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What Is a Payroll Management System & Why Is It Important?

  • Payroll
  • Article
  • 6 min. Read
  • Last Updated: 12/05/2023

A business owner uses a payroll management system to streamline numerous payroll tasks

Table of Contents

Navigating the intricacies of payroll management can often feel daunting. That's because the steps required to pay employees each pay period accurately require time and resources you may not have. Fortunately, the right payroll management system can help streamline the process. But what exactly does an effective payroll system look like, why is it important, and which specific tasks can it help you complete? Keep reading for answers to these questions and more.

What Is a Payroll Management System?

Completing payroll involves many key steps, a few of which include accurately calculating employee wages, making the appropriate deductions, processing payroll taxes, and accurate recordkeeping. A payroll management solution systematizes these tasks, helping businesses manage payroll operations and fulfill their obligations to pay employees each pay period. Depending on the business and its needs, payroll management systems can look like a manual solution, in-house software, or outsourcing — each explained in more detail later in this article.

Why Is Payroll Management Important?

When you consider what payroll management involves — such as calculating wages and deductions, depositing and filing payroll taxes, and maintaining accurate records — there's so much at stake, including critical obligations to appropriate government agencies and workforces who expect on-time paydays. Payroll management requires a system that helps mitigate errors as much as possible. Otherwise, businesses may face fines and penalties, wage claims, or disgruntled workers.

What Are the Different Types of Payroll Management?

In general, businesses can choose between a few methods for managing their payroll process, from a do-it-yourself approach to an outsourced payroll management solution. Depending on factors such as how much control or oversight you want to have, cost considerations, and time commitments, you may choose one of these payroll management systems:

  • Manual payroll management: Businesses with a limited budget, just a few employees, or who want to maintain total control and oversight over the payroll process may choose a DIY approach to payroll management. It's important to note that manual or semi-automated processes, such as spreadsheets and built-in templates, can be time-consuming and may lead to errors that can accumulate costly fines or penalties; consider also that the payroll process gets more complex as more employees come on board. A DIY payroll system can also expose your company to unnecessary risks. For example, keeping on top of key tax-filing deadlines and reporting the correct amount of taxes to the appropriate tax agencies will fall entirely on you. In contrast, payroll software can automatically help you keep track of key dates and make the correct calculations. Ultimately, an entirely in-house payroll process can cost you more in the long run than what you may save initially.
  • Payroll management software: Payroll software offers a helping hand while allowing flexibility for owners looking to maintain oversight and control over the process. Payroll management software can streamline the time and effort required to complete numerous payroll tasks, including calculating payroll amounts, generating in-house reports, preparing and remitting state and federal payroll taxes and returns, or simply printing, signing, and distributing paychecks. Payroll management software also may work well for growing businesses since integrated payroll and benefits data may help business owners to easily add and remove employees from benefits programs, accurately calculate amounts deducted from each paycheck, and provide employee benefits information directly.
  • Comprehensive outsourcing: Businesses may consider comprehensive outsourcing, such as a professional employer organization (PEO), if they're looking to take payroll management off their to-do list or can't afford to hire in-house HR and payroll administrators but still need to increase efficiencies in these areas. It can also be a good business strategy if you want a higher return on investment in certain business areas. PEOs offer assistance with payroll administration and taxes, HR and benefits administration, compliance, workplace safety, talent management, and other HR tasks.

What Are the Functions of a Payroll Management System?

At a high level, a payroll management solution should give you the flexibility to complete the payroll process as accurately and efficiently as possible. More specifically, key features of an employee payroll management system include the following:

Calculating Employee Wages

Based on data compiled in your time tracking method, your payroll system should be able to calculate employee wages accurately and account for wage garnishments, benefits contributions, payroll deductions, and payroll taxes.

Withholding Payroll Taxes

Employers' payroll tax responsibilities can be extensive. They include calculating income tax withholding (federal, state, and local), depositing payroll taxes, and filing various returns to report payroll activities. A payroll management system can help you stay on top of payroll tax responsibilities, including calculating, paying, and filing assistance.

Complying With Payroll Recordkeeping Requirements

Under state and federal statutes and regulations, businesses must maintain certain payroll records for a specified period (even after an employee has left the company) and make them available to the appropriate agencies. Some local jurisdictions may also have recordkeeping requirements that vary from federal and state requirements. An effective payroll management solution uses a central, secure electronic system to house employee records (as opposed to maintaining paper files) so that you can quickly access information such as earnings records or Form W-4 and state withholding certificates.

Providing Employees with Pay Stubs or Statements

Most states require businesses to provide employees with statements that accompany their wages. Specific requirements will vary by state. For instance, some states require providing paper or electronic access, while others allow employees to opt in or out of receiving electronic pay slips. While state law will also dictate what specific information needs to be on the statement, generally, the rates of pay, hours worked, gross pay, net pay, and deductions must be displayed. An effective payroll system can help you generate these slips with the appropriate information.

What Are the Benefits of Payroll Management Software and Service?

