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The first time I watched a payroll run go sideways, it wasn’t a software bug. It was a calendar.
Our payroll person took a long weekend. Totally normal, fully planned. But payday landed on the Monday, and suddenly nobody else knew the exact order of operations: which timesheets were still open, where the new 401(k) deferrals got entered, or which button actually submitted the run versus just previewing it. The system was fine. The knowledge wasn’t.
That’s the quiet risk with payroll. It runs like clockwork right up until the one person who knows the sequence isn’t there, and then you discover the process was never really written down.
I’m Yuval, founder and CEO of Glitter AI. I’m not a payroll administrator, to be clear. But I’ve sat with a lot of finance and HR teams trying to keep payroll from becoming a single point of failure, and the pattern barely changes from one team to the next: the work repeats every cycle, the knowledge doesn’t. So let me walk you through the full payroll process, step by step, the way it actually runs in ADP or Gusto, and how teams finally get it out of one person’s head.
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What is the payroll process?
The payroll process is the end-to-end cycle your team follows to take employee work from “hours logged” to “paid, taxed, recorded, and filed.” It’s broader than cutting checks. It starts before payday, with collecting and approving time, and it doesn’t end when employees are paid. It ends when the taxes are remitted and the filings are accepted.
Most teams run seven core stages: timekeeping, gross pay calculation, deductions, tax withholding, net pay, disbursement, and filings. Around those sits the supporting work, like onboarding new hires into the payroll system and reconciling payroll to the general ledger.
Done well, the payroll process pays people accurately and on time, keeps you compliant with the IRS and state agencies, and produces clean numbers for close. Done badly? Underpaid employees, penalty notices, and a very awkward conversation with your team. The stakes are real: a 2024 global payroll report found that 24% of employees say they would quit after a single payroll error, and 50% have experienced at least one payroll issue in the past two years. On the compliance side, in fiscal year 2024 the IRS assessed more than 4.4 million employment tax penalties totaling nearly $26.9 billion. The difference between a clean cycle and that outcome is almost never talent. It comes down to whether the process is documented and consistent. If you’ve ever written a standard operating procedure for your finance team, the payroll cycle is one of the most important ones it should cover.
The payroll process flow, step by step
Here’s the full flow. Most teams already do all of this every cycle, even the ones who’ll tell you they “just press the button in Gusto.”
1. Timekeeping
Everything downstream depends on this number being right. For hourly employees, you collect hours from timesheets, a time clock, or a scheduling tool, and someone reviews them for missed punches, overtime, and PTO. For salaried employees, you confirm exceptions: new hires mid-period, terminations, unpaid leave, bonuses.
People rush this step, and it’s the one that causes the most reruns. A manager who approves timesheets late, or doesn’t approve them at all, holds up the entire cycle. Most teams set a hard cutoff (for example, “all time approved by noon two business days before payday”) and actually hold the line on it.
In ADP or Gusto, this usually means time syncs in automatically, but the human review step still has to happen. The tool can’t tell you that a salesperson’s 60 logged hours were actually a data entry error.
2. Gross pay calculation
Once time is final, you calculate gross pay. For hourly employees that’s regular hours at the base rate plus overtime (typically 1.5x over 40 hours in a week, depending on jurisdiction). For salaried employees it’s the annual salary divided by the number of pay periods.
Then you layer in everything else that counts as gross: commissions, bonuses, shift differentials, retro pay, reimbursements. Errors compound here, because every later step is calculated as a percentage or function of gross. Get gross wrong and the taxes, the deductions, and the net all go wrong with it.
3. Pre-tax and post-tax deductions
Next, deductions come out. Order matters here, because some deductions reduce taxable wages and some don’t.
- Pre-tax deductions come out before taxes are calculated: 401(k) deferrals, traditional health and dental premiums, HSA and FSA contributions. These lower the wages that get taxed.
- Post-tax deductions come out after taxes: Roth 401(k), garnishments, union dues, charitable giving.
Garnishments deserve their own callout. Wage garnishments and child support orders have legal priority and statutory limits, and getting the order or the cap wrong creates real liability. This is a classic example of a step that’s “obvious” to the person who does it every cycle and completely opaque to everyone else.
