What is payroll processing? How to process payroll

As an HR or payroll manager, you have the critical responsibility of ensuring everyone is paid correctly and on time. Even one mistake can put employees’ trust and the organisation’s reputation at risk.

Research shows that workers would find another job if their employer paid them incorrectly even once.

Over half would lose trust in their employer and resent them.

Read this article for a list of key tasks that you have to cover as an HR or payroll manager, and learn more about payroll processing in South Africa too.

Here’s what we cover:

What is payroll processing?

Payroll processing is the administration of employee pay based on employee type, status, salary, wages, and deductions.

It also involves filing reports and paying employment taxes to SARS (South African Revenue Service).

These calculations must be made in enough time to follow the organisation’s pay schedule, and in compliance with applicable regulations including the Basic Conditions of Employment Act (BCEA).

Payroll processing can be complex to manage because of its many varying factors, such as:

• Pay rates
• Employee classifications
• PAYE tax brackets
• UIF and SDL contributions
• Employment Tax Incentive claims
• Promotions and salary changes
• Employee turnover
• Terminations

It’s essential to have checkpoints in place at the critical points of payroll processing for as much error prevention as possible.

Key elements of payroll processing

Here are 10 things that HR managers must do to ensure these calculations are accurate.

1. Start with clean data

Common mistakes such as employee misclassifications (such as typos, spelling errors or incorrect information) happen during onboarding, which impacts your employees’ medical aid, retirement benefits, and tax withholdings.

Add a checkpoint here to confirm the employee classification is correct and for your employee to verify their personal information, ID number, and tax reference number are accurate before their first payroll run.

From February 2026, SARS will strictly enforce Income Tax numbers. You won’t be able to submit reconciliations without valid tax numbers for all employees.

2. Verify timesheet information

For your timesheets, you should have a system in place that checks for inconsistencies with employee type, hours worked, and pay scale.

A preventative measure here reduces the risk of overspend on payroll and ensures you’re meeting National Minimum Wage requirements (R28.79 per hour from March 2025).

3. Know your total payroll costs

You need to know how much each employee will cost the business beyond their wages to spot inconsistencies during each pay period.

Always factor in gross pay, PAYE tax, UIF contributions (2% split between employer and employee), SDL (1% if your annual payroll exceeds R500,000), medical aid tax credits, retirement fund contributions, tips, bonuses, and any Employment Tax Incentive claims.

Using a payroll budget will help you to track and stay on top of costs related to your people processes.

4. Produce and distribute payslips

You must give each employee a payslip detailing their:

• Gross pay
• Deductions
• Net pay
• Hours worked for that pay period

Payslips should also include your employee’s tax reference number, UIF contributions, employer contributions, and leave balances.

You can either print payslips or send them electronically through secure email or an employee portal.

5. Make payments and file reports on time

Every month by the 7th, you have to submit an EMP201 declaration to SARS reporting the PAYE tax, UIF, and SDL you owe for the previous month.

SARS will send you a late filing notice if you don’t submit an EMP201 or send one late. It can also charge you a penalty (10% of the amount owed plus interest) unless you have a valid reason for reporting late.

Late, missing or incorrect payroll reports can affect your employees’ tax status and trigger audits.

You should keep a schedule of essential payroll dates, including public holidays, that impact closings.

6. Complete bi-annual reconciliations to prepare for the next tax year

South Africa operates a bi-annual reconciliation system. You need to reconcile twice yearly:

• Interim reconciliation (March to August, due by 31 October)
• Annual reconciliation (March to February, due by 31 May)

These EMP501 reconciliations must match your monthly EMP201 declarations, actual payments made to SARS, and employee tax certificates (IRP5/IT3a).

After reconciliation, you’ll need to give your employees their IRP5 or IT3a certificates and report any employee expenses and benefits.

7. Keep excellent records

SARS can check your files at any time.

By keeping excellent records for at least five years, you’ll be able to respond quickly if either SARS or one of your employees has any queries regarding payroll data.

Your policies need to be clear and documented so anyone can follow them.

8. Keep up with the minimum wage

The National Minimum Wage is legally binding and changes regularly. From March 2025, it’s R28.79 per hour.

The National Minimum Wage is the hourly rate to which all employees (with limited exceptions) are legally entitled.

Only cash wages count towards meeting this requirement; allowances for transport, accommodation, and similar benefits don’t count.

9. Keep up with all payroll legislation and compliance

Staying on top of payroll legislation can be challenging because laws are continually changing.

The Employment Tax Incentive thresholds, PAYE tax rates, and BCEA requirements are examples of how legislation can impact payroll.

You should take advantage of resources such as the SARS website to understand what changes will mean for payroll as they happen.

Attending payroll seminars, watching webinars and going to industry conferences can help to enhance your knowledge too.

10. Simplify payroll tasks with technology

Managing the many moving parts of payroll is a lot to juggle.

There are software solutions that use automation, smart data and connectivity to save you time on manually uploading payroll data.

This can help you to generate reports quickly, reduce errors and maintain compliance.

A modern cloud payroll software solution can simplify your payroll operations, so you can focus on strategic ways that the HR function can help the business to grow.

How does the payroll process work?

If you’re doing payroll processing for the first time, you’ll need to register your business as an employer with SARS, so you can pay PAYE tax, UIF, and SDL for your employees.

You can register online through SARS eFiling up to 21 business days before your first pay date.

SARS will then send you a PAYE reference number, which is critical for your business to run payroll.

