What is a payroll system? How does it work?

As your business grows, having solid systems in place keeps everything running smoothly, including payroll.

A payroll system streamlines your organization's payment process, automating the calculation and distribution of wages at each pay period's end. It records hours worked, salaries, bonuses, taxes, benefits, and deductions, ensuring accurate employee payments. It also helps maintain compliance internationally with the diverse regulations across different regions where the company operates or has employees.

What is a payroll system, and why is it important?

A payroll system handles everything related to paying your staff’s financial compensation, whether that’s hourly wages, fixed salaries, bonuses, or commissions. It automatically tallies and subtracts payroll taxes and any other deductions and then issues payment to each employee via direct deposit or check.

In many payroll systems, employees use a self-service portal to log time worked, track attendance, view pay stubs, update personal information like their home address, and access other important tax documents.

For employers, a payroll system helps you stay on top of compliance requirements and ensures that all records are accurate and secure. This is critical to helping your business adhere to various tax and labor laws across the different regions where your employees are based.

Payroll systems automate many complex tasks, eliminating the need to hire costly external accountants or payroll services and allowing in-house HR teams to focus on employees rather than managing the intricacies of payroll processes.

Main approaches to payroll management

There are various types of payroll systems, each suited to different types of businesses based on factors like size, complexity, and geographic scope. They range from simple manual processes ideal for small local businesses to sophisticated software solutions designed for large multinational corporations.

In-house manual payroll

Many smaller organizations manage their payroll using basic spreadsheets, a method that’s straightforward for experienced administrators. While this manual approach functions well at first, it often doesn’t scale well as the business grows. As a result, many companies decide to transition to professional payroll software to meet their increasing needs as they expand.

In-house payroll software

Unlike manual methods, which are prone to human error, payroll software enhances accuracy and seamlessly integrates with other systems such as timekeeping, HR platforms, and other databases your company uses. Purchasing payroll software is often a wise investment, as it reduces the time spent on each pay cycle and streamlines processes, improving efficiency and reliability across the board.

Outsourced payroll

Delegating payroll functions to a third-party provider is a practical solution for businesses that lack in-house expertise or prefer not to manage payroll internally. This option gives you access to experienced payroll professionals who can handle complex payroll tasks and provide expert advice on payroll-related issues, ensuring efficiency without the administrative burden.

Hybrid approach

For some businesses, blending different payroll methods is the best approach. An organization might primarily use payroll software for regular pay cycles while partnering with an external provider to manage payroll in international locations or for periodic reviews of compliance practices. This strategy allows companies to leverage the strengths of both in-house and outsourced solutions, ensuring thorough and adaptable payroll management.

What does payroll management software do?

In short, payroll management software tackles the end-to-end process of running your payroll and generating reports. Here’s how payroll software works:

Calculate wages

The system computes the payment for each staff member based on their hours worked or salary agreements. It also incorporates any additional compensation, such as bonuses or commissions, due for the pay period in question.

Process taxes

Payroll systems process employee payments but also compute all necessary deductions, such as federal, state, and local taxes, along with Medicare and Social Security contributions. Additionally, they handle any other specific withholdings requested by the organization, such as contributions to pension funds or premiums for life insurance policies.

Ensure ongoing compliance

Operating in multiple countries makes managing payroll even more complex. Payroll systems alert you to changes in local laws, like minimum wage or tax updates, and in some cases, automatically adjust themselves. This helps to minimize or mitigate risk.

Keep accurate and safe records

Payroll software maintains detailed records of all employee payments, tax filings, adjustments, and other related activities necessary for financial planning and internal or external audits. This data is also helpful for analyzing trends, comparing staff salaries against industry averages, and broader strategic planning efforts, such as budgeting and financial planning.

Benefits and potential roadblocks of payroll systems

If you're considering payroll management software, it's helpful to consider both the pros and the cons:

Pros of payroll management systems

• Save time: Businesses reduce manual effort by automating the payroll process, allowing their HR staff to focus on other aspects of the employee experience.
• Reduce errors: Systems that automatically calculate payroll and integrate the latest tax laws and policies from each location where you operate lessen the likelihood of mistakes. 
• Regular alerts: Real-time alerts notify HR administrators, enabling them to address and correct errors without delaying employee payments. Payroll systems also provide reminders about upcoming deadlines, regulatory changes, and other important payroll-related updates.

Cons of payroll management systems

• Data entry errors: Payroll management systems give accurate calculations, but their accuracy depends on the correctness of the input data. When it comes to data, precision is a must.
• Scalability issues: As a business grows into new international markets, some payroll systems might struggle to keep up, especially if not equipped to support new types of employment contracts or expanded benefits for a diverse, global workforce. 

How to choose a payroll system

Choosing the best payroll system for your business involves assessing your current needs and anticipating what’s down the road. It must account for the unique tax laws, labor regulations, and reporting mandates of each country where you currently operate or have staff. But it must also accommodate growth, such as handling new types of employment contracts or expanding into new regions. 

The system should also integrate with your existing infrastructure and remain flexible to adapt to future technological or organizational changes.

Finally, reliable technical support and customer service are critical, as issues with the software can lead to significant disruptions, such as payroll processing delays. The payroll provider you choose should offer adequate support to address and resolve issues swiftly.

Simplify global payroll with Oyster

Oyster allows organizations of any size to streamline payroll processes for employees in more than 180 countries. This scalable solution automates payroll calculations, minimizes errors, ensures adherence to local regulations, and enhances the overall employee experience within your organization.

Discover how Oyster can transform your global payroll management.