Payroll management is the process of compensating employees for their work during the previous month. It also includes maintaining all necessary financial documentation to conduct a smooth payroll process.
To minimize human errors, businesses today use a payroll management system to streamline the procedure and avoid mistakes. In our guide, our experts discuss payroll management systems, explaining what they are and then sharing the top three tools that can help businesses pay their employees.
Table of Contents
- What Is a Payroll Management System?
- What Are the Functions of a Payroll Management System?
- 3 Methods of Managing the Employees' Payroll System
- 3 Paycheck Management Phases
- Why Is Paycheck Management Important? 6 Main Benefits
- How To Choose a Payroll Management System: 5 Expert Tips
- Top 3 Payroll Management Systems
- Payroll Management System Takeaways
- Payroll Management System FAQs
What Is a Payroll Management System?
The payroll management system is a set of steps and auxiliary tools that help organizations manage employees’ wages and taxes. These systems are primarily used to track workers’ hours, holidays, payment sanctioning, and other aspects of payment processing.
What Are the Functions of a Payroll Management System?
The purpose and function of a payroll management system can be many, including:
- Calculating Employees Wages
- Deducting Taxes from Salaries
- Adhering to Payroll Recordkeeping Requirements
- Providing Employees With Payment Statements
1. Calculating Employee Wages
The employer must keep accurate track of the working hours of each non-exempt employee during each workweek to calculate their wages. The non-exempt employees' hours must be tracked to ensure they are adequately paid for any overtime work, which is a legal obligation of every employer.
Salaried employees’ gross pay is the product of their yearly salary divided by the number of pay periods a year, so time tracking isn’t as important.
Employers must process payroll deductions once gross wages are calculated for each employee. These include:
- Taxes: Deducted based on employees’ total taxable salary and withholding certificates.
- Obligatory deductions: These are processed if the employee receives a court order notifying them of withholding their child support, IRS, or tax levies.
- Voluntary deductions: Deducting health or life insurance, retirement plan contributions, union dues, or any other purpose the employee wishes to take away from their salary.
2. Deducting Taxes From Salaries
As part of regular payroll management, employers should also calculate and withhold local, state, and federal taxes from their employee’s salaries.
The organization must also match their employees’ contributions to Medicare and Social Security (Federal Insurance Contribution Act). In some states, employees must contribute to state unemployment, paid family leaves, and disability programs through payroll deductions.
3. Adhering to Payroll Recordkeeping Requirements
Government agencies require employers to keep their payroll records for each employee, including information such as their:
- Name
- Occupation
- Address
- Social security number
- Day and time of the employee’s beginning of the workweek
- Regular hourly pay rate
- Number of hours worked
- Gross wages
- Payroll deductions
- Overtime earnings
- Net salary
- Taxes deducted
- Payment dates, etc.
Employers must keep the federal tax purpose records for at least four years, while all others must be maintained according to laws applicable to a specific business.
4. Providing Employees With Payment Statements
In most US states, companies must also provide employees with pay statements for every pay period. These statements must contain information such as pay rates, hours worked, gross pay, net pay, and deductions. A payroll management system can streamline this process and make it more efficient. Additionally, there are laws governing electronic pay statement deliveries and how employees can access them.
3 Methods of Managing the Employees' Payroll System
Your company can choose between several different payroll management system methods, depending on your budget and business requirements.
- Payroll management software: These tools can help employers calculate gross wages, deductions, and net pay with great accuracy by automating certain tasks, thus saving time.
- Outsourcing payroll to specialized agencies: Companies that do not have the in-house capacity to perform payroll processing can outsource these services to a professional payroll company that takes care of their tax deposits, compliance, and reporting.
- Manual payroll management: Smaller companies with up to several employees may decide to perform payroll management themselves using methods such as spreadsheets. This is a cost-effective way to manage payments, but as we said, it also increases the risk of costly mistakes.
3 Paycheck Management Phases
The payroll management process consists of the following phases, regardless of the method chosen:
- Pre-payroll: At this stage, the employer needs to collect relevant information for the pay period based on the regulatory requirements and company policies such as non-exempt employees’ work hours, exception time, employee adjustments like salary changes, benefit deductions, and tax withholding. This information is vital for processing payroll.
- Payment calculation: The employer company calculates the total gross pay for each employee during the pay period while withholding deductions and payroll taxes. This results in total net pay, which is the sum the employee receives.
- Post-payroll: Finally, the employer deposits their own taxes by the required due date and processes related payments. When compensating their employees with their salary, they add a pay stub and wage statement, as required by most jurisdictions.
Why Is Paycheck Management Important? 6 Main Benefits
Knowing how to do payroll efficiently improves employee engagement and satisfaction, facilitates business processes, and boosts regulatory compliance. Employers can face wage claims and pricey penalties without an accurate system of paying their employees, maintaining payment records, and filing taxes.
The benefits of a payroll management system include the following:
- Better compliance: Payroll software and service providers notify the organizations about eventual changes in tax and employee regulations to keep their business on track and compliant.
- Accurate calculations: A sturdy payroll process makes sure payroll deductions, tax payments, and wage calculations are well-calculated and correct.
- Tax forms access: Payroll software and payroll companies provide easy access to obligatory payroll and taxation documents, such as Form 1099, Form I-9, Form W-4, and others.
- In-depth bookkeeping: With digital payroll control systems, employers can create employee profiles with diverse records that can be downloaded and aggregated for easier insight and better regulatory adherence.
