What is a payroll management system?

A payroll management system is used to calculate employee wages, hours worked, deductions, and tax withholding per pay period. It is often closely integrated with time and attendance systems to ensure accurate pay for hours worked.

An organisation can manage payroll manually, use specialised software, or outsource this function to a third-party provider. A payroll management system is a core component of human capital management (HCM).

Why is payroll management important?

A payroll management system can help companies reduce complexity, manage risk, and scale effectively. Additionally, advanced payroll software gives individuals the opportunity to generate important reports, gather insights into trends, and integrate data with cross-departmental systems.

Accurate payroll management is crucial for departments such as human resources (HR). HR and payroll require access to information on salary, benefits, and employee status to accurately maintain company records and ensure compliance with tax regulations and employment laws.

And getting compliance wrong can be costly. In 2023, the IRS assessed US employers about $8.5 billion in civil penalties for miscalculating or missing payments, and in 2021 a “name and shame” campaign and lawsuit led to millions of pounds in fines and reparation costs for hundreds of UK employers. Even minor mistakes can lead to public embarrassment, a loss of credibility, and low morale, which is why it is important for companies to get payroll management right.

What are some methods of payroll management?

Businesses of all sizes need to manage and maintain accurate payroll to pay employees on time and remain compliant. There are different options, each with their own advantages and disadvantages. Here are the three main payroll management methods:

1.     Manual payroll administration

This type of payroll management involves manually entering wages, deductions, and payroll taxes into a spreadsheet or basic accounting software. Small businesses and start-ups might be tempted to use manual payroll management to save on costs. However, this method is time-consuming and potentially vulnerable to security threats, data loss, and human error.

2.     Payroll management software

This type of specialised software is located on a computer or in the cloud and can help a company organise and streamline payroll automation. Payroll management software is increasingly managed in the cloud, generally charges a fee, and is subscription-based. It can help organisations avoid costly payroll errors, stay up to date with compliance updates, scale across regions as operations expand into new geographies, and keep employee data organised and secure.

3.     Payroll outsourcing

Companies that do not have the desire or resources to run payroll management in-house can hire an external service provider to manage this process. While a third-party company can relieve some of the administrative burden, this can be costly and requires relinquishing some direct control of the process.

What are the stages of the payroll management process?

Payroll has defined steps that organisations must follow to ensure the system works properly and efficiently as intended. After all, a single misstep can result in a delayed payslip or fine. Here are the three main phases of payroll management:

1. The pre-payroll stage

It involves gathering essential employee data, such as employment status, hourly and overtime rates, salary, timekeeping information, any bonuses, overtime, or commissions, paid leave or time off, and deductions. Organisations also need to ensure their payroll system is set up with the latest data, work policies, and compliance regulations.

2. The calculations phase

It involves calculating gross pay and then applying deductions to obtain the employee’s net, or take-home, pay. It is essential to obtain any necessary internal approvals to disburse the funds on time and keep payroll on schedule.

3. The post-payroll stage

It involves distributing pay to employees, making National Insurance and pension contributions, keeping accurate financial records, and submitting required forms and reports to government agencies. Depending on where the company is located, employers will need to retain employee records for a specified number of years. For example, HMRC states that UK businesses should keep records of employment taxes for at least four years. Internal teams should also regularly review internal processes to ensure accuracy and address any areas that require improvement.

What are the functions of a payroll management system?

Delving deeper into the details of payroll management, a modern payroll system can assist companies with the following:

• Calculating employee wages: Automate and calculate gross pay, deductions, and net pay, and ensure compliance with tax obligations and labour laws. Taxes and deductions include local, state, provincial, regional, federal, or national taxes, retirement or health insurance benefit amounts, and any other withholdings from gross pay.
• Processing payroll taxes: Calculate and remit deductions to government agencies.
• Complying with payroll record-keeping requirements: Maintain quarterly and annual tax reports and end-of-year forms for employees and contract workers.
• Providing employees with payslips: Give employees a breakdown of their earnings and deductions per pay period and year-to-date through paper or electronic payslips. Some payroll systems also allow employees to opt in to email or text messages about their payslips.

What are the benefits of using payroll management software?

