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’s often closely integrated with time and attendance systems to ensure accurate pay for hours worked.

An organization can manage payroll manually, use specialized 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 people the opportunity to generate important reports, gather insights on trends, and integrate data with cross-departmental systems.

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

And getting compliance wrong can be expensive. In 2023, the IRS assessed U.S. 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’s 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 as well as benefits and drawbacks to each one. Here are the three main payroll management methods:

1.      Manual payroll management

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

2.      Payroll management software

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

3.      Payroll outsourcing

Companies that don’t 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 remove some of the administrative burden, this can be expensive and requires giving up some direct control of the process.

What are the phases of the payroll management process?

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

1.  The pre-payroll phase

It involves gathering essential employee data, such as employment status, hourly and overtime rates, salary, time tracking information, any bonuses, overtime, or commissions, paid time off or leave, and deductions. Organizations 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 get the employee’s net, or take-home, pay. It’s critical to get any necessary in-house approvals to disperse the funds on time and keep payroll on schedule.

3. The post-payroll phase

It involves distributing pay to employees, making social insurance and pension contributions, keeping accurate financial records, and filing required forms and reports with government agencies. Depending on where the company’s located, employers will need to hold employee records for a set number of years. For example, the IRS states that U.S. 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 need improvement.

What are the functions of a payroll management system?

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

• Calculating employee wages: Automate and calculate gross pay, deductions, and net pay, and ensure compliance with tax obligations and labor laws. Taxes and deductions include local, state, provincial, regional, federal, or country 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 recordkeeping requirements: Maintain quarterly and annual tax reports and end-of-year forms for employees and contract workers.
• Providing employees with pay statements: Give employees a breakdown of their earnings and deductions per pay period and year-to-date through paper or electronic statements. Some payroll systems also allow employees to opt-in to email or text messages about their pay statements.

What are the benefits of using payroll management software?

Payroll systems support greater efficiency and help businesses save on time-consuming 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 top benefits:

• Accurate calculations:  Automating calculations helps companies avoid errors when processing payroll, ensuring on-time, accurate payment.
• Compliance assistance: When new laws are passed or existing laws change, payroll management software is much better positioned 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 localization capabilities to keep them compliant.
• Access to tax forms: Employees can easily access their tax forms on their own, reducing HR burden.
• Flexible payment options: Employees can choose whether they want to be paid via direct deposit or check, or through another company-provided option.
• Detailed record keeping: Teams can consolidate payroll details based on real-time data and generate customized reports with the push of a button. Using payroll data analytics to spot trends and patterns helps HR and company leaders make better business decisions.
• Employee self-service: Employees can access their pay statements, with a breakdown of payments and deductions, enhancing transparency.
• Reduced payroll errors: Software-based payroll eliminates the need for manual data entry and calculations and the accompanying possibility of errors.
• Automatic alerts: Payroll administrators can activate alerts in the software to call attention to potential issues and set up reminders of important dates, deadlines, and compliance updates.

How to choose a payroll management system

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

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

Check out review websites, read customer experiences and case studies, and look at the pros and cons of a provider. Also, sign up for a live demo or free trial to test-drive the software before making a commitment.

2. How secure is the system?

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

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

Find out the level of localization 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 be different in each country.

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

Determine if the vendor monitors legal regulations that impact payroll and provides timely updates to help with compliance. Also, find out if 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 like HCM software to keep key information consistent, avoid duplicating data entry, and prevent potential errors. A payroll system that provides API access can allow organizations to customize their platform and connect with other tools, but this also comes with the need to ensure these integrations stay 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, like an analysis of retirement contributions or payroll tax liability. Also, see if there are analytical features to help with forecasting and decision-making.

7. Does the cost fit budgets or expected growth?

Determine the number of licensing seats that are needed, and total costs from initial to recurring fees. Find out if the platform can scale as the business grows in size and complexity. Balance 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 implemented cloud-based systems and successfully improved their HR and payroll operations.

Real estate

After expanding from 450 to 670 employees over two years, one of Australia’s largest property groups needed better team support and operational efficiency. Learn how a consolidated HR platform with payroll built into the core helped this organization with accuracy, speed, and compliance. Read The GPT Group's story.

Sports and entertainment

A large sports and entertainment company wanted to enhance employee experience and workplace decision-making. Learn how having a single source of data helped this organization 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 organization give workers in the Middle East smartphone access to self-service tools and other data. Read BRF's story.

Explore payroll management systems

Growth-focused businesses of all sizes can benefit from refined processes and improved payroll management. Here’s a helpful HR and payroll checklist for companies to ensure that their organization is equipped to support their business goals, face future challenges, and meet employee needs.

Learn how SAP SuccessFactors Employee Central Payroll can help companies simplify payroll processes for their global workforce. Confidently conduct payroll that adheres to country-specific and regional regulations in a timely, secure, and efficient way.