Payroll Checklist: Step-by-Step Guide for Compliant Payroll

Pre-Payroll Checklist

1. Review Employee Data

This is the critical starting point. Any errors made here will ripple through your entire payroll process. Taking the time upfront to carefully review and verify all employee information as a first step will help you proactively catch mistakes.

Tasks:

• Double-check that names, addresses, Social Security numbers, and bank details are all current and accurate.
  
• Gather all essential forms, such as I-9s, tax withholding certificates, and direct deposit authorizations.
  
• Update your records to reflect any recent changes, like new hires, terminations, promotions, or salary adjustments.
  

Watch out for:

Using outdated or incorrect data can result in payments being sent to the wrong place or tax errors. Failing to update changes in employment status or payment details can lead to incorrect payroll calculations or payments not happening at all. For example, if an employee updates their bank account but this change isn’t reflected in your payroll system, your payment will fail.

Before moving on, perform a thorough audit to ensure your employee data is clean, accurate, and fully up to date.

2. Payroll System Setup

Trying to manage payroll manually is a surefire way to invite errors. Selecting the right payroll software that matches your company’s unique needs can streamline the entire process and help you avoid many common pitfalls.

Tasks:

• Choose a payroll service that automates complex tasks like tax calculations, reporting, and provides a self-service portal for employees to view payslips and manage their information.
  
• Make sure the system is set up with your company’s details — for example, your Employer Identification Number (EIN), state unemployment account numbers, and bank information.
  
• Decide on your payroll schedule (weekly, biweekly, or monthly) and set your policies around overtime, paid time off, and more.
  
• Integrate your payroll system with other key tools, such as time-tracking or attendance software, to ensure seamless data flow.
  

Watch out for:

If the software doesn’t fit your business needs or the tax setup is incorrect, you’ll spend far too much time troubleshooting. Make sure your team agrees on the right payroll software before committing, and verify it works smoothly with your existing systems to prevent disruptions.

For instance, a company might buy payroll software without checking if it integrates with their time-tracking system, which can cause data import errors and delayed payroll processing.

3. Compliance with Regulations

Failing to comply with payroll regulations can lead to hefty fines, penalties, and even lawsuits. One of the most critical issues is misclassifying employees as independent contractors, which can severely damage your business’s financial health.

Tasks:

• Stay informed by regularly reviewing federal, as well as states and localities for updates.
  
• Correctly classify employees as exempt or non-exempt, and distinguish employees from contractors.
  
• Ensure that tax deposits are made promptly through the appropriate tax systems, like the Electronic Federal Tax Payment System (EFTPS) in the U.S.
  

Watch out for:

Misclassifications can lead to owing back taxes and fines. It’s wise to get expert help to conduct audits and convert contractors to full-time employment when necessary. Missing tax deadlines also results in fines and interest — automate reminders for all critical deadlines.

For example, if a company misclassifies an employee as an independent contractor, it may trigger an IRS audit, resulting in penalties that include 1.5% of wages plus 40% of unpaid Social Security and Medicare taxes.

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2025 Guide To Avoid Employee Misclassification

Our comprehensive guide to employee misclassification include a checklist to distinguish correctly between employers and contractors, and top tips to avoid misclassification risks.

Read Guide

Payroll Processing Checklist

Once your pre-payroll tasks are complete, it’s time for the main event: Getting money into people’s pockets without issues.

4. Review Hours Worked and Paid

This guarantees fair compensation when you pay employees and helps avoid disputes over improperly logged hours.

Tasks:

• Confirm that timesheets accurately reflect regular hours, overtime, paid time off, and sick leave.
• Correct any discrepancies or missing information immediately.
  
  

Watch out for:

Faulty timesheets lead to pay errors. Leveraging automated time-tracking tools, for example Clockify, Hubstaff or Harvest, can eliminate many manual mistakes.

Not updating leave balances correctly may also cause employees to be overpaid or underpaid — use software that automatically tracks leave to prevent this.

5. Pay Calculation

There’s more to compensation than just salary. Make sure every paycheck follows relevant tax rules and takes all deductions into account.

Tasks:

• Calculate total employee wages, including regular hours, bonuses, commissions, and overtime.
  
• Accurately deduct all payroll taxes such as Social Security and Medicare.
  
• Apply deductions for benefits and any garnishments as required.
  

Watch out for:

If you miscalculate overtime pay or fail to withhold employees’ taxes, you could face serious consequences. Employers have been penalized up to $1,000 per violation for improper overtime payments under the Fair Labor Standards Act (FLSA) . Additionally, the IRS can impose a 100% civil penalty on responsible individuals for failing to withhold and pay employment taxes.

6. Distribute Payments

Getting paid on time builds trust and builds your company’s reputation.

Tasks:

• Make sure payments are issued on the scheduled pay dates.
  
• Use direct deposit, checks, or pay cards as appropriate for your team.
  

