How payroll systems work: A quick guide

Are you frustrated with trying to make sense of the payroll process? Do you wish there was an easier way to understand how it all works? If your answer is yes, look no further. In this blog post, we’ll take a deep dive into the world of payroll systems and explore how they help businesses manage employee payments. Whether you’re new to managing payroll or a seasoned professional, you’ll learn something new here. Let’s get started.

What is a payroll system and how does it work

If you’ve ever been employed, you’re probably familiar with the term “payroll.” But what exactly does it mean? 

At its core, a payroll system is a way for companies to track and manage the payment of their employees. It involves processes like calculating hours worked, determining deductions and taxes, and processing payments. In short, it’s a way for companies to ensure that their employees get paid accurately and on time. 

So how does it work? It starts with employees submitting their hours worked and any necessary deductions to the payroll department. From there, the payroll team calculates everything and ultimately generates paychecks for the employees. 

It may seem like a simple process, but it can get quite complex when factoring in things like differing pay rates, overtime, and taxes. Nonetheless, it’s a critical aspect of any organization with employees and one that plays an important role in keeping things running smoothly.

Types of payroll systems

Payroll systems can seem confusing, but understanding the different types can make a huge difference in managing your employees’ finances. Here are some of the most common types:

  • Manual payroll system. This system involves calculating payroll by hand without the use of any software or automated tools. Manual payroll systems can be time-consuming and prone to errors, but they may be appropriate for small businesses with only a few employees.
  • In-house payroll system. An in-house payroll system involves using software installed on a company’s computer system to manage payroll. This system can be customized to meet the specific needs of the business, but it requires a significant investment in hardware, software, and personnel to maintain the system.
  • Outsourced payroll system. This system involves hiring a third-party provider to manage payroll processes. It can be a cost-effective solution for businesses that do not have the resources to manage payroll in-house. The provider typically handles all aspects of payroll, including calculating wages, taxes, and benefits.
  • Cloud-based payroll system. It is a type of software as a service (SaaS) that runs on the Internet. This system allows businesses to access their payroll data from any location with an internet connection, and it can be customized to meet the specific needs of the business.
  • Mobile payroll system. Lastly, this system involves using mobile apps to manage payroll processes. This system allows employees to access their payroll information, such as pay stubs and tax forms, from their mobile devices. Employers can also use mobile apps to manage payroll processes, such as approving time off requests and reviewing payroll reports.

Each type of payroll system has its advantages and disadvantages, depending on the size and needs of the business. Because of that, businesses need to evaluate their options carefully to choose a system that is efficient, accurate, and meets their specific payroll requirements.

Steps to set up a payroll system

Setting up a payroll system is an essential aspect of managing a business. As noted before, a payroll system helps ensure that employees are paid accurately and on time. In addition,  it helps the business stay in compliance with relevant laws and regulations. 

If you’re wondering how to set up a payroll system, here are some helpful steps that you can follow:

  1. Register with the relevant authorities. Before setting up a payroll system, businesses need to register with the relevant authorities, such as the Internal Revenue Service (IRS) in the United States. This helps ensure that the business complies with relevant tax laws and regulations.
  2. Determine employee classifications. Employers must classify their employees as either exempt or non-exempt. Exempt employees are salaried and not entitled to overtime pay, while non-exempt employees are hourly and entitled to overtime pay.
  3. Gather employee information. Employers must gather information such as employee names, addresses, Social Security numbers, and tax withholding information. This information is essential for accurately calculating employee pay and taxes.
  4. Choose a payroll system. Businesses can choose between manual payroll systems, where payroll is calculated by hand, or automated systems, where software is used to calculate and manage payroll. Automated systems are more efficient and less prone to errors.
  5. Set up a payroll schedule. Employers need to establish a payroll schedule, such as weekly, bi-weekly, or monthly. Employers also need to determine the payment method, such as direct deposit or paper checks.
  6. Calculate employee pay. Once the payroll system is set up, employers can begin calculating employee pay. Employers must calculate gross pay, which is the total amount earned before taxes and deductions, and net pay, which is the amount paid after taxes and deductions.
  7. File payroll taxes. Lastly, employers must file payroll taxes with the relevant authorities, such as the IRS. Payroll taxes include federal and state income tax withholding, Social Security tax, and Medicare tax.

By following these steps, businesses can set up a payroll system that is accurate, efficient, and compliant with relevant laws and regulations. It is essential to keep accurate records and stay up-to-date with changes to tax laws and regulations to ensure ongoing compliance.

How payroll outsourcing services can help your business

As noted before, payroll outsourcing services involve hiring a third-party provider to handle the various aspects of payroll processing and administration. These services can help businesses of all sizes and industries to manage their payroll processes more efficiently and effectively. 

Here are some of the ways that payroll outsourcing services can help your business:

  • Time-saving. Outsourcing payroll frees up time for business owners and staff to focus on other important tasks. This can be especially beneficial for small businesses that may not have a dedicated HR or payroll staff.
  • Cost-effective. This type of payroll can be more cost-effective than hiring in-house payroll staff. It can also help businesses avoid the costs associated with payroll mistakes and noncompliance with payroll regulations.
  • Compliance. Payroll outsourcing services are typically staffed by experts who are well-versed in federal, state, and local payroll regulations. In addition, outsourcing payroll can help businesses stay in compliance with payroll laws and regulations and avoid costly fines and penalties.
  • Accuracy. These services use advanced software and automated systems to ensure accuracy in payroll calculations. This can help businesses avoid costly mistakes, such as incorrect payroll taxes or employee wage calculations.
  • Employee satisfaction. Outsourcing payroll can help ensure that employees are paid accurately and on time. This can help boost employee satisfaction and morale.
  • Flexibility. Lastly, payroll outsourcing services can provide businesses with a flexible payroll system that can be customized to meet their specific needs. This can include options such as direct deposit, mobile payroll access, and custom payroll reports.


To sum it all up, payroll systems are very crucial in running a business, small or large. A great payroll system can help you save time and money while making sure your employees get their wages on time. For that reason, it’s important to choose the right payroll system so that everyone can always stay on the same page. 

Even if you already have a payroll system set up, take some time to evaluate it and see if any changes need to be made. That being said, get comfortable with payroll systems. After all, they will play an important role in the success of your business.

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