How Payroll Processing Works, and How to Do It Correctly

What is Payroll Processing and How Does it Work?

Payroll processing is the structured, compliance-driven workflow an employer follows to ensure every employee is paid accurately, on time, and in alignment with all legal and contractual obligations. It’s far more than a financial transaction, payroll sits at the intersection of labor law, taxation, HR operations, and internal controls.

Effective payroll processing requires precision. Employers must gather accurate data, apply complex pay rules, calculate earnings and deductions, remit taxes, and maintain audit-ready records. When done correctly, payroll safeguards employee trust and protects the organization from regulatory risk. When done poorly, it can lead to costly penalties, employee dissatisfaction, and administrative headaches.

Here's what it typically encompasses:

• Collecting employee data (hours worked, salary details, leave, bonuses)
• Calculating gross earnings for each pay period
• Applying statutory deductions (taxes, social contributions)
• Applying voluntary deductions (benefits, retirement, garnishments)
• Determining net pay and preparing payslips
• Issuing payments through bank transfer or direct deposit
• Filing payroll taxes with local authorities
• Remitting employer and employee contributions
• Keeping accurate, compliant payroll records

Why Precision Matters

I've seen businesses stumble because they treated payroll as an afterthought. The reality is that payroll errors have real consequences:

• Employee trust evaporates quickly when paychecks are wrong or late,
• Regulatory penalties can be substantial and accumulate fast,
• Audit exposure increases when your records aren't pristine,
• Reputation damage affects both employee retention and recruitment.

Your employees have bills to pay, mortgages due, and families to support. They're counting on you to get this right, every single time.

Two Methods for Processing Payroll

When it comes to running payroll, businesses typically choose between two primary methods: manual payroll processing and automated payroll processing. Each has its strengths and limitations, and the right choice often depends on the size of the business, budget, and complexity of operations.

1. Manual Global Payroll

In a manual payroll system, businesses handle payroll tasks internally without automated tools. This process involves several key steps:

• Employee Information Collection: Gather comprehensive details for each employee, including personal information, employment contracts, tax identification numbers, and bank account information.
• Time and Attendance Tracking: Manually record working hours, overtime, and leave using methods such as spreadsheets or physical timecards.
• Wage Calculation: Compute wages by applying agreed-upon salary rates and accounting for adjustments like bonuses or deductions.
• Currency Conversion: For international employees, convert salaries into local currencies, carefully monitoring exchange rates to ensure accurate payments.
• Tax Compliance: Manually apply appropriate tax rates and deductions according to each country's laws, including social security contributions and other statutory deductions.
• Benefits Administration: Ensure compliance with local regulations regarding mandatory benefits such as health insurance and retirement plans.
• Payroll Disbursement: Initiate international bank transfers or other suitable payment methods manually, followed by the creation and distribution of payslips to employees.
• Record-Keeping and Reporting: Maintain meticulous records for auditing and compliance purposes, and prepare and submit required reports to local tax authorities and government agencies.

This manual approach requires careful attention to detail and a thorough understanding of various regulations to ensure accurate and compliant payroll processing.

2. Automated Payroll Processing

Automated payroll uses dedicated payroll software or platforms that handle calculations, deductions, payments, and compliance tasks automatically. Modern systems often integrate with time-tracking and HR tools, making payroll seamless.

Utilizing payroll software automates many aspects of the payroll process. This enhances efficiency and accuracy throughout the payroll process. The automated process includes the following steps:

• System Configuration: Set up the software to comply with local laws, tax regulations, and employment standards for each country.
• Employee Profile Creation: Input personal information, job details, and compensation structures into the system.
• Automated Data Management: Integrate with time-tracking tools to capture working hours, overtime, and leave in real-time.
• Regular Updates: Ensure the system reflects current exchange rates, tax laws, and regulatory changes.
• Payroll Processing: Automatically determine an employee’s gross pay, apply deductions, and calculate net pay (taking currency differences into account).
• Compliance Management: Receive automatic updates on changes in local labor laws and tax regulations. This facilitates timely tax filings and statutory reporting.
• Benefits Administration: Manage accurate enrollment to benefits schemes, relevant tax deductions, and adherence to local benefits requirements.
• Payment Distribution: Automate timely disbursements to employees through preferred methods such as direct deposits or digital wallets (accompanied by electronic payslips).
• Reporting and Analytics: Generate customizable reports on payroll expenses, tax liabilities, and compliance status, providing valuable insights into payroll trends to inform a business’s strategic decisions.

