Error-proof payroll preparation in 9 steps + free checklist

Payroll errors often start long before HR issues paychecks. Most problems come from poor data hygiene. When employee records, tax forms, and bank details are out of date or scattered across disconnected systems, it’s easy for mistakes to slip into each pay cycle. 

Payroll prep demands time and attention. Even small business owners spend close to five hours calculating, filing, and remitting taxes each pay period.¹ Despite all that work, the average payroll accuracy rate is just 80.15%. Time/attendance and expense errors are the most common, occurring 1.139 times per employee each year.² 

With the right tools and a repeatable step-by-step framework, HR teams can reduce the amount of time they spend on payroll prep and bring down the error rate at the same time. Keep reading for a full guide and a free downloadable payroll preparation checklist to keep every payroll run on track.

1. Bloomberg, 2020

2. EY, 2022

What’s payroll preparation?

Payroll preparation is the process of collecting and verifying the information needed to run the HR payroll process, including employee records, time tracking data, and tax details. Accurate payroll depends on clean inputs. HR teams need reliable, up-to-date information before any calculations begin.

Payroll preparation procedures also have to stay on the right side of the law. As SHRM notes, “...payroll is complex, with many legislative rules and compliance issues to manage.” Teams achieve accurate and compliant payroll either through regular and meticulous audits or by using software to keep data organized and apply the right legal rules automatically.

How do you prepare payroll for processing? 9 simple steps

EY research found that each payroll error costs companies an average of $291 to fix. Here’s how to prepare employee payroll and minimize costly mistakes.

1. Choose a payroll model and lay out the rules

“Once it’s set up, everything runs automatically in the background. It might take hours to build, but then it just works smoothly and efficiently every time.”

— Suraj Paneru, Customer Success Coach at Leapsome

Start by choosing a payroll model. You have three primary options:

• Manual payroll: Take care of everything by hand, including data entry and pay calculations.

• Outsourced payroll services: Hire a third party to handle everything for you.

• Payroll software: Use dedicated HR software to manage and automate core payroll functions.

Once you have the model, create a compliant payroll policy that defines essential rules. This should cover:

• Pay periods and pay dates.

• Payment methods.

• Overtime pay.

• Paid time off (PTO) and sick leave.

• Deductions and withholding.

• Payroll benefits.

• Recordkeeping procedures.

Managing so many details can get cumbersome. Leapsome simplifies it with customizable payroll policies that automatically apply everywhere you need them to.

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🎛️ Your payroll policy, your rules

Configure your own payroll structures, tax rules, and allowances, then watch them cascade from your centralized policy across processes and jurisdictions.

👉 Explore Payroll

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2. Round up the data

“Leapsome connects directly with DATEV for payroll. Salaries, taxes, and benefits flow to authorities automatically, and errors are flagged before submission.” 

— Suraj Paneru, Customer Success Coach at Leapsome

This payroll process step involves gathering all the information necessary to pay your workforce accurately, including each employee’s:

• Full name and contact information.

• Banking details and Social Security or identification number.

• Direct deposit authorization.

• Timesheets.

• Tax forms like Form W-4 (Employee’s Withholding Certificate) and Form I-9 (Employment Eligibility Verification).

• State tax withholding form (if necessary).

• Benefits enrollment forms.
• Garnishment orders.

This step sets the foundation for every calculation that follows. Verify all data to keep payroll accurate and predictable.

3. Calculate taxes and deductions

Once the data is ready, it’s time to determine withholdings and deductions. The following are typically withheld from each paycheck:

• Federal income taxes.

• State and local income taxes (if applicable).

• The employee’s portion of FICA (Social Security and Medicare) payroll taxes.

Deductions fall into one of two categories based on whether they come out before or after taxes:

• Pre-tax deductions: Such as health insurance premiums, flexible spending accounts, and 401(k) retirement plan contributions.

• Post-tax deductions: Such as Roth retirement plan contributions, union dues, and garnishments.

4. Determine gross pay and net pay

Gross pay is the total amount an employee earns before withholdings and deductions are taken out. To calculate it for salaried employees, use this formula:

Gross pay per period = Annual salary ÷ number of pay periods

For employees who get paid hourly, use this formula:

Gross pay per period = Hours worked during the pay period × hourly rate

To calculate net pay, subtract the employee’s withholdings and deductions from their gross pay.

5. Cut the paychecks

Once payday rolls around, verify timesheets and send out payments. Then compare your payroll reports to bank statements and tax filings to make sure everything matches up. If you’re working by hand, update your records and payroll journal to bring everything up to date. Outsourced providers and software solutions take care of this step for you.

