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It’s incumbent on all businesses to manage payroll effectively. Such is the importance and potential complexity of the process, many organizations outsource payroll to a payroll company.

Those managing payroll in-house can benefit from the use of payroll software to automate calculations and stay updated with legal changes.

Here I’ll share what you need to know when managing payroll.

Why Managing Payroll Is Important

Payroll is a vital business function. Here are the main reasons why the effective management of payroll is so important:

  • Legal compliance: Payroll management ensures compliance with various laws and regulations related to employee payments. This includes accurately calculating taxes, social security contributions, and adhering to minimum wage laws. Failure to comply can result in legal penalties and damage to the company's reputation.
  • Financial stability and budgeting: Effective payroll management helps maintain financial stability and ensure that the company is budgeting appropriately for employee costs, including salaries, benefits, and taxes.
  • Resource management: Payroll management involves keeping track of employee hours, overtime, bonuses, and deductions. Accurate record-keeping is essential for efficient resource management, enabling the company to make informed decisions about staffing and compensation.
  • Employee morale and trust: Timely and accurate payment of salaries is crucial for maintaining employee morale and trust. Inconsistent or incorrect payments can lead to dissatisfaction, decreased productivity, and high turnover rates. Employees who feel valued and fairly compensated are more likely to be engaged and productive.
  • Data security and privacy: Payroll data contains sensitive information such as employee personal details, salary information, and bank details. Proper payroll management ensures the security and confidentiality of this data, protecting it from unauthorized access and breaches.
  • Strategic planning and analysis: Payroll data can be used for strategic planning. By analyzing trends in payroll expenses, companies can make informed decisions about hiring, compensation strategies, and workforce management.

Who Should Manage Payroll?

Being predominantly an HR-focused publication, we’re often asked “Does HR do payroll?”

Truth is the responsibility for payroll can vary depending on the size and structure of the organization. Typically, the following parties are involved:

  • Human Resources (HR) department: In many companies, the HR department plays a key role in payroll management. They are responsible for aspects like maintaining employee records, overseeing timekeeping and attendance, determining benefits and deductions, and ensuring compliance with labor laws.
  • Accounting or finance department: The accounting or finance department often handles the financial aspects of payroll. This includes processing payments, managing payroll software, handling taxes and deductions, and ensuring that all financial records are accurate and up-to-date.
  • Payroll department: Larger organizations may have a dedicated payroll department. This department specializes in all aspects of processing payroll, including calculating pay, managing deductions, ensuring tax compliance, and addressing employee queries related to payroll.
  • External payroll service providers: Some companies outsource payroll responsibilities to external service providers. These providers offer specialized payroll services, ensure compliance with tax laws, and often provide additional services like tax filing and employee self-service portals.
  • Small business owners or managers: In small businesses, the owner or a designated manager might handle payroll responsibilities due to the limited size of the staff. They might use payroll software or consult with external accountants or bookkeepers for assistance.
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What Are Some Methods Of Payroll Management?

As alluded to in the intro, some organizations choose to outsource payroll to a payroll service company.

Here are the potential methods for managing payroll.

  • Manual payroll: In this traditional approach, payroll is managed manually by a person or a team. They calculate pay and deductions and prepare payment by checks or cash. This method is more common in smaller businesses due to its low initial cost, but it can be time-consuming. You also have to report manually to the relevant tax authorities.
  • Payroll software: Many companies use specialized payroll software to automate the payroll process. This software can calculate wages, taxes, and deductions automatically. It often includes features for direct deposit, tax filing, on-demand pay, and generating reports.
  • Outsourcing to payroll service providers: Some businesses outsource their payroll management to external service providers. These companies specialize in payroll services and ensure compliance with tax laws and regulations.
  • Hybrid systems: Some companies use a combination of these methods. For example, they might use software for calculations and reporting but outsource certain aspects like tax filing and compliance.

How To Manage Payroll

The payroll management process typically involves several key phases, each crucial for ensuring accurate and timely payment of employees.

Assuming you already have your employer identification number, here's an overview of these phases:

  1. Employee information gathering: Collecting and recording all relevant employee information. This includes personal details, bank account information, tax withholding details, and any other pertinent data like salary grade, department, and position.
  2. Timekeeping and attendance tracking: Accurately recording the time each employee works, including overtime, sick days, vacation days, and any other forms of leave.
  3. Payroll calculation: Calculating the gross pay for each employee based on their timekeeping and salary information. This calculation includes accounting for various factors such as hourly rates, salaries, overtime pay, bonuses, and any other forms of compensation.
  4. Deductions and withholdings: Making necessary deductions from the gross pay. These may include federal and state taxes, social security contributions, Medicare, health insurance premiums, retirement plan contributions, child support payments, and other legally mandated or voluntary deductions.
  5. Paying employees: After calculating the net pay (gross pay minus deductions), employees are paid via their chosen method e.g. direct deposit, check, cash, or payroll cards. This phase also involves ensuring that payments are made on a consistent and regular schedule.
  6. Tax filing and reporting: This critical phase involves reporting payroll information to government authorities and filing necessary payroll tax documents. Employers need to ensure they comply with payroll taxes and meet all filing deadlines to avoid penalties.
  7. Year-end processing: At the end of the fiscal year, employers need to prepare and distribute year-end tax documents, such as W-2 or 1099 forms, to employees. This phase may also involve reconciling the year's payroll data and preparing for the new fiscal year.

