Get started with Payroll Processing


In today’s world, payroll processing is essential for growing organizations. It consists of calculating deductibles, filing taxes, and much more.

Efficient payroll processing and management help businesses optimize expenses and streamline these operations for higher efficiencies. Businesses are taking payroll processing more seriously today, according to a report by Deloitte. 67% of organizations today have a formalized payroll strategy compared to 61% in 2019.

Read on to understand payroll processing and everything that goes around it.

Components of Payroll Processing

Payroll processing has ten components that must function in tandem for operations to conclude promptly. Let’s understand what these components are.

1.  Employee Information

The first component of payroll processing is the financial information of your employees. Based on company policies and regulatory mandates, your organization must gather specific details from your employees when they are onboarded. For example, you need information about your employees’ working hours, overtime, leaves, salary revisions, bonuses, etc., to process their payroll correctly. It is best to automate and digitize this data for security and accuracy.

2.  Payment Policies

Every company has its payment policies that comply with the prevalent local laws. Typically a company is free to design these payroll policies as long as they are within the law and comply with regulatory mandates (such as minimum wage). Pay policies of each company differ on aspects like a bonus, attendance, overtime pay, etc.

When onboarding employees, they should receive a handbook of these pay policies for clarity.

3.  Basic Salary

Every company communicates the total Cost to Company to its employees. Out of this CTC, a certain amount (anywhere between 35% and 65%) is the employee’s basic salary, which they get to take home. This basic salary remains fixed during the employee’s tenure at a specific designation. Other components include commissions, bonuses, and more.

The basic salary is the salary component that remains fixed.

4.  Gross Salary

Gross salary is the total cost your company bears to retain an employee in its payroll before considering any deductions. The total of all the bonuses paid, commissions incurred, basic salary, overtime, etc., apply to the employee’s payroll for one financial year.

If your employees contribute to retirement schemes or similar benefits, they would also count towards the gross salary.

5.  Net Salary

The net salary of an employee is the cost to the company calculated after factoring in all the deductions. It refers to the amount your employee takes home after all deductions.

Each employee has a different net salary based on their deductibles. For example, employees contributing to investment may have lower net salaries.

6.  Allowances

Allowances are the company’s expenses for an employee in addition to his salary and other benefits. These allowances are made so the employee can engage in business-related travel and development activities without spending money for the company’s growth.

Every designation has a different allowance package. The higher the designation, the higher the allowance package.

7.  Deductions

Every employee has a deductible component in their salaries. These deductions may be voluntary or involuntary, depending on who makes them. For example, voluntary deductions are made towards stock, investment, health benefits, or insurance premiums. On the other hand, involuntary deductions are in the form of taxes, withholdings, or garnishments.

Each month while calculating salaries, the deductions must be calculated individually for each employee.

8.  Ad-Hoc Pay

Ad-hoc pays aren’t a regular thing at companies. They may be doled out to employees through bonuses for a job well done, commissions for a new client, incentives or leave encashments, festive advances during the season, etc.

The quantum of ad-hoc pay varies each time and with each employee. It makes payroll processing complicated as each ad-hoc pay is accounted for differently.

9.  Taxation

Tax Deducted at Source, or TDS is the amount withheld from an employee’s salary towards taxes owed to the government. It may be counted towards income tax. Every country has a different rate of TDS on an employee’s monthly salary; it depends on the quantum of income the employee earns. According to the salary earned, TDS differs.

10.  Prerequisites

Prerequisites are perks that employees of high designations enjoy. A few examples of these payroll components are apartment rents for high-level employees, company cars, education fees for children, travel expenses, insurance premiums, and more. These components are considered taxable.

These expenses also need to be factored in when calculating the payroll and expenses for high-level employees working at your company.

How to Process Payroll for Remote Employees?

Setting up payroll for remote employees can be complicated, but you can simplify it by following the method described below.

  • You need first to classify the type of people you employ: employees and independent contractors. You would be required to withhold taxes from your employees’ salaries but not from the payments to independent contractors. 
  • You must now identify which of your employees are working remotely but locally or working remotely but in a different region (out of state or international). Based on that, the taxes you withhold from the salaries would vary.
  • You need to get your tax forms in order. For remote employees, you would need to consider Forms 1099-MISC and Form W-9 in the USA.
  • You now need to consider whether your payroll will be in-house or outsourced. To ensure that payroll operations are executed smoothly, it is recommended that you outsource this department to Professional Employer Organizations or PEOs. These organizations help your company with administrative tasks such as payroll management, benefits administration, etc.
  • One of the most critical aspects of payroll management is tracking employee time and the cost of the task or project. You need to employ efficient time and cost tracking solutions that give you good visibility into the actual figures of overtime or undertime.

