Payroll Management System [2023 Guide]

Payroll Management System [2023 Guide]
Article by Zarah Ariola
Last Updated: September 29, 2023

Payroll mistakes can have severe consequences: trouble with employees and government authorities. To avoid them, businesses must implement a reliable payroll management system. This article explains all you need to know about it.

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. They are mostly used to keep track of workers’ hours, holidays, payment sanctioning, and other aspects of payment processing.

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What Are the Functions of a Payroll Management System?

  1. Calculating Employees’ Wages
  2. Deducting Taxes From Salaries
  3. Adhering to Payroll Recordkeeping Requirements
  4. Providing Employees With Payment Statements

The purpose and the functions of a payroll management system can be many and include:

1. Calculating Employees’ 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. Also, the organization must match their employees’ contributions to Medicare and Social Security (Federal Insurance Contribution Act). In some states, employees must contribute to state unemployment, paid family leave, 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 with every salary.

For each salary period, these statements must contain information such as pay rates, hours worked, gross pay, net pay, and deductions. Some laws govern electronic pay statement delivery and how employees can access them.

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3 Methods of Managing the Employees' Payroll System

Your company can choose between several different payroll management methods, depending on your budget and business requirements.

  1. Payroll management software: Saving time and automating certain tasks, these tools can help employers calculate gross wages, deductions and net pay with great accuracy.
  2. 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.
  3. 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 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.

  1. 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.
  2. 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, that is the sum the employee gets in their bank account.
  3. Post-payroll: Finally, the employer deposits their own taxes by the required due date and process related payments. When compensating their employees with their salary, they add a pay stub and wage statement, required by most jurisdictions.

Why is Paycheck Management Important and What Are Its Benefits?

Having well-defined payroll management solutions 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 in order 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: Payroll management system, especially the 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

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, small businesses with limited budgets are likely going 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 the 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.

Best Payroll Management Systems

  1. Gusto
  2. ADP
  3. Paychex

Here are three top-notch payroll management systems that can streamline your payroll processes and ensure accurate employee payments:

1. Gusto

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 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


  • 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 taxes 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 at request.

3. Paychex

Paychex is an all-in-one, award-winning payroll 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 that 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.

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