Skip to content Skip to footer

How Does the Payroll System Work?

payroll automation software

Table of Contents

A payroll system is designed to manage and distribute the wages of employees. The system may feel like a one-click solution, and that’s true as well. Yet, there are a lot of workflows involved in payroll processing. So, in this blog, we are going to elaborate on the process of paying your employees via payroll automation software. 

Quick Fact: According to the “Getting Paid in America” survey, 58.96% of people said that they get paid through a program offered by employers. Simply put, almost 62% of companies use payroll automation software to pay wages. And the number is growing each year. 

Let’s dive into more details about how this automation software works.

Understanding Payroll Automation Software

As business grows, team management and payroll tasks become headaches. With a lot of work, like managing employees and payroll, things become too complex. So, to cope with the situation, different payroll automation software is being used around the world. These software simplify the payroll task and allow you to get better control of your business. 

Furthermore, it helps streamline operations and save time. Here are some benefits you get from payroll automation software:

  • Automation of Repetitive Tasks: Calculation of employee and contractor pay is automatically processed. Additionally, the tax and deduction amounts are also calculated involuntarily.
  • Employee Satisfaction: Payroll automation software comes with pre-built ESS  (employee self-service) portals. Just a simple means to satisfaction.
  • Tax Compliance: Most of the payroll automation software is designed to automatically calculate and withhold taxes. Furthermore, these systems get updated with tax updates, ensuring your company gets all the last-minute changes in tax laws. 
  • Direct Deposit Option: almost 95% of the Americans prefer direct pay. Thus, these systems are designed with direct deposit options to ease your payment problems. 
  • Quick Pay Stubs: Same as repetitive calculations, generating pay slips is an iterative task. So, this software automatically generates electronic pay stubs.

The list can go on and on! There are a lot of benefits to using an automated system. However, the primary purpose of this information is to convey the importance of a payroll system for your business. 

The Payroll Process: What Is It?

The payroll process is a 4-step approach to paying your employees. If you have a small business with all administrative work on your plate, learning the payroll process will help you pay the correct amount on time.

You need to do comprehensive planning of the whole process. As there is always ongoing work contribution, automating these tasks will be a great help.

Consider software that requires minimal input from you to process wages on time. Isn’t that ironic? However, the payroll automation software needs initial setting up to work properly. Basically, the payroll process involves these steps:

Step 1: Initial Payroll Setup:

First and foremost, buy software with comprehensive functionalities. Consider E-Work Force Payroll. Our software comes with state-of-the-art features and technology infusions.

So, once you get the software, do these initial setups to build a working environment. 

  • Log in via the provided credentials and set up your company. 
  • Provide necessary details, including company type, address, city, state, and mailing address.
  • After that, input employees’ information. These details typically include the first and last name of the employee, the job start date, the payschedule, and other information. 

Furthermore, in the initial step, you can configure direct pay and contractor portals as well. 

Step 2: Pre-Payroll Process:

As we have a working payroll system in hand now. It’s time to define your company’s policies. It can be:

  • Leave policy
  • Attendance policy
  • Bonus policies
  • Tax withholding policies

These policies will help both parties (management and employees) clearly understand rules and regulations. It ensures a professional and healthy environment in the organization. So, make sure you have clearly defined all the policies and that they are signed off by your administration. 

Data Collection:

The next crucial step is to gather all relevant employee information. Typically, it includes:

  • Time and attendance records (hours worked, overtime, leave taken)
  • Updates on employee status (new hires, terminations, promotions)
  • Changes in pay rates or deductions (benefits, taxes) 

Data Validation:

Once you have collected all the data, you need to cross-check it for errors. Be careful on this step; the data is going to be in the payroll system. Any mistake in employees work hours, overtime, and leave can frustrate your employees. Additionally, there can be terminated employees in previous records. So, remove them before processing payroll. Otherwise, you will end up losing money!

Adjustment in Collected Data:

This is a skipable step if you don’t find any errors in the collected data. However, if that’s not the case, then perform the below-mentioned steps:

  • Correcting mistakes in time records
  • Applying retroactive pay increases or bonuses
  • Updating deductions for benefits or taxes

Approval:

Pre-payroll process is all done. Get necessary approval from administration and you are ready to move to pay transfers.