Payroll Solutions: PEO vs. Outsourcing Payroll

Payroll processing and PEO solutions differ from each other slightly. Partnering with a PEO for payroll services brings more under the scope of your firm. Let’s understand the differences between the services.

ServicePEOPayroll Processing
ContractYour business needs to get into a contract with PEOs for servicesThere is no requirement for a contract.
Scope of servicesWorkers’ compensation, administrative and HR tasks, employee benefits, and compensation insurancePayroll only
LiabilityAll liabilities are shared between PEO and your businessYour business has the sole responsibility for all liabilities.
CostInitial investment is required, but savings are long-term.You may need to hire staff for services not covered, which is costlier.

For example, while a PEO covers managing the employees’ attendance, the payroll service provider may or may not cover this service. This means that with payroll processing services, you would still be managing a lot of HR functions on your own.

Payroll Tax Compliance with PEOs

Taxes are a necessary aspect of payroll, and they are time-consuming as well. For you to focus on running your business the right way, you can outsource your payroll tax management to PEOs. They help you save time and ensure all the taxes are filed timely.

Some of the payroll tax management services that PEOs provide are:


Your PEO partner will now be responsible for correctly calculating taxes. Your employees can focus on the more strategic aspects of their work. Furthermore, tax filing is associated with a lot of paperwork and tallying. PEO partners ensure all state and federal tax paperwork is ready on time and filed according to stipulated dates.


Payroll compliance rules are dynamic and keep changing to accommodate new work patterns. It becomes tough to keep track of every change and remain compliant. Your PEO partner stays in step with all the updates and ensures your business follows all the regulations to the T.

Employee forms:

It is the job of your PEO partner to track the changes in employee status and update their payroll accordingly. Whether someone quits or is promoted, demoted, or switches departments, or there is any other change, your PEO will send out relevant paperwork and update the system.

Debts and wage garnishment:

It is the responsibility of your PEO to manage all the notices and payments concerning child support and other debts.

Payroll Processing Best Practices PEOs

To ensure that payroll is processed accurately and timely, there are a number of best practices your PEO partners employ. Let’s see what they are.

1.  Creating Policies and Guidelines

It is always best to have a well-documented process for payroll operations. As your business expands and employees grow, your PEO partners first establish a payroll guideline that lays down a beaconed workflow to execute the payroll process.

Additionally, payroll policies ensure that all your employees are compensated fairly for the hard work they put in for your company.

2.  Establishing a Schedule

No employee likes waiting for his salary to come in. Once your payroll processes have been documented, PEOs then demarcate the deadlines for all the associated tasks:

  • Regulatory deadlines
  • Tax deadlines
  • Salary release dates
  • Paid and unpaid leave schedules

Once the payroll calendar is in place, marking all the important dates and setting up reminders is easy.

3.  Automation

PEOs rely on robust automation technologies to deliver efficient payroll management to your firm. Mundane tasks like tax and pay calculations can be executed accurately by software. Approvals, correspondences, and other activities can also be efficiently automated using payroll processing software.

If your business struggles to meet deadlines, automating part of your payroll operations can help save a lot of time.

4.  Get Notified and Reminded

Tax and regulatory deadlines can result in hefty fines and penalties if they aren’t met. One of the most important things your PEO partners do is increase your payroll operations efficiency is to set up notifications and reminders.

Reminders help by keeping the due tasks on top of their minds. Notifications help them stay updated about the status.

5.  Real-Time Logging

Any typical employee would submit their attendance, overtime, leave, and other payroll data at the end of the month. It creates an undue burden on the payroll department to handle at the last minute.

PEOs introduce real-time attendance logging can help keep track of payroll data as the actions happen.

6.  Maintaining Detailed Records

The federal/central government may require companies to furnish payroll information or taxation data periodically. For this purpose, it is necessary to maintain detailed payroll records at all times. Some countries may require you to retain an employee’s payroll for at least five years after they quit. Your PEO partners ensure that you stay compliant with these requirements.

7.  Leverage the Convenience of Cloud

Your PEO partners use cloud-based software to deliver efficient services. You don’t need physical storage space or dedicated management. Your payroll operations would be safe and securely stored on the cloud and managed efficiently without latencies through cloud-based payroll solutions.

You also get the benefit of scaling up or down as needed, optimizing your expenses.

8.  Consider Direct Deposit

Is your organization still issuing cheques as a mode of salary payment? Consider bringing a PEO on board for direct deposits that are electronic and recorded automatically. The year-end process of taxation and preparing financial statements becomes more convenient and faster when payroll is handled electronically.

It also eliminates physical documentation, helping your company achieve sustainability and environmental consciousness.

9.  Ensure Data Security

Payroll data is sensitive and confidential. It needs to be stored securely with access only upon authorization. Ensuring payroll data security is constantly updated with the most reliable encryption technologies is essential.