6. Distribute payslips to create a paper trail

Payslips or pay stubs create a record of an employee’s earnings. They typically include:

• The employer’s name, address, and contact information.

• The employee’s name and tax identification number.

• The employee’s gross pay, withholdings and deductions, and net pay.

Generating payslips can feel tedious, especially when the end of the payroll cycle feels so near. Leapsome changes that.

“Employees can update their own personal information, and it’s sent to HR for approval — no need for back-and-forth emails.” — Sophie O’Donoghue, Customer Success Coach at Leapsome

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🧾 Payslips made easy — and accessible

The latest employee data flows into payroll automatically, generating payslips employees can access directly from their personal self-serve profiles.

👉 Explore Payroll

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7. Submit remittances and file tax forms

Pay the employee-withheld taxes and the employer’s federal unemployment tax (FUTA), state unemployment tax (SUTA), and appropriate portion of FICA taxes. This takes care of your payroll liabilities.

You also need to file the relevant tax forms for each employee, such as Form 941 (Employer’s Quarterly FUTA), Form 940 (Employer’s Annual FUTA Tax Return), and Form W-2 (Wage and Tax Statement).

8. Retain payroll records

Organized records make it easier to respond to requests from authorities and maintain compliance. As Deloitte points out, “Employment taxes can trigger critical risk and compliance exposure for any business.” Holding onto critical records is your first line of defense if an auditor comes knocking.

Keep the following records for at least four years:

• Employee contracts and tax forms.

• Payslips.

• Tax withholdings, filings, and remittances.

• Benefits and deductions records.

9. Keep up with change

“Leapsome is powerful enough to already know the local regulations that apply in your geography — and flags it if your setup isn’t compliant.”

— Suraj Paneru, Customer Success Coach at Leapsome

Running payroll isn’t a one-and-done affair. Workforces, labor laws, and tax rules evolve — and it’s HR’s job to keep up. Regularly review tax and labor legislation in your jurisdiction. To keep workforce data current, consider using software like Leapsome, which comes with self-service features so employees can update records themselves. 

Free payroll preparation checklist

Use this checklist to cover all your bases each pay period.Before payday

Before payday

• Choose a payroll model (manual, outsourced, or software).
• Create a payroll policy that defines essentials like pay periods and overtime pay rules.
• Compile data and documents, including tax forms, banking details, and timesheets.
• Approve timesheets.
• Calculate taxes and deductions.
• Calculate gross and net pay.

On payday

• Process and send out payments.
• Reconcile payments.
• Update records (if working by hand).

After payday

• Generate and distribute payslips.
• Submit withheld taxes.
• File tax forms.
• Remit the employer’s FICA, FUTA, and SUTA obligations.
• Retain records for at least four years.
• Stay up to date with tax laws, labor laws, and workforce changes.

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😎 Stop sweating payday

Have this free checklist handy to keep payroll runs smooth and error-free.

👉 Download the checklist now

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Make payroll preparation second nature with Leapsome

The key to clean payroll lies in the prep work. Maintaining accurate and current data reduces the risk of errors slipping in. A centralized HR system keeps data and the processes that rely on it in sync.

Leapsome gives busy HR teams a unified environment with features like:

• Flexible payroll policies: Payroll structures and tax rules stay customized and consistently applied anywhere you do business.

• A single source of truth: Centralized data flows directly into payroll and other HR processes to eliminate manual errors. 

• Less manual reconciliation: Employee records auto-sync with compensation and absences so you never have to piece data together by hand.

• Built-in compliance: Multi-jurisdiction tax rules and labor laws apply automatically so compliance is baked in.

“Leapsome did a really great job with performance, OKR, and feedback management — everything in one platform.” — Zhen Wang, People Servicer | Jina AI

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🔗 One interconnected system, zero loose ends

Keep payroll synced around the clock with employee records, compensation, and time tracking so everything is where you need it, when you need it.

👉 Request a demo

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FAQ

What are the steps in payroll preparation?

Payroll prep can be broken down into nine core steps:

1. Choose a payroll model and create a policy.

2. Gather payroll data.

3. Calculate taxes and deductions.

4. Determine gross pay and net pay.

5. Process payments.

6. Distribute payslips.

7. Submit remittances and file tax forms.

8. Retain payroll records.

9. Keep up with workforce or legislative changes.

What documents are needed to prepare payroll?

Payroll prep relies on a range of documents, including:

• Tax forms, such as W-4s and I-9s.

• Payment information, including bank details and direct deposit authorization.

• Identification documentation, such as Social Security numbers.

• Benefits enrollment documents and garnishment orders.

• Timesheets.