If you feel stretched thin by employer responsibilities around payroll administration, legal compliance, data security, and recordkeeping, you may consider using a payroll management software or service provider. There's much to gain with payroll management software, with benefits such as:

  • Time saved: Payroll management software can make the process more efficient versus taking time to input data manually every pay period.
  • Reduced payroll errors: Integrating payroll software with other HR and time-tracking systems may eliminate the time-consuming and error-prone process of repetitive data entry.
  • Compliance peace of mind: Keeping up with ever-changing payroll tax laws can be challenging, and penalties for errors can be significant. Payroll management technology keeps your payroll administration in line with applicable regulatory changes.
  • Money saved: Consider the costs saved on printing and distributing paychecks and generating reports for in-house and accountant use. Payroll software performs these tasks automatically, and often digitally.
  • Greater security of payroll data: Most payroll providers offer systems with security features for sensitive employee and company data. They employ redundant backup systems, multiple server locations, and the latest technology to protect client data.
  • Employee satisfaction: An integrated payroll system with employee self-service options empowers your staff to handle common tasks independently, including submitting time-off requests, printing tax documents, and updating benefits and tax allowance forms.

How To Choose the Right Payroll Management System for Your Business

Because the payroll process impacts everyone in the business, consider multiple factors during the payroll management system selection process. Some questions you'll want to consider include:

  • What are the different types of payroll systems available to my business? Whether you're considering a PEO, payroll service provider, reporting agent, or other payroll service setup, take the time to understand what differentiates these systems.
  • Do similar businesses successfully use this system? Ask for referrals and references, read reviews online, and do your due diligence to understand how businesses like yours (size, industry, etc.) use the system.
  • Is this an established and reputable provider? In addition to getting referrals, do your homework on the payroll systems you're considering, and look for providers with a record of accuracy and reliability.
  • What kind of assistance does it provide? Payroll is too important to leave to chance, so you should choose a system that offers support if you run into any issues. This might look like around-the-clock support, a single point of contact, or periodic check-ins to help ensure the services meet your business's needs.
  • How does the technology actually work? Request a trial of the provider's payroll software to determine if it's easy to use. Try accessing data from a smartphone or other mobile device. Look for outmoded technology and ask how often the provider makes updates to improve the experience.
  • What's the cost? Look for upfront and transparent pricing, whether you have a minimal budget or additional funds for more advanced options. To avoid the unpleasant surprise of hidden fees, ask for an explanation of the pricing structure, specifying any supplemental charges and processing fees. See if the payroll management company is willing to disclose the possibility of pricing changes.
  • Are there security features in place? Payroll involves highly sensitive employee information. You should feel confident in the system's security practices, including having a reliable server with a high uptime rate and regularly updated applications to meet the latest protocols.

Get Started with a Payroll Management System

Considering the time and cost savings a payroll management system can deliver, now is a great time to find a provider that can work closely with your business. Explore our payroll processing solutions built to help businesses of all sizes meet their needs.

Frequently Asked Questions: Payroll Management Systems

  • What Is the Meaning of Payroll Management?

    What Is the Meaning of Payroll Management?

    Payroll management is the ongoing process of paying employees and completing tasks related to payroll administration. This includes completing and keeping records of employee wages, deductions, and tax liabilities. Employers may meet these responsibilities by using payroll software or outsourcing through a PEO.

  • Is a Payroll Management System the Same As Payroll Software?

    Is a Payroll Management System the Same As Payroll Software?

    Payroll management systems and payroll software, while often used interchangeably, are distinct terms. A payroll system is a general term for handling everything related to paying employees and filing payroll taxes. The method that you choose to complete these tasks may be with payroll software from a third-party provider. Still, you can also choose a do-it-yourself process (such as using Excel spreadsheets and manual calculations), or you can opt for a more comprehensive payroll outsourcing option.

  • How Do You Manage Payroll?

    How Do You Manage Payroll?

    Once you have employees, you must pay them and handle applicable taxes every pay period. There are many steps involved in managing payroll, and some of the key tasks include:

    • Classifying workers correctly.
    • Collecting and tallying the hours worked by each employee.
    • Paying the right amount, including double-checking all employee information, tax withholding amounts, and payment information.
    • Processing payroll on time every pay period.
    • Depositing and reporting employment taxes correctly to all federal, state, and local tax authorities.
    • Printing and signing paychecks and administering payments via any other methods, such as direct deposit.

    These and other responsibilities comprise the payroll process, which you or another staff member can do, or you can find an accountant or payroll provider to help manage these tasks.

  • Is Payroll Management Hard?

    Is Payroll Management Hard?

    It depends on how familiar the person managing payroll is with the process. Still, most people would agree that payroll management is a complex process, as evidenced by the many steps listed in the question above. Getting help from a third party with payroll management isn't right for every small business, but it's a boon to many who feel stretched thin by the administration, compliance, data security, and recordkeeping aspects of payroll.

  • What Are the Advantages and Disadvantages of Using a Payroll Management System?

    What Are the Advantages and Disadvantages of Using a Payroll Management System?

    The advantages of a non-manual payroll management system are legion, including time and cost savings, and improved security of payroll data. While many potential disadvantages can be mitigated by carefully selecting a strong payroll company, some cons may include the cost of services, the need to take additional steps to make corrections to payroll errors or obtain wage and employee data if the information resides on the provider's server, and risk of the vendor going out of business.

Professional employer organization (PEO) services provided by Paychex Business Solutions, LLC (Florida employee leasing license GL7), Oasis Outsourcing, LLC (Florida employee leasing license GL42), and their affiliates, which are licensed or registered to provide PEO services where required by law.


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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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