In order for your business to be legally compliant, you’ll also need to choose a payroll processing solution that makes accurate and timely payments.

There are three options:

• Your business can run its own payroll by using SARS-recognised payroll software
• If you have fewer than 10 employees, you can use SARS’s free Basic PAYE Tools (or you can use payroll software)
• Alternatively, you can outsource payroll processing to a payroll provider, which can be anything from a qualified accountant to a dedicated payroll bureau

9 steps of the payroll process

Once you set up payroll, the payroll process consists of 9 important steps:

1. Collect employee information

Your business must collect and maintain accurate and up-to-date employee information, including employment contracts, ID documents, tax reference numbers, and bank details verified against bank records.

For example, when a new team member joins a retail shop, the HR manager collects their ID document to verify their details with Home Affairs, obtains their tax reference number, and puts their bank details on file in order to pay their salary.

2. Record hours worked

When processing the pay of employees who work for your business on an hourly basis, you must record the number of hours worked, the amount of overtime completed and any absences from work.

A consulting firm, for example, uses a digital timesheet system to record employees’ start and finish times. This ensures that employees receive pay for the correct number of hours.

3. Calculate gross pay

Work out gross pay by calculating the employee’s wages for hours worked, adding applicable allowances (travel, housing, etc.), including overtime at the correct rates (1.5 times for weekdays and Saturdays, double time for Sundays and public holidays), and adding bonuses or commissions.

For instance, an estate agent might add commission earnings to the basic salaries of its agents and these additions must be reflected in payroll.

4. Calculate PAYE tax

An employee’s PAYE tax depends on their income level, with rates ranging from 18% to 45% for the 2025/26 tax year.

The calculation must also account for tax rebates (R17,235 annually for all taxpayers, with additional rebates for those over 65) and medical aid tax credits (R364 monthly for the member and first dependant, R246 for additional dependants).

If your business is using payroll software, you should be able to access these features as part of the package (but check with the vendor if you’re unsure).

5. Calculate UIF and SDL deductions

UIF contributions total 2% of employee earnings, split equally between employer (1%) and employee (1%). These are capped at R17,712 monthly earnings, creating maximum contributions of R354.24 per employee per month.

SDL operates differently. It’s charged at 1% of total payroll and paid entirely by the employer. SDL only applies if your annual payroll exceeds R500,000.

6. Calculate net pay

Once you’ve worked out PAYE, UIF, SDL, and all other deductions (pension contributions, medical aid, garnishee orders), subtract them from the gross pay.

The resulting figure is known as the net pay, or employee’s take-home pay, which is the amount your employees will actually receive for the period.

7. Approve payroll

Typically, the payroll manager or the head of HR is responsible for approving the payroll.

But before payroll processing begins, it’s essential for them to do a comprehensive review to ensure that employees will be paid correctly and that your business will comply with all relevant laws.

8. Pay employees

You can pay your employees via EFT (electronic funds transfer), which is the most common method in South Africa.

Regardless of the payment method, your business must pay its employees by the agreed pay date and issue them with a payslip, either electronically or in hard copy.

It’s a legal requirement under BCEA that the payslip shows employees’ earnings before and after deductions, the amount of deductions and the number of hours worked.

9. Submit EMP201 to SARS

Submit your monthly EMP201 declaration to SARS on or before the 7th of the following month. This reports employees’ pay, PAYE tax deducted, UIF and SDL contributions, and any Employment Tax Incentive claims.

In addition to submitting the EMP201, you must pay SARS the amounts owed by the 7th of the month. Late payment triggers automatic 10% penalties plus interest.

How long does payroll take to process?

Payroll processing times vary depending on the size of your business, how many employees it has, the payment method it uses and whether or not you use automated software.

Small businesses should typically expect the payroll process to be completed within one to three days, depending on:

• The accuracy of the data: incorrect data slows down the process
• The number of employees: the higher this is, the slower the process will be
• The complexity of the payroll structure: the more complicated it is, the longer the process will take
• Payroll frequency: weekly or fortnightly pay runs take more time and resources than monthly pay runs
• Manual versus automated payroll: automated payroll is substantially quicker and more accurate than manual payroll
• Internal versus outsourced payroll: outsourcing payroll processing tasks to third-party service providers initially takes a little longer than internal payroll, but it eventually speeds up the process and frees up internal resources to perform other tasks

Payroll process tasks to manage

Beyond the monthly payroll process, your business is legally required to keep payroll records for at least five years (SARS requirement) or seven years (Companies Act). This will ensure that it’s ready for an audit, if one is ever carried out.

Your business is also responsible for reporting any changes to employee details to SARS, such as updated bank details or changes to tax reference numbers.

And following the end of a tax year (28/29 February), as part of your payroll year end duties, your business will need to:

• Complete the bi-annual EMP501 reconciliation (due by 31 May)
• Issue IRP5 or IT3a certificates to employees detailing their pay and deductions
• Report any employee benefits and expenses
• Complete any workplace retirement fund duties (if your business has eligible employees)

Final thoughts

Payroll processing is a sizable yet manageable task for your business.

By following the key steps, from recording employee hours to submitting EMP201 declarations to SARS, your HR manager or payroll manager can rest assured that their processes are efficient and compliant.

And by using payroll software, they simplify the process further by pooling all the critical information into one place, automating repetitive tasks and providing transparency for the purposes of compliance and auditing.

This transforms your payroll into a seamless process, helping you pay your team accurately, on time, and with confidence.