Watch out for:

When paying an international team via direct deposit, checks, or pay cards, be aware of potential compliance pitfalls. For example, some countries require employers to establish in-country bank accounts for payroll payments, and others mandate that salary payments be made in the local currency.
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Post-Payroll Checklist

Don’t relax once payroll has been processed — there are important administrative tasks to tackle to wrap things up and ensure future payrolls go smoothly.

7. Reconciliation

Cross-check your payroll records against actual payments to catch discrepancies early and prepare for clean audits.

Tasks:

• Match payroll reports with bank statements and ledger entries.
  
• Investigate and resolve any inconsistencies immediately.
  

Watch out for:

Skipping reconciliation can let errors go unnoticed, causing problems during audits or financial reporting. For example, an unnoticed duplicate payment to an employee could cause financial losses only discovered much later.

8. Tax Deposits and Filing

Paying taxes on time is essential to avoid fines and scrutiny from authorities.

Tasks:

• Submit all required payroll taxes by their deadlines.
  
• File necessary tax forms such as 941s, 940s, and relevant state equivalents.
  

Watch out for:

Missing deadlines for payroll taxes hold penalties in many countries. For example, In the U.S., employers face a 10% penalty if they’re more than 15 days late.

9. Communicate with Employees

Timely communication around critical processes like payroll creates clarity to build employee trust and satisfaction.

Tasks:

• Provide pay stubs promptly and offer online access to pay information for transparency.
  
• Respond quickly to any payroll-related questions or concerns.
  

Watch out for:

Without easy access to pay stubs and payroll records, employees will feel uncertain about their compensation – and you’ll waste time in back-and-forth communication to manually send team members their details. Implement self-service portals so employees can view and verify their pay information independently.
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Year-End Payroll Checklist

10. Prepare for Year-End

Planning ahead prevents surprises and keeps you compliant during the busy payroll year-end period.

Tasks:

• Review salary increases and any new minimum wage laws.
  
• Manage unused benefits like FSA carryovers.
  
• Plan bonuses for the new year and understand their tax impacts.
  

Watch out for:

Missing an update to wage laws can lead to non-compliance. For example, neglecting to adjust wages after a state minimum wage increase might result in underpayment and legal issues.

Use free tools that provide real-time compliance updates to stay on top of these changes.

11. Processing Year-End Payroll

Accurate year-end payroll processing sets the foundation for a smooth tax season. 

Tasks:

• Finalize your final payroll for the current year: Make sure all employee hours, bonuses, commissions, and deductions are accurately recorded and included in the final payroll run.
  
• Distribute critical tax forms to employees, such as W-2s in the U.S by required deadlines.
  
• File required tax documents like W-3s.
  

Watch out for:

Errors in employee names, Social Security numbers, wages, or tax withholding amounts can trigger audits or rejections by the IRS and SSA, requiring time-consuming corrections. Double-check all employee data against payroll records.
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Staying Compliant

12. Run Regular Audits

Don’t wait for problems to find you — proactive audits help catch issues early.

Tasks:

• Regularly review employee data, payroll calculations, taxes, and deductions.
• Use a payroll audit checklist for thoroughness.
• Conduct audits on a quarterly or semi-annual basis.
  

Watch out for: 

Without clear ownership, timely audits slip through the cracks. Assign specific team members to oversee the process.

13. Staying Compliant

Employment laws change frequently and vary by jurisdiction – keep up with regulatory news in the regions that matter to your business.

Tasks:

• Follow reliable sources for regulatory updates, like official IRS announcements or compliance tracking tools.
• Update your company policies and procedures to reflect the latest legal requirements.
• Train your team on new rules and procedures.
• Document all compliance efforts and training.

Watch out for:

Federal, state and local laws differ – for example minimum wage adjustments, sick leave mandates, or data privacy regulations. These differences are easy to overlook but have a significant impact on your business if ignored.
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Pro Tips to Nail Your Payroll

• Automate the hard stuff: Use payroll software to handle tricky tasks like calculating wages, taxes, and creating payslips. This cuts down manual work and reduces errors like miscalculations or missed deductions.
• Train your team: Keep your payroll staff updated with regular training on tax changes, compliance, and company policies. This helps them process payroll accurately and on time.
• Do regular audits: Regularly review your payroll to catch issues like misclassified employees, incorrect tax withholdings, or unauthorized payments. Fixing these quickly helps avoid legal problems and fines.
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Make Payroll Easy with Playroll

Handling global payroll can feel like a juggling act – but it doesn’t have to be. Our all-in-one payroll platform works smoothly with your current systems, letting you bring together and standardize multi-vendor payroll with just a few clicks.

Easily manage compliance, payments, taxes, and customize workflows, giving you time back and greatly reducing stress.

Want to learn how to simplify your global payroll? Set up a chat with one of our experts.