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4. Tax withholding
Now you withhold taxes on the taxable wages. There are several buckets, and confusing them is one of the most common payroll mistakes:
- Employee-paid: federal income tax (from the W-4), state and local income tax, and the employee share of FICA (Social Security and Medicare).
- Employer-paid: the employer’s matching share of FICA, plus federal unemployment (FUTA) and state unemployment (SUTA).
Providers like ADP and Gusto calculate these automatically based on the employee’s tax setup and work location. But “automatic” is doing a lot of work in that sentence. The calculation is only as good as the W-4 on file, the correct state assignment for remote employees, and the right pay frequency. Documenting how you verify those inputs matters far more than documenting which button computes the tax.
5. Net pay
Net pay is what’s left: gross pay, minus pre-tax deductions, minus taxes, minus post-tax deductions. This is the number employees actually care about, and it’s the one they’ll email you about the moment it looks off by even a few dollars.
Before you finalize, run a preview or register and sanity-check it. The teams that do this well compare the run against the last one and chase down anything that moved unexpectedly: a net that doubled, a new zero, a negative. A two-minute variance check here saves you from a very bad payday.
6. Disbursement
Now you actually pay people. For most teams that’s an ACH direct deposit batch, submitted a couple of business days before payday so it clears on time. A few employees may still get paper checks, and contractors may run on a separate schedule entirely.
This step has a hard, unforgiving deadline. ADP and Gusto enforce a submission cutoff, and missing it by an hour can push payday by a day. The single most useful thing you can document about disbursement is the exact cutoff and what “submitted” actually looks like on screen, because “I thought I clicked it” is how late paydays happen.
Disbursement is also where money leaves the building, so it’s a natural place for a control. The person who edits employee bank details generally should not be the same person who releases the pay run. That separation is exactly the kind of thing a structured chain of approvals is built to enforce.
7. Tax filings and remittances
Payroll isn’t done when employees are paid. The withheld taxes belong to the government, and you’re holding them on deposit. You have to remit them on a federal and state schedule (often within a few days of payday for larger employers) and file the returns: Form 941 quarterly, Form 940 annually for FUTA, state returns, and W-2s and W-3s at year end.
Full-service providers like ADP and Gusto handle most of the remittance and filing automatically, which is genuinely great. But “the provider handles it” is not a process. Someone on your team still has to confirm filings were accepted, reconcile the tax liability, and know what to do when an agency notice lands in the mail. The IRS assessed over 1.17 million failure-to-deposit penalties alone in fiscal year 2024 - these are exactly the kind that land when a filing or deposit step falls through a gap in the process. That knowledge is almost always undocumented, and it’s the most expensive kind to lose.
Where the payroll process actually breaks
After watching enough teams, the failure points start to rhyme. None of them are about the software.
- It lives in one person’s head. The cycle runs fine until that person is out, and then nobody knows the cutoffs, the review steps, or the order of deductions. This is textbook knowledge trapped in one person’s head, and payroll is one of the worst places for it.
- Inputs aren’t verified. The provider calculates perfectly on wrong inputs. Bad W-4s, wrong work-state assignments for remote staff, and unapproved timesheets all produce confidently incorrect paychecks.
- The handoffs are fuzzy. Managers approve time late. Nobody owns the variance check. The cutoff is “known” but never written, so it slips.
- Year-end is a different process nobody documents. W-2s, bonus runs, and benefit true-ups happen once a year, which is exactly why no one remembers how to do them.
Every one of these is a documentation gap, not a tooling gap. Switching from ADP to Gusto won’t fix any of it. You fix them by writing the process down in a way people will actually follow.
How to document the payroll process (without writing a novel)
Here’s the thing about payroll documentation: a written manual goes stale the moment your provider changes a screen, and nobody reads a 30-page Word doc at 8am on payday anyway.
What actually works is recording the process while you run it. Not describing it from memory, weeks later, in prose. You capture the real screens and the real clicks in ADP or Gusto, in order, the next time a live cycle goes out.