Step 3: Actual Payroll Process:

On this step, you will have all payroll data with verified records. Now is time to calculate payroll and transfer wages. Although most of the payroll automation software automatically handles this work, oversight of the process is still mandatory.

Data Entry: 

Data is already available in digestible form now. Feed your automated payroll system with all the data, including employees’ bank details. 

Payroll Calculation:

The software will automatically calculate wages with the help of worked hours and pay rate parameters. This step also entails tax withholdings and net pay calculations. Once this step is done, run payroll, and there you have it!

Step 4: Post-Payroll Process:

Well, a lot of you might think once salaries are transferred, you are free to move forward with other tasks. Yet, there are some post-payroll process requirements you need to meet to keep your company thriving. 

Record Keeping:

For optimal growth of your company, it is a great idea to keep record of your transactions. Especially payroll transactions. It will help you gain insightful data from transactions. 

Reports:

Once salaries are transferred, your finance department may require reports of all expenses. So preparing a detailed report for all expenses, including payroll, location rent, and other bills as necessary.

Remember, payroll isn’t a tough process to handle. Yet, it is a time-consuming and resource-burning process. Furthermore, doing it all without proper automation payroll software is unimaginable. Thus, you need to have a system in hand that can handle payroll calculations and provide comprehensive reports and other relevant data to ease your payroll blues.

Common Pitfalls in Payroll Process with Quick Fixes

Payroll is something every business has to deal with. Every month or even week, if you are working with contractors, there is a pay deadline. And guess what? A lot of payroll processes involve errors and mistakes. There are multiple companies whose mistakes turn into hefty penalties for their business. So, to avoid it, here we share common slip-ups and how to deal with them.

Inaccurate Data Entry:

One of the major blunders made in the payroll department is inaccurate data entry. Look! We are humans, and mistakes are unavoidable. However, payroll mistakes can be nightmarishly terrifying for businesses. Wrong data entry can lead to inaccurate calculations of employees pay. Ultimately, it will lead to employee dissatisfaction. 

Solution:

Use payroll automation software. These programs are designed to calculate wages in an error-free manner. Additionally, implement a double-check system for each entry to ensure employee information is correct. 

Missing Deadlines:

Salaries greatly influence employee behaviour and productivity. Missing payroll deadlines is another pitfall that can hit your business reputation. You may lose talented employees in your organization due to missing deadlines. Additionally, late payroll leads to frustration for your employees. According to a survey, 18,972 said they would get in trouble if their salaries got delayed. In fact, 70% of Americans live paycheck to paycheck. Thus, a small delay in salaries can cause huge trouble.

Solution:

Use a system that automatically calculates salaries and reminds you timely for payroll. If your company pays salaries on the 5th of each month, a payroll system that reminds you about dates will be a great help. Additionally, payroll automation software will eliminate repetitive tasks, leading to extensive productivity. 

Ignoring Tax Regulations:

Not keeping up with changing tax laws can trigger penalties and tax audits. For instance, an employee may claim way more than tax deductions. Companies in that response withheld fewer taxes. However, as a result, it will cost penalties and interest on low taxes. 

On top of that, tax laws change very frequently, and your employee can make many mistakes in the W-4 form.

Solution:

Buy a system with automated tax calculation and withholding functionalities. In case you miss any details or put the wrong details. The system will alarm you about it. Additionally, it will help you e-file your taxes with ease.

Lack of Employee Self-Service:

Do you know what matters most for employees? It’s wage satisfaction. If your organization lacks an employee self-service application, it will mess up other data. For example, let’s suppose an employee recently changed their bank account. The previous one is inactive now, but you processed the payroll for that inactive account. What next? It’s a painful process to revert that amount and send it to the right account late. 

Solution:

Bring in a payroll automation system with a fully functional ESS (Employee Self Service) portal. Now, employees will be able to update their personal information without any hassle. Additionally, the employee portal will allow them access to pay stubs and other records. 

Poor Record-Keeping:

Record-keeping is crucial in every area of business. And when it comes to the payroll department, poor record-keeping can lead to significant problems. Imagine you don’t have a record of payrolls, and the IRS calls you for an audit. What happens now? Even after being true and actively paying all your employees, you have to face problems. Yeah, it happens!

Solution:

Always keep a record of your data. Establish a systematic record-keeping process using payroll software. Use proper means to store documents securely and accessibly. 

