Tech

What is Payroll Cycle?

What is Payroll Cycle?
Written by Paresh Bramhane

It’s the time when your employees look at you with glistening eyes. It’s the time when their bank accounts will get credited for the hard work they have put in working for you.

Yes, it’s time for you to perform the payroll cycle.

But if you are stuck on the what’s and how’s of a smooth payroll cycle system, neither you nor your employees will be satisfied.

That is why you need to know everything about the payroll cycle and the different types of payroll cycles that will help you understand the correct process.

What is Payroll Cycle?

A payroll cycle is the list of tasks performed by employers while processing payment for their employees every month. This payment could be a regular payment that the employees receive or a one-time payment based on the number of hours they have worked.

Based on the continuous payment cycle and hourly working hours, a payroll cycle is broken down into 4 different categories:

  • The Standard Payroll
  • The Off-Cycle Payroll
  • The Retroactive Payroll
  • The Final Payroll

Before you get to know about the different payroll cycles, let’s understand the various stages involved while performing these payroll cycles.

Ideally, you will undergo 5 stages to create a concrete payroll software. With this system in place, you can conduct the payroll operations smoothly.

Stages of Payroll Cycle-

A payroll cycle is divided into 5 stages:

  1. Updating the information

Update the information of the employees along with the salary amount before performing the payroll. Let’s say you have onboarded a new hire. Now, they should be enrolled in your payroll software along with their relevant data such as their salary, tax information, social security details,

  1. Calculating the work time

Track the working hours of every employee so that every employee receives the correct amount as salary when the regular payroll cycle is performed. 

For this, organizations use manual or automated systems using entry cards or biometric systems that determine the employees’ attendance. With these systems, you know when the employee starts their work and at what time they stopped. This helps in recording the accurate working hours and helping in executing the timely payments to the employees.

  1. Calculating the deductions

Adjust the pre-tax deductions and benefits that the company offers to an employee in the payroll to calculate the net gross payment for the employee once his/her work hours are calculated. The net-gross pay is added into the working hours, which makes up the total amount to be paid to an employee.

  1. Confirming the payment procedure

If your company uses an automated payroll management system, the admin will print or view the report before issuing the salary. With a manual system, verify the calculations before issuing the compensation.

  1. Preparing the accounts

If there are issues with a payroll like a deposit of rejected taxes, the administrator must address them once the employees receive their salary. You must create a record for the same.

Payroll Cycles You Need To Know About-

The Standard Payroll

The standard payroll calculates regular salaries on a fixed date every month. If the salary is taxable, it is adjusted to tax deductions based on the taxable income, national and state taxes. 

Let’s say you are an employee working in a company and receive your salary on the 7th of every month. This is a continuous cycle wherein you receive your salary on the 7th of every month. Your salary is fixed. This is the standard payroll cycle where you receive your salary on a fixed date every month.

The Off-Cycle Payroll

When you receive on-time payment as a bonus or additional incentives, off-cycle payroll is used. This payroll cycle is also used to provide reimbursements or late payments that could have been missed in the regular payroll cycle. The off-cycle payroll is performed between the days of the regular payroll cycle and the date when the payroll check for the next payroll run is made available.

If you do overtime or perform well at work, you are likely to get additional incentives for the work you have done. You receive these payments as off-cycle payroll, as they are not included in the regular payroll cycle. This is called the off-cycle payroll.

The Retroactive Payroll

How many times do you hang in the due payments cycle? 

When you make adjustments in the payroll cycle back to a certain period, it is called a retroactive payroll cycle. With this payment cycle, you make payments to your employees from a previous pay period that has not been performed. The reason for retroactive payroll could be different:

  • Incorrect salary compensation
  • Salary for hourly work
  • Increment in salary

Let’s say you have performed the regular payroll for your sales department, and two of the sales team members have received an increment in the past month. 

But the salary received is the regular one with no increment. Now, to fix the payroll cycle, you make adjustments and pay the correct amount to your employees. When you perform this change, it is known as the retroactive payroll.

The Final Payroll

When your employee leaves the company, you pay them final payroll, including their final salary and the reimbursements, vacation pay, bonuses, and commissions.

Let’s say your employee is leaving the company. You need to pay the final payroll to your employee, which includes their final salary. Apart from their final salary, they will receive the additional bonuses, non-funded reimbursements, and vacation pay they earned during their employment period.

While each payroll cycle is different, these cycles are an addition to the regular payroll cycle.

…That’s a wrap

With the right system in place, you can execute the payroll cycle the right way every month. The standard payroll cycle is the base of your entire payroll cycle system, which is further combined with off-cycle payroll, retroactive cycle, and final payroll. Know that the standard payroll cycle is the foundation of your system.

About the author

Paresh Bramhane

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