What Is Payroll? (Definition, Methods And Steps To Follow)

Indeed Editorial Team

Updated 7 November 2022

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Payroll systems handle tasks related to paying employees and submitting employment taxes. They track the number of hours worked, calculate wages, withhold taxes and other deductions, print and deliver checks and process government employment taxes. Understanding how payroll processing works makes it easier to manage and distribute employee remuneration, while also ensuring that a business enterprise adheres to the local tax regulations. In this article, we examine what payroll and payroll processing is and the methods for processing payrolls, along with the challenges you may face while processing payroll.

What Is Payroll?

The answer to the question, ‘What is payroll?' is that it is a comprehensive list of employees who are eligible for remuneration from a company. It refers to the company's financial record of payments that the employer provides their employees, such as wages, salaries, bonuses and incentives. It can also include the amount that each employee is eligible to receive for the time they spend working or for the tasks they perform as part of their duties. Many businesses employ payroll software to manage their payroll.

Companies can use an application programme interface (API) to input the employee's hours, and they process payment and send it to their bank accounts. Some companies also outsource payroll services to simplify the process. Employers track how many hours each employee works and report this to the payroll service. The payroll service calculates the gross amount payable to the employee on payday based on the number of hours or weeks they work during the pay period and the applicable pay rates. The service reduces taxes and other withholdings from employee earnings before paying them.

Related: What Is Pay Grade? Definition, Structures And Examples

What Is Payroll Processing?

The term ‘payroll processing' refers to the entire process of computing an employee's overall payment figure for a period. It includes defining compensation structures, obtaining employee data, setting up relevant rules concerning taxes and other adjustments and computing the total salary after adjusting all corporate policies. The complete payroll processing cycle includes filing, reporting and sending payslips to employees once the employees receive their wages. In simpler terms, payroll processing is the whole technique for precisely calculating the net pay of employees as per statutory guidelines and corporate regulations.

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Methods For Processing Payroll

These are some popular methods for processing payroll:


Many firms in their early stages of operations find spreadsheet-based payroll management to be beneficial, as they only have a few people to maintain. This approach entails utilising standard templates with pre-programmed mathematical algorithms for calculating compensation and compliance payments. While this is a cost-effective strategy, it may not be appropriate when firms expand in size.


Payroll outsourcing entails entrusting the processing of your payroll to an external agency. Many firms that do not have dedicated personnel often employ payroll outsourcing. Based on their payroll cycle, they provide the agency with information regarding wages and other data like attendance, leaves and reimbursement details. The agency is in charge of calculating dues and ensuring that they meet all legal requirements.


Companies can eliminate all the drawbacks of utilising spreadsheets or outsourcing payroll by using automated payroll software. There are various payroll automation tools and software available in the market to help you save time and money by reducing human labour. The software you employ is required to be up to date with the latest compliance laws.

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Steps Involved In Executing Payroll Processing

These are the steps involved in executing payroll processing:

  1. The first step of payroll processing involves getting employees on board and preparing a list of employees to remunerate.

  2. Businesses develop their policies and seek the approval of management in this step to guarantee regular payroll implementation. Pay policies, leave and attendance policies and employee benefits policies are some of these policies.

  3. For payroll processing, employee information such as PAN, address and bank account data is critical. The concerned teams gather these inputs from employees when they join the company.

  4. Once the concerned teams collect the inputs required, they check the details for accuracy in terms of corporate policy and approval model. They also make sure that they consider all active employees for salary and compliance payments, and that they include no former employees.

  5. They supply the verified inputs into the system for payroll processing at the next stage.

  6. At this stage, businesses ensure that their bank accounts have sufficient funds to make salary transfers. Then, they submit a salary advice statement to the bank, instructing it to transfer salaries to employees.

  7. All mandatory deductions happen at the time of payroll processing. Then, within due dates, companies make these payments to relevant government departments.

  8. The last step involves the distribution of payslips to employees along with their tax computation sheets. Employees can easily access their payslips by logging into their accounts.

Payroll Software Programmes

Some companies employ payroll software systems to simplify workflows. Typically, there are no additional monthly expenses to cover after the firm acquires the software. They often include printable tax forms and withholding tables. Internal payroll systems help firms keep confidential financial information discreet. Software applications can also be time-consuming, which can be an issue for small businesses with few employees.

Accounting software benefits small business owners by allowing them to handle accounts receivable and payable, measure profitability and prepare for tax season. As a company grows, its accounting requirements become more complex, necessitating the use of a specialised enterprise resource planning (ERP) system. Small businesses can choose from various cloud-based accounting software options. The type of business and the number of employees influence which accounting software is ideal. A freelancer, for example, would not require the same accounting software features as a restaurant owner.

Related: 21 Of The Best Accounting Software In India (With Features)

What Is A Payroll Service?

A payroll service is a third party corporation or organisation that assists with the processing of payroll. It reduces the amount of manual work and time spent on payroll processing and relieves stress on the professionals in charge of payroll administration in a firm. It also eliminates the unnecessary work that manual payroll calculations can entail. When you employ a payroll provider, they show you how to use their website to access their services. It is usually a single entry point to a website that helps with calculating time and attendance, payment processing and taxes.

Every day, employees log in to check-in and out of their shift. The software automatically tracks their hours. You can verify and validate their hours after the pay period. The payroll service calculates the employee's compensation, deducts taxes and withholdings and then pays them. Employees typically receive their payments by direct deposit through payroll services.

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What Is The Difference Between Payroll And Salary?

Salary is the regular payment of a pre-defined sum of money or remuneration to an employee for their labour. Salary is a term often pertaining to employees who collect remuneration based on a predetermined rate for a fixed amount of hours. It might be on a daily, weekly, monthly or yearly basis. Payroll is the system that companies use to process their employees' remuneration. It is a type of administrative function that integrates human resources and accounting. Companies pay employees' salaries through payroll, which is crucial because it has an impact on staff morale and represents the financial health and prestige of a company.

Related: Gross Salary And Net Salary: Definitions And Examples

What Are The Challenges In Calculating Payroll?

The following as some challenges you may encounter while calculating payroll:

  • Even if a company has the necessary technology platform in place to handle payroll, it can be a challenging and time-consuming procedure. As a result, calculating wages and deductions takes up a substantial amount of time.

  • Many organisations prefer to conduct their payroll activities internally and manually to spend less. Manually inputting employee data/records and doing manual computations makes the payroll process much more prone to mistakes and not using any type of technology platform can cause process redundancies and inefficiencies, which can result in wastage of time and resources.

  • The incompatibility of payroll management software is another major challenge in payroll management. For example, the software you use to retain employee records may differ totally from the software you use to record leave, performance or benefits.

  • Businesses are vulnerable to payroll fraud, which may include employees manipulating their timecards or inputting higher-paying shifts. Using payroll software to run reports across departments and analyse data for suspected tendencies is the best defence against fraud.

  • When various parts of a developing organisation use a variety of separate procedures and technologies, productivity suffers, and it is difficult to gain a clear understanding of performance. Standardising a single payroll system can minimise the time you spend on payroll processing and make analysis and reporting easier.

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