What is payroll cycle and types of payroll cycle

Payroll cycle is the list of tasks performed while processing payrolls when we pay employees for a set period or on a given date. It can be the regular payment that is done regularly for the current period salary or hourly Calculation along with Off Cycle payroll, Retroactive Payroll and Final Payroll.

A typical payroll cycle consists of 5 steps:  

  1. Information Updating

Before running the payroll, It is important to update the employee information such as new-hire information and pay rate increases. For example in case of a new hire they have to be enrolled in the system along with their data like salary, tax information, Social Security Details, Dental and Health Insurance Premiums etc.

2. Work Time Calculation

The work time must be recorded for payment purposes as per the system used by the company either manual or automated using entry cards or biometric systems

3. Deduction Calculation

All the pretax deductions and benefits as offered by the company are needed to be adjusted in the payroll to calculate gross-to-net pay for employees.

4. Payment Processing Confirmation
The administrator can print out or view reports in case of an automated payroll management system or if doing manual calculations should be verified before sending out the salary or payment transfer. 

5. Accounting
The administrator must address other payroll-related matters, such as the deposit of withheld taxes, after the employees receive their pay. Along with that, the journal entries need to be created.

Types of Payroll Cycle

Payroll Cycle are of 4 types based on which period payment is done and when the payment is done as mentioned below  

  1. The Normal Payroll Cycle

The normal payroll calculates the regular wages or salaries. It is for the period of current pay duration which is paid on a specific day in every period. It has to be adjusted for tax deductions based on taxable income and national as well as state taxes as applicable to the business. Other deductions like pretax benefits and contributions also need to be adjusted before running the normal payroll cycle.

For example, the salary of an employee which is paid to the employee every month after appropriate deductions and taxes is normal payroll.

2. The Off-Cycle Payroll

Payments like one time bonuses which are paid outside the regular payroll cycle. The off cycle payroll is executed between the day of regular payroll payment and the date of releasing the Payroll Control Record for the next payroll run. This can also be used to reimburse employees for expense claims and any other payments like late overtime that were missed in the regular payroll run.

After the execution of an off-cycle payroll run, you also need to execute an off-cycle bank transfer along with posting the off-cycle results to the accounting as in regular payroll cycle.  

3. The Retroactive Payroll

The Retroactive Payroll is the adjustment in payments for previous payroll periods back to a point in time. It refers to income owed to an employee from a previous pay period and may happen for several reasons, such as incorrect salary compensation or wages for hours worked, or a pay increase.

It is useful for retroactive adjustments to analyze employees’ past earnings, deductions, costing based on changes to pay rates, benefit elections, and cost account changes. It is reported on both regular and supplemental payroll details related to earnings and deductions for retroactive periods.

However, adjustments caused by changes to cost distributions, late entry of leave balances and error corrections often negatively affect accounting functions, especially reporting on quarterly financial statements, grant reimbursements and other periodic financial reporting. So the best practice is to minimize the retroactive Payroll adjustment and do the same before any financial reporting.   

4. The Final Payroll 

When an employee separates from the company there is a requirement to administer a final payroll. The final pay will be your employee’s last form of compensation from your business. Other payments could include allowances previously agreed upon by both the employee and the employer, reimbursements that have not yet been refunded, or any outstanding bonuses or commissions.

Any accumulated vacation pay that the employee earned over the course of their employment must also be paid out at this time, and you also need to include any vacation calculated on the severance pay.

In some cases, a company may choose to pay an employee for their two-week notice, but not require them to revisit the workplace due to any sensitivities or confidentiality. If you are paying an employee for their two weeks, or if you terminate them and owe them two week’s pay, you are required to pay vacation pay for these weeks as well.

Employers have a “reasonable time period”, or a set amount of time determined by state law to administer a final paycheck.

It is important to check the specific guidelines for the location of your business.