25% of all workers in the US have been at the receiving end of payroll process errors and 49% of them begin the search for a new job if a payment-related error happens again.

Also, in 2020, the IRS has incurred over $6 billion in penalties over missed payments on employment taxes.

Simply put, a business cannot afford to make mistakes when it comes to paying their employees, as it gets them in hot water with their own talent as well as government authorities.

A way to avoid these mishaps is implementing a sturdy and reliable payroll management system.

In this article, we will take a good look into what makes a good payroll management system, what type of paycheck management you can opt for and how to do payroll with a solution that best fits your business purposes.

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What Is a Payroll Management System?

Payroll management system is a set of steps and auxiliary tools that help organizations manage their employees’ wages and employment taxes.

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

What Are the Functions of a Payroll Management System?

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

1. Calculating Employees’ Wages

It is the employer’s duty to keep accurate track of the working hours of each non-exempt employee during each workweek in order to calculate their wages.

The hours of non-exempt employees must be tracked in order to make sure they are properly paid for any overtime work, which is a legal obligation of every employer.

On the other hand, salaried employees’ gross pay is the product of their yearly salary divided by the number of pay periods in a year, so for them, time tracking isn’t as important.

Payroll deductions must be processed by employers 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 in case the employee receives a court order that notifies them of withholding their child support, IRS or tax levies.
  • Voluntary deductions: Deducting health or life insurances, retirement plan contributions, union dues or any other purpose that 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 employees’ salaries.

Also, the organization is required to match their employees’ contributions to Medicare and Social Security (Federal Insurance Contribution Act). In some states, employees are required to contribute to state unemployment, paid family leave and disability programs, also through payroll deductions.

3. Adhering to Payroll Recordkeeping Requirements

Employers are required by the government agencies 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
  • Numbers 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 a minimum of four years, while all others must be kept according to laws applicable to a specific business.

4. Providing Employees With Payment Statements

In most US states, it is also requested that companies provide their 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. There are also laws that govern electronic pay statement delivery and the ways in which the 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.

  • Payroll management software: Saving time and automating certain tasks, these tools can help employers calculate gross wages, deductions and net pay with great accuracy.
  • 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 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 taxes. This results in total net pay, that is the sum the employee gets in their bank account.
  • 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 matters because it improves the company’s 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.

No matter which method you opt for – using payroll management software, the services of a professional payroll company or doing it yourself – it will bring the following benefits to your organization:

  • 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

Taking your time and making some effort to pick the right payroll management system is important. Doing so can provide you with a reliable solution able to deliver timely and precise payroll processing and tax filling services.

To find the best solutions supported by integrated technology and specialized knowledge, you should 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 reports, annual reports and other vital documents that outline your payroll services history and performance is important for keeping up with government compliance.

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.

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