By making use of comprehensive payroll software, businesses can streamline the complexities of international payroll. This helps ensure accuracy, compliance, and boost efficiency when managing a global workforce.

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How to Process Payroll Manually in 9 Steps

Now that you know how payroll works, let’s take a closer look at setting up a payroll abroad. By following the below steps, you can set up your international payroll and boost your employee happiness regardless of whether you’re using dollars, euros, or yen.

Step 1: Understand Local Payroll Regulations and HR Laws

Understanding international tax and HR laws should be your first step in setting up an international payroll. Like tipping etiquette and TV channels, tax and HR codes differ based on your employees’ locations. The last thing you want is to apply the same tax laws you knew in Madison, Wisconsin, to your burgeoning business in Mexico City.

To set up your global payroll for success, take note of the following information:

• Employees’ country tax system: Tax systems vary by country. While some countries like the Bahamas and Qatar don’t tax local and foreign incomes, other countries, like the United States and Hungary, do. Many other countries tax local incomes while abstaining from taxing foreign incomes. Knowing your employees’ home income tax codes is highly beneficial when it comes to setting up your payroll system. You should also fill up the relevant tax forms in a timely fashion.

• Exemptions: In some countries, foreign employers are exempt from withholdings, pensions, and contributions. This gives big financial advantages to businesses whose employees reside in these tax-friendly countries.

• Registration requirements: In some countries, like the United States, you must register your business in order to set up your payroll process. However, some countries simplify this process by requiring that you only register your payroll. You might still be required to pay local taxes and withholdings, but you won’t have to spend time formally establishing your business on foreign soil. Knowing how to do payroll in different countries is essential in navigating these variations.

• Minimum wage: If your business employs minimum wage workers, you’ll want to know the minimum wage laws of your international employees’ countries. While some countries have a fixed federal minimum wage, other countries have no minimum wage laws on the books.

• Holidays: If your business offers holiday bonuses or overtime pay, you’ll need to note the holidays in your employees’ countries for payroll purposes.

While understanding your employees’ country-specific tax laws might seem like an unachievable task, you don’t have to wade through international payrolls alone. Instead of checking out every international tax codebook at your public library, engage a company that can provide you with all the country insights you need to seamlessly set up your global accounts.

Step 2: Establish Your Employer Identification Number (EIN)

An Employer Identification Number (EIN), also known as a Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN), is a unique nine-digit number assigned by the Internal Revenue Service (IRS). An employer’s EIN is recorded on the W-4 Form in the "Employers Only" section, along with the employer's name, address, and the employee's start date All business entities operating within the United States are required to obtain an EIN for tax identification purposes and can do so by following these key steps: 

1. Ensure that your business entity is legally formed.
2. Identify the “responsible party” who controls or manages the entity and include their name and Taxpayer Identification Number (SSN, ITIN, EIN) in the EIN application. This individual must be a natural person, not another entity. 
3. Complete an online, fax or mail EIN application. EIN applicants whose principal place of business is outside the U.S. are able to apply for an EIN by phone, fax or mail. 

Keep in mind that you can only apply for one EIN per day, irrespective of the application method used. Some states require employers to obtain state or local tax identification numbers, often referred to as state tax ID numbers or state EINs, depending on the state's regulations. In the U.S., local tax ID’s are used for state-level tax obligations, such as sales tax collection, state income tax withholding, and other state-specific taxes.

Step 3: Classify Employees Correctly

The type of employee your international business hires is just as important as the employee’s location. Understanding how to do payroll for different employee types is crucial for accurate payroll processing.

Employees may occupy one of several employment categories, and each category directly impacts your running payroll. For both international and domestic businesses, the most common employee types include:

• Full-time: Full-time employees typically work 40+ a week and are eligible for benefits. That said, the number of hours full-time employees are required to work to meet their full-time classification differs based on the business and country. These workers are also usually salaried.

• Part-time: In most U.S. businesses, part-time employees put in less than 40 hours a week and are ineligible for benefits. Additionally, part-time employees are usually hourly workers. If you hire part-time employees with different hourly wages, you’ll need to enter each employee’s hourly wage into your payroll.

