Payroll Checklist: Step-by-Step Process [Download Free Templates]

Payroll is one of the most crucial processes of any organization. Accurate payroll processing is necessary for employee compensation, taxation, and statutory compliances.

However, payroll is a complicated process. Payroll processing has multiple steps and complex calculations. Therefore, you need a payroll processing checklist to avoid making mistakes in this process.

A payroll checklist is a list of activities that you need to perform to complete your payroll processing from end to end. Whether you are a seasoned payroll professional or new to payroll, a checklist can greatly help you.

Keep reading to find out how to create and use a payroll checklist! We’ve also included free payroll checklist templates at the end, so stay tuned! 

Why is Payroll Checklist Important?

A payroll checklist is important for several reasons. Payroll consists of various steps, which you may miss without a checklist. So, to ensure that you create a streamlined payroll management process, creating a checklist becomes important.

Reasons why a payroll checklist is crucial –

• It makes payroll processing easier and more efficient.
• It helps to standardize your payroll processing.
• You don’t have to rely on memory to ensure that you have gone through every step in the process.
• Knowledge transfer of your firm’s payroll process between payroll professionals becomes easier.
• It decreases the chances of calculation errors.

Step-by-Step Process for Creating a Payroll Checklist

A complete payroll checklist has three distinct parts:

1. Pre-processing checklist

   This checklist applies to processes you need to perform before running payroll. These activities are one-time processes. Once you have completed them, you will not need to repeat them. These processes include:

   • Obtaining an Employer Identification Number (EIN) or Federal Tax Identification Number: This number is your firm’s unique identifier for paying federal income tax. The exact name of the identifier can differ from one country to another.
   • Obtaining state and local tax ID numbers similar to the EIN: These are legal steps that are critical to payroll processing.
   • Opening withholding accounts: Withholding accounts are bank accounts where you deposit the taxes you collect from your employees. The payroll tax withholdings will stay in these withholding accounts until they are allocated to the appropriate authorities.
   • Collecting employee pay information: This would include the nature of employment (part-time/full-time), payment frequency (daily, weekly, etc.), break-up of the pay, and all other relevant details for calculating wage/salary and taxes.
   • Collecting employee tax information: Depending on the nature of employment, employee location, and other factors, you will collect the relevant data via taxation forms. The exact name and format of these forms differ from country to country. In the US, businesses use forms W-4, W-9, and I-9 to gather information about payroll tax.
   • Obtaining employee direct deposit information: You will need to do this if you will pay your employees directly.
   • Making a payroll budget: This step will give you a clear idea of how much you need to pay your employees in the financial year and monthly.
   • Making a payroll schedule: As payments can go out with different frequencies (weekly, fortnightly, monthly), a payroll schedule will help you easily stay on top of payments.
   • Making a tax payment schedule: Similar to a payroll schedule, a tax payment schedule will help you to make your tax payments on time and accurately.
   • Determining the method of payroll processing. This step involves deciding whether to opt for payroll software, process payroll manually, or outsource it. Each firm has its policy regarding the method of processing payroll.

2. Payroll Processing Checklist (Also Called Monthly Payroll Checklist)

   Once you have completed the one-time steps mentioned above, you can take the following six steps to process payroll regularly. One of the most common frequencies for processing payroll is monthly, so the following checklist is also called a monthly payroll checklist. The six steps are –

   Step 1: Verify employee information

   Although you collect employee payroll information before the payroll process, reviewing and verifying it during payroll processing is critical.

   A business firm’s employee data is dynamic. Employees might leave, new employees might join, and employees might get promoted or relocated. Therefore, the first step in the end-of-month payroll checklist is ensuring that all the employee information is up-to-date.

   If there are changes in the data, you will need to adjust payroll accordingly. For instance, if new employees have joined, you must collect their pay, tax, and direct deposit data. Or, if someone’s optional benefits have changed, you might need to calculate their tax deductibles differently.

