Payroll Management System | 4 mins read

How a Payroll Management System Works

how a payroll management system works
Hanh Truong

By Hanh Truong

Integrating a sound payroll management process into the workplace is the best way to ensure that employees are paid accurately, and to streamline calculations for income deductions and taxes.

Using updated software to manage payroll will also help all sized businesses as a whole, as it complies to government and employment laws. Here is a guide on what these systems are and how they benefit both employers and employees.

What is a Payroll Management System?

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A payroll management process records employees' wages according to hours they have worked and accurately determines income tax withholdings and deductions. These web-based systems are also responsible for making sure that all paychecks are delivered to employees on time, whether through direct deposit or by print.

These payroll solutions have key features and are programmed with the latest state, federal, and employment tax requirements, removing the strain from employers of trying to keep up with the ever-changing labor law regulations.

Three Steps of the Payroll Process
1. Pre-Payroll
Before computing paychecks and handing them out to employees, employers need to establish employment policies on pay, hours, and benefits.

Once completed, the data should be collected and validated-

- Collect Data
For companies that have different departments, payroll administrators or human resources need to communicate with each respective manager so that they are updated with all necessary information, such as wage adjustments, current employee rosters, and employee time attendance logs.

Some software payroll systems allows for employees to manage their own time tracking and sick leave requests through self service features. This removes some of the workload from management, as well as makes the data collection process more accurate.

- Validate Input Data
At this point, payroll administrators need to review the information that was collected and inputted. Before beginning calculations, it's best to make sure that all working employees are in the payroll, inactive workers are removed, and that the data aligns with the company's employment policies.

2. Payroll Calculation
All data should be added into the management payroll system at this step. Afterwards, calculations for taxes and deductions are ready to be processed. Those responsible for payroll should review the final results to make sure that the adjustments were made accurately.

3. Post-Payroll
Payroll processing is almost done. After the required taxes and withholdings are deducted from employees' paychecks, administrators have to-

- Follow Statutory Compliances
Tax deductions go to various agencies, like Social Security, Employee State Insurance, Tax Deduction at Source, and Medicare. After the deductions are processed, the funds need to be sent to the corresponding local, state, and federal bureaus.

Because different state and local governments have their own requirements, it's integral to verify how to send these deductions. Once the money is received by the agencies, return reports are processed.

- Manage Payroll Accounting
Payroll departments, such as payroll accounting, must record and archive all transactions, return reports, and paychecks. This will help the company's management team review reports and evaluate costs of the company and financial information.

All payroll tax and data should be inputted into an accounting software or Enterprise Resource Planning software.

- Send Payouts
Paychecks can now be sent out for delivery to employees. Administrators should make sure that the company accounts have enough funds and that their bank has a salary bank advice statement for each employee, which will clearly identify which employee the paycheck belongs to.

There is payroll management software that has options for employees to personally access their checks and financial accounts online.

- Send Reports
Periodically, workforce management teams will want to have a payroll report to assess employee costs. Because data is consistently recorded during payroll management, accurate reports are easily accessible.

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The Benefit of a Payroll System

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1. Compensation
Employees must receive compensation and the best payroll systems manage all aspects of that, from salaries to bonus pay and overtime. Full service payroll management will make it easier to keep track of who needs to be paid and how much.

2. Happier Employees
Online payroll systems ensure that employees will be paid on time and in the right amount. If their pay is often late or inaccurate, it can bring down overall morale and reflect poorly on the company's management and financial status. This could either cause a higher turnover rate as employees look for a more reliable source of income, or their productivity will decrease.

3. Reputation
By following tax and employment laws, companies will have a good reputation as a legal and stable employer. Whether it is a big or small business, consumers are more likely to frequent and buy from credible establishments. Job seekers and employees will be attracted to a reputable company, rather than one that does not follow through with their financial duties.

4. Convenient Government Reporting
The best payroll software organizes financial information for employers, making it convenient to send data reports about payroll, taxes that are withheld, and employees to government agencies.

5. Comply with Labor Laws
Payroll processes will ensure that companies are following all the labor laws for their state and federal government. Advanced software will make it easy to follow the different laws for minimum wage, bonuses, overtime, and more.

6. Pay All Taxes
Similar to labor laws, there are different federal and state tax laws that companies need to follow. Payroll taxes and withheld income include, but are not limited to, employee benefits, Social Security, and Medicare. Efficient payroll services will help make tax filing less tedious and managing a company simpler.

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