Managing Payroll Best Practices

Here are some best practices to help ensure that payroll management is timely, accurate, and compliant.

  • Stay updated on regulations: Keep updated on your knowledge of local, state, and federal tax laws and employment regulations.
  • Use reliable payroll software: Investing in the right payroll software can automate many aspects of payroll management, reduce errors, and save time. Here are some key payroll software features to look out for.
  • Maintain accurate records and documentation: Accurate and systematic record-keeping is essential for payroll compliance and future reference. This includes maintaining detailed records of payroll transactions, timekeeping data, tax filings, and any other relevant documents.
  • Payroll reconciliation and review: Regularly reviewing and reconciling the payroll process helps in identifying and correcting any discrepancies. This ensures the accuracy and integrity of payroll information.
  • Clear payroll policies: Have clear, written policies regarding payroll processes, including pay periods, overtime, bonuses, and leave policies. This clarity can reduce confusion and disputes.
  • Provide easy access to payroll information for employees: Make it easy for employees to access their payroll information, such as pay stubs and tax documents, perhaps through an online portal. Transparency builds trust and reduces the number of queries payroll staff must handle.
  • Regular communication: Maintain regular and open communication with managers and regular contributors about what is required of them regarding payroll.

Using Payroll Software

Payroll administration can be time-consuming and it’s pretty important to get it right. 

So, if you decide to manage payroll in-house, odds are you’re going to use some form of payroll software to help automate much of the process.

Payroll software is a specialized type of software designed to manage and automate the process of paying employees. 

It automates much of the various (time-consuming and error-prone) tasks related to payroll management including tracking time and attendance, calculating wages, withholding taxes, direct deposits, submitting reports, and generating paychecks.

Key features include:

  • Automated payroll processing: The software must be able to process your employee’s pay, including automatically calculating wages, deductions, and taxes. This eliminates manual errors and saves time, making the process more efficient.
  • Direct deposit: Pretty much all payroll software allows employers to pay their staff directly into their bank accounts. This eliminates paper-based processes and provides a better experience for employees and payroll staff.
  • Tax compliance forms: Compliance requirements require payroll software to prepare year-end tax forms for employees, such as W2s or T4s. What’s neat is that the vendors will ensure that the software is up-to-date with payroll regulations.
  • Customizable payroll reports: The ability to customize your payroll reports to track payroll taxes, employee deductions, and other expenses can help with budgeting and financial forecasting.
  • Data management: Payroll software typically includes an employee database to store key details such as salaries or hourly rates, position levels, emergency contacts, social insurance numbers, and other employment details.
  • Unique payment options: This might be unlimited payroll runs or pay-on-demand options to make payments between designated paydays.
  • Time-tracking: Especially for hourly workers, having timesheets and scheduling built into your payroll system greatly streamlines your processes.
  • Compensation management: This includes being able to track different pay rates (salary, hourly, overtime, vacation pay, PTO, etc.). It can also mean tracking salary increases over time.
  • Self-service employee portals: These portals allow employees to proactively access and update their own personal information, access pay statements, and submit time off requests or expense reports. This is an important feature since it simultaneously empowers employees and reduces demands on your HR staff.
  • Analytics: Dashboards, graphs, and reports to analyze payroll data to gather insights about your staff. These analytics support your organization’s workforce planning efforts.

Using A Payroll Service

Payroll services are outsourced solutions provided by external companies that specialize in handling all aspects of payroll processing for other businesses.

These services take on the responsibility of managing employee payments, including calculating wages, deducting taxes, and ensuring compliance with legal and tax requirements.

The goal of payroll services is to streamline payroll operations, reduce the administrative burden on internal staff, and mitigate compliance risks associated with payroll management.

These services are particularly useful for managing global payroll.

Managing Payroll Doesn’t Have Difficult

Payroll is a critical business function and not to be taken lightly. However, with the right process and best practices, managing payroll can run like a well-oiled machine.

For some further help check out our articles payroll software for small businesses and payroll integration and make use of our payroll checklist.

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Finn Bartram
By Finn Bartram

Finn is an editor at People Managing People. He's passionate about growing organizations where people are empowered to continuously improve and genuinely enjoy coming to work. If not at his desk, you can find him playing sports or enjoying the great outdoors.