   This step is crucial to ensure that all employees are paid accurately. It will also ensure that taxes are deducted accurately. Once your employee information is up-to-date, you can proceed with the next step of the checklist.

   Step 2: Calculate Gross Pay

   Gross pay is the amount that you owe an employee before any deductions. It includes base pay, bonuses, commissions, allowances, benefits, overtime, reimbursements, and other additional payments they have earned.

   Different firms have different elements of Gross Pay based on the taxation laws of the country or region they operate in, the laws of the country of origin, the policies of the company, and other legal and strategic factors.

   Gross pay can be gross salary or gross wages based on the nature of the industry and the work. It is usually calculated based on time worked or output volume. In either case, accurate record-keeping will help you to get an exact amount for paying your employees.

   You can keep a manual record of hours worked or output volumes. However, most businesses prefer automating these records to ensure accuracy.

   Step 3: Calculate Net Pay

   Net pay is what you pay employees after all the necessary deductions. Deductions include statutory deductions, local taxes, federal and state taxes, medical and insurance contributions, retirement contributions, and wage garnishments.

   Net pay is what your employees take home, also called take-home pay.

   While calculating it, you need to be extra careful about two things. First, pre-tax or tax-exempt components of the salary or wage should be left out of tax calculations. And second, company-matched retirement or healthcare contributions must be accounted for.

   If your payroll process is manual, you will calculate net pay manually. However, manual calculations might be prone to calculation errors. So, many firms choose to process payroll through software applications. Such applications ensure error-free, fast, and timely accounting.

   Step 4: Do a final review of data and calculations

   Doing one final round of review before you hand over their pay to your employees is a good idea. Then, you can double-check the data and the calculations to ensure no mistakes.

   Even if you use automated payroll software, this step of the end-of-month payroll checklist is necessary. You can make corrections in case of any errors or missing data.

   One way to reduce the effort and monotony of this step is to establish checkpoints in your process. Checkpoints will help you to identify where an error has started and rectify it more easily.

   Step 5: Make payments

   This is the step that the checklist has been working towards, where you pay your employees their wages or salaries.

   Different businesses choose to pay their employees differently. Although direct deposits are generally preferred, there are other modes of payment too.

   For example, some firms pay by check or cash. In addition, with the popularity of e-wallets and different digital payment modes, some firms are also opting for those.

   You might also need to issue pay stubs or salary slips while distributing employees’ pay. These pay stubs or slips give a break-up of the amounts you have paid and deducted from the salary. Again, This is another area where payroll automation may be beneficial.

   Step 6: Submit tax withholdings

   Although payment of wages or salaries is the high point of the payroll process checklist, one more crucial step is left. You must deposit the deducted taxes in the withholding accounts you opened before starting the payroll process.

   From the withholding accounts, the taxes are then paid into the appropriate government accounts. You might pay federal and state taxes as well as local taxes.

   You might also pay any healthcare, insurance, or retirement funds for which you made deductions while calculating payroll. In addition, if any employer contributions are relevant for these funds, you would deposit those amounts.

   How often and when you pay taxes and other authorities depends on the tax schedule that you made before. Quarterly payments are quite popular due to convenience. However, some firms prefer to distribute the withheld funds monthly.

3. Year-end checklist

   Along with the pre-processing and monthly payroll checklists, a third checklist is important. These are the steps you need to take at the end of the payroll or financial year.

   These steps are important to ensure that your annual payments and taxes have been accurately calculated. In addition, your yearly payroll data will also go into the relevant financial statements that your firm prepares at the year-end.