When you choose a PEO for payroll operations, you ensure that all security protocols are being followed and the technological environments are safe to house your data.

10.  Practice Proper Employee Classification

Every class of employee has a different pay grade. In addition, other factors must be considered, like paid leave, bonuses, remittances, etc., to process their payroll correctly. PEOs ensure that the employee classification and attribution that you practice are accurate.

If this isn’t done correctly, your company may run into trouble with the regulatory authorities when you submit documents.

Partnering with PEO Payroll Processing: The Good and the Bad

Payroll processing is a mundane yet complicated task that requires meticulousness to be appropriately executed. The amount and variation of data involved is far too great to take upon yourself. While partnering with PEOs has multiple advantages for a business, there is a flip side to that coin as well. Let’s now discuss the benefits of and problems with outsourcing payroll processing.

Advantages of Outsourcing Payroll Processing

Partnering with PEOs comes with several advantages. The following are listed below. For small and medium businesses, the biggest advantage is in terms of ‘peace of mind.’ Having a professional PEO partner who has proven experience in delivering hygiene HR functions plus taking care of the ever-changing maze of compliances and statutory/regulatory matters is a god send.

Lower Risk and Liabilities

Given that payroll regulations change frequently, it is easy to breach compliance simply because of being unaware. The same applies to taxation as well. There is a heightened liability of filing inaccurate taxes and a risk of breaching payroll regulations.

The good news is that your PEO partners can help you stay within regulations by keeping all your tax and payroll records aligned with regulations.

Lower Costs

It may sound counterintuitive, but PEOs provide a good return on investment. According to NAPEO, you can realize an ROI of 27.3% based on the costs you save with a PEO partner. This is because your employees get more time to spend on business development while the PEO manages the clerical tasks.

Technologies and Efficiency

PEOs leverage intelligent software tools (for example, WebHR) to quickly and accurately process payroll, taxation, and compliance for your firm. It helps improve the system’s efficiency and delivery timelines and streamline taxation activities.

Additionally, your PEO partners also bring to your firm their network and software loaded with the latest security measures. It helps to ensure that your employee data remains unbreachable and secure in your systems.


With your PEO partners, you get access to a multitude of HR functions as well. The following functions of your HR department become the responsibility of your PEO:

  • Benefits – Benefits are sought by employees. They expect. At the time of interviews, it is definitely one question that is always on their mind. After all, who does not want just a little more? Payroll outsourcing will ensure that your employees will have access to benefits but even how they get administered.
  • Workers’ compensations – Work accidents impact productivity and morale. There are also state and federal regulations around it. In addition to compensation, there is also the need to prepare and execute a rehabilitation program to ensure that workers are comfortable in their ‘return to work steps.
  • Retirement plans
  • HR functions – There is no dearth to the number of HR initiatives that companies can take to ensure employee well-being. They keep getting added and very soon the list is either unmanageable or you are looking at a team that has grown in size. Outsourcing HR functions on a cost-basis to a PEO will ensure that activities and corresponding costs are kept in check.

It helps to offload a significant amount of load from your employees, helping to boost productivity.

Disadvantages of Outsourcing Payroll Processing

  • For companies that prefer keeping payroll control to themselves, outsourcing may feel like your operations are getting out of hand. Although payroll professionals operate by your standards and policies, your company still doesn’t have total control.
  • There may be better choices than outsourcing for companies with sensitive or confidential payroll information. It may breach employee confidentiality policies or leak other confidential information.
  • Coordination between the company and the payroll services may be challenging, depending on how willing or effective each party is in communicating the requirements. There may be time constraints or availability problems that lead to delays.

How to Choose Payroll Solutions

Deciding to outsource your payroll processing is a difficult decision. Choosing the right payroll service is even more challenging. Here are a few tips to help you make the right selection:

  • Thorough market research is essential if you want to select the best payroll service provider. Start by narrowing down the providers that have experience working in your industry.
  • Make it a point to check their website for testimonials, customer reviews, G2 ratings, and more to ensure that the service you would be partnering with is worth its mettle.
  • You also need to consider whether the payroll processing service offers you package customizations to fit your business needs better.
  • Implementation of the solution and correspondence with the service provider should be seamless. Check the kind of workflows they employ to communicate with employees and your HR team.
  • Security, confidentiality, and compliances are must-haves for your chosen service provider. Payroll data is sensitive – try to know how the service provider treats this information.

The Verdict

Payroll services require a dedicated setup to be executed efficiently. Keeping that in mind, PEOs offer a full scope of services that cover everything from HR needs to payroll paperwork. It makes sense to partner with a PEO instead of payroll service providers for comprehensive management of your employee ecosystem.

Therefore, if your organization is considering hiring new staff for payroll, consider partnering with a PEO for added scope and benefits.

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