- Flexibility of payments: A payroll management system, especially one that uses software, can facilitate alternative payment methods and direct deposits.
- Reduced errors: Professional agencies or specialized payroll software prevent errors by integrating with HR tools that track time and reduce repetitive data entry.
How To Choose a Payroll Management System: 5 Expert Tips
To find the best payroll management solution supported by integrated technology and specialized knowledge, consider these aspects in your search:
- Your budget and projected staff growth: If your organization anticipates big employee growth in the future, you may be willing to spend more money on a robust solution that can scale with your company. On the other hand, payroll for small businesses is more constricted since they have limited budgets, meaning they’re more likely to opt for basic payroll management functions.
- The provider’s reputation and experience: Payroll service vendors with a long track record in your industry may have a long list of clients who have faced the same challenges as you and whom you can reach out to for an independent opinion on the vendors’ services. The more years the vendor has spent working with clients in a specific industry, the more likely they are to keep up with relevant laws and regulations.
- The security of their services: Look for a payroll service provider or payroll software that uses encryption, multi-factor authentication, backups, and other essential techniques to maintain the confidentiality and security of your sensitive data. Payroll service providers that can provide these should also demonstrate and list all the security steps they are taking on their website and portfolio to ensure overall data safety.
- Software compatibility with other programs: In case you opt for payroll software, don’t forget to check whether it is possible to integrate it with the programs and tools you are already using, such as time-tracking and HR software.
- Reporting capacities: Having access to new hire payroll reports, annual reports and other vital documents that outline your payroll services history and performance is important for keeping up with government compliance.
Top 3 Payroll Management Systems
Here are three top-notch online payroll management system options that can streamline your payroll processes and ensure accurate employee payments:
1. Gusto
Gusto is a user-friendly, comprehensive payroll system management that allows you to run your payrolls in minutes. You can use it for both employees' and contractors' payments and benefits like health and retirement.
Gusto is an online payroll management system that doesn’t just calculate your taxes; it files them with the appropriate government agencies every time you run the payroll. Its features work seamlessly on one platform — health insurance, 401(k), workers’ comp, time tracking, PTO, and more.
Key features of payroll management system:
- Automated payroll calculations
- Tax filing and payments
- Direct deposit and pay options
- Employee self-service
- Benefits administration
- Time tracking integration
- Compliance assistance
- Reporting and analytics
Pricing:
Simple plan: $40/month plus $6/month per person
Plus plan: $80/month plus $12/month per person
Premium plan: available at request
2. ADP
ADP is an award-winning payroll and HR management system that assists businesses of all sizes in efficiently managing their payroll processes. It provides various payroll features that save time and keep you from making costly mistakes.
ADP simplifies payroll calculating and administration, ensures accurate and timely payments, helps businesses comply with tax and labor regulations, and always stays on top of changing rules and regulations, making it a valuable tool for payroll management.
Key features of payroll management system:
- Automated online payroll
- Payroll tax calculation and payment
- Federal, state, and local compliance
- Simple integration with time-tracking and HR
- Easy-to-use self-service app for employees
- Expert support
Pricing:
- ADP offers four payroll plans: Essential, Enhanced, Complete, and HR Pro. Price is available on request.
3. Paychex
Paychex is an all-in-one, award-winning online payroll management system and HR solution that simplifies business processes. Its advanced features allow you to calculate, file, and pay payroll taxes accurately and effortlessly and stay compliant with laws and regulations.
The tool provides 24/7 US-based support and a mobile app for easier access to information. Using Paychex, businesses can save time, improve efficiency, and focus on their core operations while ensuring accurate and streamlined payroll management.
Key features of payroll management system:
- Automated payroll calculations
- Tax filing and payments, direct deposit
- Employee benefits
- Time and attendance tracking
- Compliance assistance
- Reporting and analytics
- Mobile access
Pricing:
- Custom, available on request.
Payroll Management System Takeaways
A reliable payroll management system consists of either third-party payroll processing services provided by a specialist company or payroll management software. Alternatively, companies can go the in-house route and hire accountants who would manage the payroll process themselves.
Whichever method you opt for, the four main functions of any payroll management system include:
- Calculating employees’ wages
- Deducting taxes from wages
- Complying with bookkeeping requirements
- Providing payment statements to employees
At each stage of the payment process — pre-payroll, payment calculation, and post-payroll — you should take the necessary steps to provide your employees and the authorities with the documentation and proof of compliance required.
A well-defined, healthy payment management system can bring your company plenty of long-term benefits, such as scalability, better compliance, payment flexibility, accurate calculations, and reduced errors.
Payroll Management System FAQs
1. What systems do companies use for payroll?
Some of the best systems companies use for payroll are Gusto, Paychex Flex, QuickBooks Payroll, Workful, OnPay, ADP, Payroll4Free, and Rippling.
2. How does the payroll management system work?
The payroll management system automatically calculates the correct payment for employees based on the number of their working hours and accurately manages the payment of salaried employees.
3. Which payroll method is best?
Choosing between the three payroll management methods (manual, software, or outsourcing) mainly depends on your needs and budget. Small businesses usually go for the manual payroll method, i.e., conducting it themselves since this is a more budget-friendly option.
However, bigger companies are advised to use an online payroll management system, so they ease the job of their finance department. Alternatively, if you don’t have a payroll expert, consider outsourcing it to professionals. However, note that both options are more expensive.