• Temporary: As their classification implies, temporary employees are workers hired for a specific amount of time. As a result, temporary employees may be either full-time or part-time workers. Temporary employees tend to be popular hires for international businesses. That said, if you’re thinking of adding temporary employees to your global payroll, make sure to comply with their country's specific tax laws.

• Seasonal: Although seasonal and temporary employees sound similar, there’s one big difference: temporary employees are hired throughout the year, while seasonal employees are typically hired to fulfill a company’s needs during a given season. For example, if you’re an international tax agency, you might hire seasonal employees only during tax season.

• Freelance: If temporary workers are hired for a specific amount of time, freelancers are hired per job. Many international businesses choose to hire freelancers because they’re not technically employed by the business. Instead, freelancers are self-employed independent contractors untethered to an employer’s payroll.

Taking time to learn more about employee types and correctly classifying your employees is critical for businesses to ensure compliance with tax laws and labor regulations. Employee misclassification can lead to significant legal issues, financial penalties and reputational damage. 

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Learn more about how Playroll's Global Payroll Manager reduces manual errors, improves payroll cycle workflows, and streamlines multi-country payroll processing.

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‍Step 4: Select Your Pay Cycles

Once you’ve classified your international employees, you’ll want to update your payroll with their pay cycles.

Most domestic and international businesses use one of the following pay cycles:

• Monthly 
• Semi-monthly 
• Biweekly 
• Weekly

Regardless of the pay cycle, ensure that your payroll has enough funds to pay your employees on their specified pay dates. It’s equally important to pay attention to country-specific payday regulations: For example, Luxembourg mandates that employees be paid on the last working day of the month, while Mexico has different pay cycles for different workers: weekly for “blue-collar” workers and biweekly for “white-collar” workers.ensive solutions to pay international employees, with multi-currency payments and built-in compliance with complex tax regulations in different jurisdictions.

Step 5: Gather Employee Information

To facilitate accurate and compliant payroll processing across various countries, employees should provide the following general information:

• Personal Details: Full name; residential address; date of birth; contact information (phone number and email).
• Identification Numbers: National identification or social security number (if applicable); tax identification number.
• Banking Information: Bank account details for salary deposits; preferred currency for payment, if options are available.
• Employment Documentation: Signed employment contract; work permit or visa documentation, if required.
• Tax and Financial Forms: Completed tax withholding forms specific to the country; details of existing insurance coverage.
• Emergency Contact Information: Name and contact details of a designated emergency contact.

Step 6: Set Up Compensation and Benefits

If you offer domestic employees benefits, be prepared to offer comprehensive global benefits packages (depending on their classifications). The most common benefits include health insurance and retirement plans. The good news is that some governments already provide employee benefits in the form of health insurance and retirement packages.

Other governments, however, require that businesses provide employee benefits regardless of where they’re based. Knowing how to do payroll in such cases becomes crucial. If your employees live in countries that mandate government benefits, your payroll may still be affected for benefits—even if you don’t provide them domestically.

Step 7: Calculate Your Payroll Taxes

Calculating payroll taxes is a fundamental aspect of managing employee compensation and ensuring compliance with tax regulations. While specific tax rates and regulations vary by country, the general process involves the following key components:

• ‍Income Tax Withholding: Employers are typically required to withhold a portion of an employee's earnings to cover income taxes. The amount withheld is based on the employee's earnings and applicable tax rates, which can be progressive (meaning higher earnings are taxed at higher rates).
• ‍Social Security Contributions: Many countries require contributions to social security programs, which provide benefits such as retirement pensions and disability insurance. These contributions are often shared between employers and employees and are calculated as a percentage of the employee's gross wages. For example, if the social security contribution rate is 6% for both the employer and the employee, the employee’s contribution would be $180 ($3,000 x 6%) and the employer would be expected to match this contribution. This means that the total contribution to the social security fund for this pay period would be $360 ($180 from the employer and $180 from the employee).
• ‍Healthcare Premiums: In some countries, employers and employees contribute to national healthcare systems through payroll deductions. Alternatively, employers may offer private health insurance, with premiums partially or fully paid by the employee through payroll deductions. If an employer provides health insurance with a total monthly premium of $400 and splits the cost equally with the employee, the employee’s contribution would be $200 ($400  ÷ 2) and so would the employer’s. In this case, the employee's $200 share is deducted from their paycheck.

