I-9, Employment Eligibility Verification, is used to verify employees' identity and employment authorization. All businesses must complete this form for every employee, citizen and non-citizen alike.
A direct deposit authorization form permits employers to deposit an employee's paycheck directly into their bank account.

Once you have gathered the required documents, it's time to enter details like tax filing status, Social Security numbers, addresses, and contact information into your payroll system.

Step 2: Calculate Gross Pay

Once you've finished gathering and inputting employee information into the payroll system, you need to calculate gross pay, the total amount earned by an employee before deductions. Make sure to address overtime and legal requirements.

Here's how to calculate gross pay for different pay types:

Hourly employees: Multiply the total hours worked by the hourly wage. For instance, 40 hours at $80 per hour is $3,200.
Salaried employees: Gross pay equals annual salary divided by the number of pay periods per year, which depends on the pay schedule. Employees paid weekly have 52 pay periods, those paid bi-weekly have 26 pay periods, those paid semi-monthly have 24 pay periods, and those paid monthly have 12 pay periods. For example, an employee who is paid $1,000 per week and works every week in a year would have a gross pay of 1,000 x 52 = $52,000.
Commissioned employees: Multiply the commission rate by the sales amount. For example, if an employee lands a $60,000 sale and their commission rate is 5%, their gross pay for that sale would be 60,000 x 0.05 = $3,000.
Overtime: The formula for calculating overtime pay is multiplying the employee's regular pay by 2.5 and the number of overtime hours worked, according to the FLSA

Step 3: Withhold Taxes and Deductions

After calculating gross pay, it's time to withhold the necessary taxes and other deductions. These include federal and state taxes, Federal Insurance Contributions Act (FICA) taxes, and other deductions, such as benefits, health insurance, and court-ordered garnishments.

Step 4: Make Payments

The next step is paying employees. You can do this in several ways, including direct deposit, pay cards, or paper checks.

Step 5: File Payroll Taxes

Besides paying employees, employers need to also file payroll taxes with federal, state, and sometimes local authorities! It's an essential part of keeping the workforce thriving and making sure everyone plays their part in supporting their communities.

For more information, refer to the IRS tax resources on Social Security, Medicare, and federal income taxes. To learn more about state and local taxes, check your state or regional tax agency for more information.

Step 6: Maintain Records

As an employer, you must create and keep records up-to-date. Doing so will not only make payroll management more efficient, but records will also serve as proof of legal compliance during audits. Plus, having these records on hand will back you up if and when disputes with employees crop up.

Key Components of Payroll Management

To manage payroll effectively, you must understand the key components affecting employee compensation, tax compliance, and record-keeping. These include gross pay and net pay, payroll taxes, employee benefits, and time and attendance.

Gross Pay and Net Pay

Gross pay includes all earnings before deductions such as taxes and garnishments.

Net pay is employees' take-home pay. You can calculate it by subtracting voluntary and mandatory deductions such as benefits, taxes, and garnishments from gross pay.

Payroll Taxes

Taxes are a major part of payroll management. You must deduct and file taxes in compliance with federal, state, and local regulations or run the risk of fines and lawsuits.

The taxes you should be aware of include:

Federal income tax withholding: The federal government has seven tax income brackets, ranging from 10% to 37%. Look at the employee's W-4 form and withhold federal income taxes according to IRS tax tables.
Social Security and Medicare taxes (FICA): Employees pay Social Security tax at 6.2% with a wage-based contribution limit. They also pay Medicare at 1.45% without any cap. In total, they pay 7.65% in FICA taxes per paycheck until the Social Security wage base is reached. As an employer, you are legally obligated to match these rates.
Federal and state unemployment taxes (FUTA and SUTA): You must pay federal (FUTA) and, in most cases, state unemployment taxes (SUTA) to fund unemployment benefits.
Local taxes: Some areas require additional local taxes, such as municipal or city taxes.

Employee Benefits

There are two main types of employee benefits: pre-tax and post-tax deductions. Pre-tax deductions are drawn from an employee's paycheck before taxes are withheld. Types of pre-tax deductions include health insurance, retirement plans, and group-term life insurance. Meanwhile, post-tax deductions are taken after taxes. They include optional benefits such as life insurance premiums and disability insurance contributions.