This is exactly why I built Glitter AI. You hit record, run your normal payroll cycle once, and Glitter turns every screen and click into a clean step-by-step guide automatically. Record the timesheet review, the deduction entry, the preview check, the submit. The next time someone covers payroll, they follow the exact sequence instead of guessing, and you have a real record of how pay actually gets run. Record it once, and it stops being one person’s secret.
A good payroll standard operating procedure doesn’t try to teach payroll theory. It captures your cutoffs, your approval chain, your deduction order, and the literal screens, so a competent person can run the cycle correctly without the usual person in the room.
Teach your co-workers or customers how to get stuff done – in seconds.
Bringing it together
The payroll process is seven repeatable stages: timekeeping, gross pay, deductions, taxes, net pay, disbursement, and filings. None of them are exotic. The risk isn’t the math, since ADP and Gusto do the math. The risk is that the sequence, the cutoffs, and the judgment calls all live in one person’s head.
So treat payroll like the critical process it is. Map the flow, assign owners to the handoffs, and record a real cycle so the knowledge survives a vacation, a resignation, or a bad week. If you want a broader view of how this fits with the rest of finance, our guide to the accounting SOPs every finance department needs puts payroll in context, and if your team runs payroll in ADP specifically, you can capture it screen by screen the same way.
Get it out of one head, and payday stops being something you hold your breath for. - Yuval, Founder & CEO, Glitter AI
Frequently Asked Questions
What is the payroll process?
The payroll process is the end-to-end cycle for paying employees. It typically covers timekeeping, gross pay calculation, deductions, tax withholding, net pay, disbursement, and tax filings, ending when withheld taxes are remitted and returns are accepted.
What are the steps in the payroll process?
The core steps are collecting and approving time, calculating gross pay, applying pre-tax and post-tax deductions, withholding taxes, determining net pay, disbursing payment, and remitting and filing payroll taxes. Onboarding new hires and reconciling to the general ledger wrap around the cycle.
What is the difference between gross pay and net pay?
Gross pay is total earnings before anything is taken out, including base wages, overtime, bonuses, and commissions. Net pay is what the employee actually receives after pre-tax deductions, taxes, and post-tax deductions are subtracted from gross pay.
What is the difference between pre-tax and post-tax deductions?
Pre-tax deductions, such as traditional 401(k) and health premiums, come out before taxes are calculated and reduce taxable wages. Post-tax deductions, such as Roth 401(k), garnishments, and union dues, come out after taxes and do not reduce taxable income.
How does the payroll process work in ADP or Gusto?
In ADP or Gusto, time syncs in and is reviewed, gross pay and deductions are calculated, taxes are withheld automatically based on each employee's tax setup, you preview the run, then submit a direct deposit batch before the provider's cutoff. Full-service plans also remit taxes and file returns on your behalf.
What payroll taxes does an employer have to withhold and pay?
Employers withhold federal income tax, state and local income tax, and the employee share of FICA (Social Security and Medicare) from wages. Employers also pay the matching FICA share plus federal unemployment (FUTA) and state unemployment (SUTA) taxes.
What payroll tax forms do employers need to file?
Common federal filings are Form 941 quarterly for income and FICA taxes, Form 940 annually for FUTA, and W-2s with a W-3 transmittal at year end. States have their own income tax and unemployment returns. Full-service payroll providers usually file most of these automatically.
What are the most common payroll process mistakes?
The most common mistakes are unapproved or late timesheets, incorrect W-4 or work-state setup for remote employees, applying deductions in the wrong order, mishandling garnishment limits, and missing the provider's submission cutoff. Most are input and process errors, not software errors.
How do you document a payroll process?
Document your cutoffs, approval chain, and deduction order, then record yourself running a real payroll cycle in your provider. Tools like Glitter capture each screen and click as you run payroll and turn it into a step-by-step guide, so the process is recorded rather than remembered.
Why is documenting the payroll process important?
Payroll often lives entirely in one person's head, so it stalls or breaks when that person is unavailable. Documenting the cycle preserves the cutoffs, judgment calls, and exact steps, reduces compliance risk, and lets someone else run payroll accurately during a vacation or turnover.
