What is a payroll system and how does it work? - woman wrapping merchandise at a table

What is a payroll system and how does it work?

Monday, November 29, 2021

As a small business owner, you have a lot of jobs to do to run your business. That includes paying your employees on time. And while it’s probably not the most fun part of your business, it’s an integral part of keeping your business going. But payroll can be time-consuming. The good news is that payroll systems can help you run your business by streamlining the payroll process and doing a lot of the legwork for you. With less time spent on payroll, you can focus on running your business. In this article, we’ll go over payroll systems: what they are, how they work and how they can help a small business like yours. To start, let’s define payroll.

What’s payroll and how does it work? 

As a business owner, you’ve probably heard of the term payroll. At its basic level, payroll is the act of compensating the people who work for you, your employees. Usually, a business runs payroll for a specific period of time. This is usually every two weeks. During payroll, an employer calculates and then distributes employees’ wages.

But payroll is not just distributing wages to your employees. Payroll also consists of tax filing, calculating and taking out deductions for local, state and federal taxes, as well as Social Security, unemployment insurance, and any voluntary deductions from employees.  

As you can see, payroll can become complicated pretty quickly. And as your business grows and you hire more employees, this process can get even more complicated. That’s why many businesses opt to either hire an employee or a team of employees to specifically handle payroll. Outsourcing payroll to a third-party partner is also common among businesses.

Let’s take a look at how processing payroll works.

The general payroll process can be broken down into the following steps: 

  1. Determine your business’s payroll system: Decide how your business will handle payroll, either internally or externally
  2. Define your payroll policies: Determine how you will pay your employees, independent contractors and freelancers; then develop policies for leave, attendance, and benefits
  3. Collect and input employee data: Get all the necessary employee information, including bank account numbers and routing numbers so that you can set up direct deposit for each employee
  4. Implement time tracking: Introduce a method for employees to track their working hours
  5. Review timesheets: Examine employee timesheets and check for discrepancies
  6. Approve and submit payroll for payment: Confirm accurate timesheet recording, deduct any necessary withholdings, and then send for payment
  7. Save payroll records: Keep copies of payroll records for any adjustments you need to make

Now that you have a better understanding of the payroll process, let’s take a look at payroll systems.

What’s a payroll system? 

A payroll system is a series of processes that are put together to help your business complete payroll accurately and on time. Having a system helps to ensure that your business is paying its employees the correct wages for the pay period on payday. 

There are three main functions of a payroll system:

  • Calculates wages: The most important part of a payroll system is calculating an employee’s pay. A payroll system takes into account the employee’s hours and their hourly rate or salary rate to produce a gross pay amount for that employee during the time period. A system helps to calculate each employee’s paycheck more efficiently.
  • Manages taxes and deductions: After finding each employee’s gross pay amount, a payroll system calculates net pay after taking the taxes and withholdings from each paycheck. The system uses the employee’s IRS W-4 form to make these tax deduction adjustments. In addition, a payroll system can help ensure that your business complies with federal, state and local tax obligations as well. It can even fill in the necessary tax forms for your business.
  • Helps your business manage labor: Another important benefit of a payroll system is that it can help you manage labor. Many payroll systems can generate custom reports to help your business analyze its payroll costs for a given period. It can also give you insights into the top earners at your business.

When it comes to implementing a payroll system, there are a few different types of payroll systems businesses like yours might utilize:

  • In-house payroll: This option is the most economical and involves a payroll process that an owner or employee must complete manually every pay period. This can work for small businesses and is generally more economical than other options. However, it can be difficult to sustain these processes as your small business expands and your team grows.
  • Full-time accountant: This option outsources payroll to an accountant, who has the financial expertise to run your payroll and even provide advice and insights to you. Your business could either hire this person for an internal role or outsource it to a contractor who would handle your payroll for you. By hiring a single person, you get expertise but at an economical cost for your business.
  • Payroll service: This option utilizes a third-party company to run your payroll. These payroll service providers offer other financial services to businesses, so you should check with them to see about bundling multiple services for your business. Integrating your financial services with one provider is a great way to keep all of your financial information in one place. This makes it easy to compare company revenue and labor expenses, among other things. If you’re already working with a financial services provider, they may give you a discount if you add their payroll services. As always, it’s best to check with your provider for their options for your business.
  • Payroll software: The last option uses special accounting software to completely automate your payroll. These software solutions can minimize human error, perform payroll reports and keep track of an employee’s timesheets. Many software options offer intuitive interfaces that make payroll management easy. Much like using a payroll service, payroll software tends to integrate well with other software (like onboarding or HR software) your business uses. It can even supply employees with an employee self-service portal that gives them quick access to their payroll records.
The right payroll system for your business depends on your business’s needs. But one thing is certain: your business needs a system. So let’s discuss the benefits of a payroll system.

What are the benefits of a payroll system?

As you’ve seen, payroll can be a daunting task if you’re taking it on by yourself. That’s why a payroll system is so essential to making sure your business runs smoothly. Here are ways a payroll system can help:

  • Saves your business time: Payroll systems help you streamline your payroll process. When you have a system in place, you’ll spend less time manually computing figures, entering data and calculating taxes. Instead, you’ll be able to focus on running your business./li>
  • Ensures accuracy: If your business has many employees, there’s a lot of information to track down and stay on top of. But when you put a payroll system into practice, you’ll help ensure your employees get paid the right amount for their work and on time. Paycheck errors and delays can be very frustrating for employees, but an accurate payroll system means fewer errors and happier employees at your business./li>
  • Keeps your business compliant: As a small business owner, you have a lot to keep track of. But one of the things you may not stay on top of is your business’s compliance with Medicare, taxes, Social Security and unemployment. Luckily, working with someone who specializes in payroll can help you navigate these things. Again, payroll systems can help you delegate to people or companies that have more expertise than you. That helps save you time and keeps your business running. Not following compliance regulations can have serious consequences for your business. The IRS can penalize incorrect payroll as a criminal act./li>
  • Ensures deductions are correct: You know your business is required by law to withhold payroll taxes from employees. Tax withholding can be complicated, as tax laws can change every year. These mandatory deductions include the Federal Insurance Contributions Act (FICA) tax, which is made up of Social Security and Medicare taxes. Other mandatory deductions include wage garnishments (if applicable), federal income tax, and state and local taxes. An employee can also elect to have voluntary deductions withheld from their paycheck. These include health insurance premiums, retirement plans like IRAs or 401Ks, and life insurance premiums. As you can see, all of these can add up. But a payroll system can help you run payroll and handle these deductions with ease./li>
  • Manages other expenses and benefits: A payroll system can also help you manage expenses, benefits and bonuses. This is especially useful if you reimburse employees for work-related expenses and mileage. It can also help you factor in paid time off including typical days off or a perk like a paid day off for an employee’s birthday. Tracking all of these different expenses and costs can be a hassle. However, a payroll system can help you stay on top of all of it./li>
  • Generates forms: Using payroll systems can give you access to various reports and summaries. They make it easy for you to see salary statements and benefits reports and store your employee records in one place. Your employees may also have access to other payroll functions like pay stubs and withholdings.
Payroll is a necessary nuisance. It keeps your business running and your employees happy. While there are a lot of ways to do payroll, implementing a payroll system can save you time and money (and potential headaches). 

You’ve seen the importance of choosing the right payroll system for your business. So when evaluating your options, keep your business’s specific needs in mind. In the end, choosing a great payroll system will give you more time to do what you do best – your business.
 

Ready to work with a company who can help you manage your payroll more efficiently?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.