Payroll systems support greater efficiency and help businesses save time on labour-intensive HR tasks. And with cloud-based payroll software and its access-anywhere interface, payroll teams have responsive and powerful tools at their fingertips. Here are some of the main benefits:

• Accurate calculations: Automating calculations helps companies avoid errors when processing payroll, ensuring timely and accurate payment.
• Compliance assistance: When new laws are enacted or existing laws change, payroll management software is much better placed to incorporate these changes to regulations, ensuring businesses stay ahead of critical deadlines and avoid penalties. For companies that operate in multiple regions and countries, advanced cloud-based payroll includes global localisation capabilities to keep them compliant.
• Access to tax forms: Employees can easily access their tax forms themselves, reducing the HR burden.
• Flexible payment options: Employees can choose whether they wish to be paid via direct deposit or cheque, or through another company-provided option.
• Detailed record-keeping: Teams can consolidate payroll details based on real-time data and generate customised reports at the touch of a button. Using payroll data analytics to identify trends and patterns helps HR and company leaders make better business decisions.
• Employee self-service: Employees can access their payslips, with a breakdown of payments and deductions, enhancing transparency.
• Reduced payroll errors: Software-based payroll eliminates the need for manual data entry and calculations, along with the associated possibility of errors.
• Automatic alerts: Payroll administrators can activate alerts in the software to draw attention to potential issues and set up reminders for important dates, deadlines, and compliance updates.

How to choose a payroll management system

When it comes to choosing the right payroll management system, it is essential that business decision-makers evaluate their needs and requirements before selecting a system. Once they have determined what they can spend and their essential features, they can address the following questions:

1. What is the provider’s reputation and level of experience?

Consult review websites, read customer experiences and case studies, and consider the advantages and disadvantages of a provider. Also, register for a live demonstration or free trial to try out the software before making a commitment.

2. How secure is the system?

Find out whether the provider uses encryption, complies with data protection regulations, and offers customisable user access. Learn about data backup and recovery processes as well.

3. Does the provider support countries and territories where business is carried out?

Find out the level of localisation provided for locations where the company operates or plans to expand. This includes language, currency, date, and time zone support, and goes much further into specific fields, calculations, and reports that might differ in each country.

4. Does the provider help companies remain compliant with changing regulations?

Determine whether the supplier monitors legal regulations that affect payroll and provides timely updates to assist with compliance. Also, find out whether a provider supports the required reports needed to file with various agencies, and for which countries and territories.

5. Does the software integrate with other systems?

Look for a provider that offers integration with existing systems such as HCM software to keep key information consistent, avoid duplicating data entry, and prevent potential errors. A payroll system that provides API access can enable organisations to customise their platform and connect with other tools, but this also comes with the need to ensure these integrations remain up to date with any changes made in all connected systems.

6. What are the reporting capabilities?

Learn what types of reports a provider can generate, such as an analysis of pension contributions or payroll tax liability. Also, see whether there are analytical features to assist with forecasting and decision-making.

7. Does the cost fit budgets or anticipated growth?

Determine the number of licensing seats required, and the total costs from initial to recurring fees. Find out whether the platform can scale as the business grows in size and complexity. Weigh those costs against the potential costs of incorrect payroll or non-compliance with legal regulations.

Payroll management use cases by industry

Here are examples of companies in three industries that have implemented cloud-based systems and successfully improved their HR and payroll operations.

Property

After expanding from 450 to 670 employees over two years, one of Australia’s largest property groups required better team support and operational efficiency. Learn how a consolidated HR platform with payroll integrated at its core helped this organisation achieve accuracy, speed, and compliance. Read The GPT Group’s story.

Sport and entertainment

A large sports and entertainment company wished to enhance the employee experience and workplace decision-making. Learn how having a single source of data helped this organisation automate HR processes, reduce onboarding processing time, streamline payroll operations, and make more informed workforce decisions. Read Sharks Sports & Entertainment’s story.

Consumer products

One of the world’s largest food companies needed to upgrade its processes to enhance employee experience and culture. Learn how a cloud payroll management system helped this organisation provide workers in the Middle East with smartphone access to self-service tools and other data. Read BRF’s story.

Explore payroll management systems

Growth-oriented businesses of all sizes can benefit from streamlined processes and enhanced payroll management. Here’s a useful HR and payroll checklist for companies to ensure that their organisation is equipped to support their business objectives, face future challenges, and meet employees’ needs.

Learn how SAP SuccessFactors Employee Central Payroll can help organisations simplify payroll processes for their global workforce. Confidently run payroll that complies with country-specific and regional regulations in a timely, secure, and efficient manner.