Step 8: Distribute Paychecks

Distributing paychecks involves calculating each employee's net pay by deducting applicable taxes and contributions from their gross earnings. Employers then distribute the net pay through methods such as direct deposit, paper checks, or payroll cards, accompanied by pay stubs detailing the deductions from employees’ paychecks and their net pay. Maintaining accurate records of these transactions is essential for compliance and future reference. 

Step 9: Comply with Tax Filing and Reporting

Ensuring compliance with tax filing and reporting requirements is crucial for businesses to avoid legal penalties and maintain smooth operations. Key steps include:

• Submitting Required Tax Returns and Social Contributions: Regularly file payroll tax returns and remit social contributions to local tax authorities as mandated by law. This includes reporting wages, taxes withheld, and employer contributions.
• Providing Employees with Tax-Related Documentation: Issue necessary tax documents to employees, such as W-2 forms in the U.S. or P60 forms in the U.K., detailing their annual earnings and tax withholdings. These documents are essential for employees' personal tax filings.
• Maintain Accurate Payroll Records: Keep detailed records of all payroll transactions, including employee wages, tax withholdings, and filed tax returns. Accurate recordkeeping is vital for compliance and audit purposes.

Utilizing a comprehensive payroll management system like Playroll’s Global Payroll Manager can streamline these processes. Playroll offers features such as automated payroll calculations, real-time tracking with complete audit trails, and seamless integration with various HR data sources. These capabilities help boost efficiency and ensure compliance with evolving local tax regulations.

Best Tools to Automate the Payroll Process

Selecting an appropriate global payroll system is crucial for employers managing international teams. The right payroll solution should ensure timely and compliant compensation across various countries. When businesses are looking for the right global payroll system or switching providers, they should keep the following in mind: choose a solution that supports multi-country payroll processing. Viable options include:

For small businesses:

• ‍Gusto: An intuitive platform ideal for new payroll managers. Automates onboarding, tax filing, and direct deposits, making payroll simple for small teams.‍
• OnPay: A straightforward, all-in-one payroll and HR tool with strong compliance support, especially for niche industries like agriculture, churches, and restaurants.‍
• Patriot Payroll: A budget-friendly system offering essential payroll features and automatic tax calculations without unnecessary complexity.

Best automate tools for remote or global workforces:

• ‍Playroll: A global payroll, Employer of Record, and contractor management platform designed to ensure full compliance across countries. Playroll handles local taxes, statutory benefits, employment contracts, and country-specific payroll rules, making it ideal for organizations hiring talent anywhere in the world.‍
• Remote: Supports payroll and compliance in 60+ countries, with simple onboarding and localized tax handling for globally distributed teams.‍
• Deel: Manages international hiring and payroll in 150+ countries, offering strong compliance controls and local expertise for cross-border employment.‍
• Oyster HR: Covers payroll in 180+ countries and provides localized employment insights, making global workforce compliance more accessible for growing companies.

Tools ideal for larger teams with bigger budgets:

• ‍ADP RUN: A scalable payroll solution with multi-state compliance, strong integrations, and 24/7 support, well-suited for companies anticipating rapid growth.‍
• Paychex Flex: Flexible and customizable, offering payroll, HR, and benefits options that adapt as a business expands.‍
• Rippling: A tech-forward platform that unifies payroll, HR, and IT in one place. Excellent for automating workflows and reducing manual data entry.‍
• Paycom: Known for its employee-driven payroll model (Beti®), which allows employees to verify their pay before submission, reducing employer-side errors.

How to Make Global Payroll Compliance Truly Easy

Expanding your business internationally is a thrilling step – but can mean a lot of work. Not only do you have to keep up with multi-national accounts, but you also have to make sure your payroll systems are in tip-top shape to pay your people in time. To reduce the complexity, take advantage of Playroll’s comprehensive payroll services and products. Playroll’s Global Payroll (GP) suite makes keeping up with international payroll a breeze.

‍Global Payroll Analytics allows you to consolidate multi-vendor payroll data into an all-in-one dashboard. Connect and visualize rich data sources to make more informed decisions for your business, and easily monitor payroll Key Performance Indicators (KPIs).

Use Playroll’s GP Manager to optimize your existing payroll system. Our product helps you streamline multi-country payroll operations and processes in one convenient platform. Book a chat with our team to find out how you can offload the complexities of global payroll, so you can focus on growth.