Time and Attendance

Accurate and detailed time tracking is necessary for calculating pay accurately, managing overtime, and maintaining compliance with labor laws. Employers must manage overtime according to FLSA requirements and ensure they record absences correctly. You can use tools like digital time clocks, biometric scanners, and time-tracking software to get accurate records of employee hours worked.

What Are the Best Practices for Payroll Management?

Now that you have a deeper understanding of key concepts in payroll management, here are some best practices to minimize errors, boost employee trust, and ensure compliance.

Prioritize Data Security

Protecting sensitive employee and payroll information such as Social Security numbers, tax forms, addresses, and banking information should be your topmost priority. Mishandled and poorly protected data can lead to cybersecurity incidents, identity theft, legal penalties, and reputational loss.

To safeguard sensitive information, consider adopting encrypted payroll systems. You should also implement privacy policies that limit access to payroll systems to authorized personnel only. You should also require staff to regularly update passwords and system security measures.

Implement Internal Controls to Ensure Payroll Accuracy and Timeliness

You should implement internal controls to prevent payroll errors. For example, HR could regularly audit payroll processes and double-check calculations to identify and fix missed deductions, incorrect pay rates, and other errors.

HR should also create a schedule and send notifications to ensure timely payment. This will help preserve morale and trust between you and your employees.

Create and Continuously Maintain Detailed Payroll Records

Creating and continuously maintaining comprehensive payroll records will help you comply with labor laws. Clear records will also make it easier for you to resolve employee disputes if and when they happen.

According to SHRM, most organizations retain employee files and payroll records for seven years since that covers many compliance requirements across the United States.

Communicate with Employees Clearly

Last but not least, you should always keep a clear line of communication about payroll with your employees.

Provide them with clear payroll information, including detailed pay stubs that outline gross pay, net pay, and deductions, and ensure they understand the information provided. You should also be available to answer employee's payroll-related questions and resolve any disputes as they occur.

Optimizing Payroll Processes

Payroll processes can be difficult to manage, particularly if you have limited resources and staff. Here are some of the best tips for optimizing and improving payroll processes.

Payroll Automation

Managing payroll by hand can be a daunting and exhausting task! That’s where payroll automation software comes to the rescue.

These powerful solutions streamline the process, dramatically cut down on errors, and save you valuable time. Here’s how they do it:

Minimize the need for manual data entry.
Streamline payroll deductions, tax filings, and direct deposits, giving staff more time and energy for tasks that require human ingenuity.
Improve the accuracy of deductions.
Ensure compliance with tax regulations by automatically staying up-to-date with legislative changes.

Payroll Reporting

Besides implementing payroll automation software, embracing payroll reporting solutions can significantly elevate your payroll process! These tools empower you to generate payroll reports for informed analysis and decision-making.

With payroll reports at your fingertips, you can quickly spot trends and boost payroll efficiency. Plus, they are invaluable when preparing tax documents for governments and during audits.

Outsourcing Payroll

Finally, outsourcing payroll is a great solution if you have complex payroll needs or want your staff to focus on core operations instead of menial tasks.

To choose a reliable third-party payroll provider, look for those with experience, reliability, and robust data security standards such as ISO 27001. Also, make sure your provider offers the services your business needs, whether that's benefits management or tax filing.

Support Employees Beyond Payday

The ideal payroll process for your company shouldn't just empower you to pay accurately on time. It should also follow ever-changing tax and labor regulations and ensure data security and employee satisfaction. In short, it must support your workforce's overall wellbeing.

One of the best ways to enhance your employees' overall wellbeing is to implement a wellness program. These programs have been proven to improve employee satisfaction and trust in the company. They offer a variety of monthly plans aimed at supporting mental, physical, and nutritional health.

Wellhub, for example, connects employees to voluntary benefits such as live-stream classes, virtual personal training, popular gyms and studios, and stress-relieving apps for mental wellbeing. It also offers the flexibility to join, upgrade, or pause wellness plans whenever needed.

Speak to a Wellhub Wellbeing Specialist today to learn how to launch a wellness program that helps every employee thrive!

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See how we can help you reduce your healthcare spending.

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[*] Based on proprietary research comparing healthcare costs of active Wellhub users to non-users.