   The year-end payroll process is also critical because, in some countries, it is a legal requirement. As a result, you might face fines or penalties if you don’t complete this process or complete it inaccurately. To avoid such a situation, you can use the following checklist:

   • Review your business information. You will verify your EIN, state/local taxation numbers, company details, and payroll-related account details.
   • Review employee personal data. You will verify employees’ complete records, like names, addresses, social security numbers, job titles, contact numbers, etc.
   • Review payment and taxation data. You will verify salaries/wages, increments, benefits, and applicable deductions. This step might include filing tax returns, adjusting year-end payment data, submitting employees’ investment proofs, and other such activities.
   • Complete outstanding transactions. You may need to complete any payouts and deductions that are made annually, like bonuses, unused benefits, income tax adjustments, leave encashments, gratuity payments, and such.
   • Update information. All information related to payments made to employees and taxation authorities will need to be checked and updated.
   • Resolve any outstanding issues. These issues can be related to payments or taxation.
   • Prepare for the next payroll year. You can prepare a payroll budget, payroll and taxation schedules, and policies. Some of these activities are also mentioned as pre-processing activities. That is because you need to have them in place before your start your payroll every year.

Leverage Payroll Checklist for Creating Streamlined Processes

Our checklist will help you whether you are new to payroll processing or a seasoned professional.

It ensures you don’t have to rely on your memory to go through every necessary step. As a result, our checklist makes payroll processing smoother and more accurate. However, to make the most of this payroll implementation checklist, here are a few more things you can do:

1. Tweaking To Customize

   The checklist we have given is a standard one meant to cover the basic steps of payroll processing. It is a great starting point. But based on your business, industry, geography, employee strength, etc., you can modify and customize it to make it a perfect fit for your firm.

2. Compliance and Internal Audit

   You can ensure ongoing compliance by updating regulatory information regularly, keeping accurate records, making timely tax payments, and reporting payroll changes to taxation authorities punctually. You can also set up an internal audit checklist for your payroll system to help you stay compliant.

3. Outsourcing

   Once you are familiar with the payroll services and this checklist, you can be confident about handing over the processing to experts. You will be able to track their work and ensure efficiency and accuracy.

4. Adopting Payroll Software

   One of the best ways to ensure that your payroll system is quick, efficient, and accurate is to use payroll software. Many options are available in the market, and you can choose one that fits your firm’s requirements and budget. You can use our checklist along with the software.

Free Payroll Checklist Templates

Here are a few templates for different types of payroll implementation checklists. You can customize these templates for your business per your needs.

1. Human Resources/Payroll Processing Checklist

Download Human Resources/Payroll Processing Checklist

This checklist from Penn University is for Human Resources employees who manage personnel records and run payroll. It includes accounting for the number and types of employees, time reporting, and late pay.

2. New Employee Checklist

Download New Employee Checklist

This checklist is for adding new employees to your payroll services. It includes a list of documents and tax forms that the payroll provider will need to complete the data entry for a new hire.

3. Payroll Year-end Checklist

Download Year End Payroll Processing Checklist

This Year-end payroll checklist from Payroll Unlimited gives a comprehensive list of steps to complete the payroll process for a particular year.

4. Sub-tracking Payroll Processing Checklist

Download Sub Tracking Payroll Processing Checklist

This checklist is specifically for substitute employees. It gives a detailed list of steps that you can undertake to process payroll for substitutes.

5. Bi-weekly Payroll Checklist

Download Bi-weekly Payroll Checklist

This is a payroll checklist for employees who get paid bi-weekly. It also provides a list of tools that the payroll administrator can use, along with the list of activities that they must perform.

6. Payroll Checklist for Hourly Employees

Download Payroll Checklist for Hourly Employees

This is a checklist from Cornell University for employees who get paid by the hour. It has details of employee information (personal and job-related), employee payment and tax information, direct deposit information, and other necessary inputs for accurate payroll processing.

Conclusion

You can use any of these templates as the base for creating your own checklist. You can add, remove, or modify the specific items in the checklist to tailor it to your business. Alternatively, you can build your own checklist using the detailed steps we gave earlier. In either case, our post will give you a leg-up in your payroll processing by helping you develop a payroll implementation checklist!