From Timesheet to Payslip: Anatomy of a Payroll Run
What happens between hours worked and money paid: the gross-to-net sequence, employer costs against employee deductions, the ledger postings, and how corrections work.
What a payroll run is
A payroll run is a dated batch calculation. It gathers every input for a period, computes what each employee is owed and what must be withheld, produces payslips and a payment file, and posts the result to the ledger.
The defining property is that it is a batch, not a series of edits. It runs, it is checked, and then it is locked. That constraint is deliberate, and most of what follows is a consequence of it.
The inputs
- Standing data: who is employed, their contract, salary or rate, tax status, and bank details.
- Time: hours worked for hourly staff, overtime, shift premiums. Salaried staff contribute nothing here unless something varies.
- Absence: holiday, sick leave, unpaid leave — each with its own pay rule, and each able to change the period's pay.
- Variable pay: commission, bonuses, expense reimbursements, one-off deductions.
- Statutory parameters: tax bands, thresholds and contribution rates for the period.
Most payroll errors are input errors rather than calculation errors. The calculation is deterministic; whether the starter who joined on the 18th was set up with the right start date is not.
Gross to net, in order
The sequence matters, because each step changes the base the next step works on. Getting the order wrong produces a plausible number that is wrong.
- Compute gross: base pay for the period, plus overtime, premiums, commission and bonuses, less unpaid absence.
- Apply pre-tax deductions: pension contributions, salary-sacrifice items. These reduce the figure tax is computed on.
- Arrive at taxable pay.
- Compute income tax on taxable pay, against the employee's tax status and the period's bands.
- Compute social contributions — often on a different base from income tax, with their own thresholds.
- Apply post-tax deductions: loan repayments, union dues, court orders, anything that does not reduce tax.
- Net pay is what remains, and it is what reaches the bank.
The step most often mishandled is the second. Whether a deduction is pre-tax or post-tax is a legal question, not a preference, and getting it wrong misstates tax for every affected employee in every period until it is caught.
Employer cost is not employee deduction
Two different money flows that newcomers routinely conflate. Employee deductions come out of gross pay — the employee earned it and part is withheld. Employer contributions are additional, paid by the business on top of gross.
| Line | Amount | Whose cost |
|---|---|---|
| Gross pay | 5,000 | Employer |
| Employee pension (5%) | (250) | Employee — from gross |
| Income tax | (820) | Employee — from gross |
| Employee social contribution | (400) | Employee — from gross |
| Net pay | 3,530 | To the employee |
| Employer pension (3%) | 150 | Employer — additional |
| Employer social contribution | 690 | Employer — additional |
The employee sees 3,530. The business spends 5,840. The gap between gross and true cost is typically 15–25% depending on jurisdiction, and budgeting headcount from gross alone understates the cost of hiring by exactly that margin.
What posts to the ledger
One run produces one journal, and it is rarely the two-line entry people expect. Taking the figures above:
| Account | Debit | Credit |
|---|---|---|
| Wages expense | 5,000 | |
| Employer pension expense | 150 | |
| Employer social contribution expense | 690 | |
| Net wages payable | 3,530 | |
| Income tax payable | 820 | |
| Social contributions payable | 1,090 | |
| Pension payable | 400 |
Note that the expense lines are the employer's total cost, and every withholding becomes a liability rather than a reduction in cost. Those liabilities clear when the money is actually remitted — to the employee on payday, to the tax authority and the pension provider on their own schedules.
Which is why the payable accounts should be reconciled every month. A balance that keeps growing in a tax payable account means remittances are being missed, and that is a problem with a deadline attached.
Starters, leavers and mid-period changes
Full-period employees are arithmetic. Everything interesting in payroll happens to people who were not employed for the whole period, and proration is where most disputes start.
The problem is that there is no single correct method, only a policy that must be applied consistently and stated in the contract. The three common bases produce different answers for the same person.
| Basis | Method | Joined 18th of a 30-day month |
|---|---|---|
| Calendar days | Days employed ÷ days in month | 13/30 = 43.3% |
| Working days | Working days employed ÷ working days in month | 9/22 = 40.9% |
| Annual divisor | Annual salary ÷ 260 × days worked | Fixed daily rate |
On a 60,000 annual salary those give roughly 2,165, 2,045 and 2,077 for the same person's first month. None is wrong; picking one and applying it to everybody is what matters. The annual-divisor method is usually the fairest, because calendar-day proration quietly pays people differently depending on which month they joined.
Leavers add their own complications, and they come with deadlines:
- Accrued but untaken holiday is normally payable, and the balance has to come from the absence system rather than from memory.
- Notice pay may be taxed differently from ordinary pay depending on jurisdiction and whether it is contractual.
- Recoveries — a season ticket loan, overpaid holiday — need a lawful basis to deduct, and there are limits on how much of a final payment can be taken.
- The leaving date drives statutory filings, and getting it wrong creates a correction with an external deadline rather than an internal one.
Mid-period changes follow the same logic: a pay rise on the 12th means two rates in one period, prorated on the same basis you use for starters. Systems that only hold one current salary per employee cannot do this correctly, which is why effective-dated salary records matter more than they first appear.
Why a run locks
Once a payroll is committed it should not be editable, and the reason is that it has already had consequences outside the system: payslips issued, a bank file sent, statutory filings made against those figures.
Editing a committed run would silently desynchronise the ledger from what was filed and from what people were actually paid. So corrections are made by posting something new rather than by changing something old.
- An adjustment in the next period: the simplest route for an underpayment or a missed deduction, and usually correct when the error is small and recent.
- A reversal and reissue: the run is reversed in full and recalculated. Appropriate when the error affects statutory figures and the period is still open.
- An off-cycle run: a separate payment outside the normal schedule, used when someone cannot wait — a missed starter, a termination settlement.