Overlooking Overtime and Leave Policies:

If an organization fails to calculate overtime and pay accordingly, it can lose valuable resources. And that can be your company as well. Yeah, the situation is alarming for businesses that don’t clearly communicate overtime and leave policies. 

Solution:

Utilize payroll automation software to involuntarily calculate overtime and adhere to leave policies. Furthermore, train your employees to check in and check out appropriately so there will not be any missing hours. 

Neglecting Employee Feedback:

Feedback really matters for an organization. 

“We all need people who will give us feedback. That’s how we improve.”  – Bill Gates

Most of the companies neglect the power of employee feedback, leading to a poor work environment. Ignoring employee concerns about payroll issues can lead to decreased morale and trust.

Solution:

Encourage communication with employees. Promptly answer their concerns and improve employee satisfaction. 

In a Nutshell:

Payroll systems are the most valuable tool for organizations looking to grow business. Since the payroll process is pretty simple, having a tool with automation power is amazing. Thus, be sure to go for a quality solution for your business. Choose software that works well for your organization and comes with efficient automation features. Additionally, avoid the common pitfalls for optimal growth of your business. 

Lastly, if you are looking for jaw-dropping payroll automation software, consider E-Work Force Payroll systems. It is accompanied by automatic pay stubs, employee portals, direct deposit options, and a lot more.

FAQs:

Who does payroll in a company?

Payroll is typically managed by the HR (human resources) department of a company. However, if the company possesses hundreds of employees, there can be a dedicated team for payroll work. Furthermore, in small companies, the owner and business managers handle payroll. These payroll processes include:

  • Employee hours calculation
  • Wages calculations
  • Overtime and attendance cross-check
  • Calculating tax withholdings
  • Pay stub generation

It doesn’t matter who in an organization handles the payroll. The only thing that matters the most is the accuracy of payroll, efficiency of the system being used and productivity of work. 

What are some payroll systems?

The popular payroll systems include the E-Workforce Payroll application, Gusto, and Quickbook. All of these programs have their own features and limitations. The best is one that perfectly matches with your organizational needs.

What is a computerized payroll system?

Computerized payroll systems are semi-modern technology used in organizations to manage payroll work. It can be a spreadsheet-based payroll system or a fully automated payroll system. Both fall in the same category of computerized payroll systems. However, this term is more specifically used for automated payroll solutions nowadays. It usually automates repetitive tasks such as wage calculations, tax calculations, and contractors’ hourly rate calculations. 

Can you do payroll without a payroll company?

Yes, payroll can be done without a payroll company. Instead of outsourcing your payroll stuff you can bring in an automated payroll solution for your business. Both outsourcing and automated payroll software have their benefits and the choice of the right solution depends on your needs. For instance, a small and medium-sized business may preferably use a system to automate payroll in-house. On the other hand, large organizations may benefit from outsourcing their payroll work. 

Who are the ideal customers of payroll software?

The ideal customers for payroll software are small and medium-sized businesses. In fact, any business that wants to streamline its payroll process without leaning on third-party outsourcing services is an ideal customer for payroll software. Even large organizations and enterprises use payroll applications for their businesses. Furthermore, industries such as retail, healthcare, hospitality, and manufacturing often require efficient payroll solutions. It’s due to fluctuating hours and various compensation structures.

What is the biggest challenge in payroll?

Keeping up with tax regulations is the biggest challenge in payroll. The federal and state tax laws change frequently, so missing any details or staying compliant can be challenging. Additionally, last-minute changes in tax laws can be tough to handle. So, ensure you have an automated system that updates itself with tax laws on the go. 

What are the advantages and disadvantages of payroll systems?

Payroll systems are quite advantageous for businesses. It helps in multiple ways:

  • Efficiency: Streamlines processes, reduces manual errors, and saves time.
  • Accuracy: Ensures precise calculations and minimizes the risk of errors.
  • Compliance: Helps maintain compliance with labour laws and regulations.
  • Cost-effectiveness: Reduces administrative costs and overhead.
  • Timely payments: Enables accurate and timely payroll processing.
  • Improved employee satisfaction: Offers a more efficient and convenient experience.
  • Data security: Protects sensitive employee information.
  • Scalability: Easily adapts to changes in workforce size and structure.
  • Integration: Seamlessly integrates with other HR systems and applications.
  • Reporting: Provides valuable insights and analytics for informed decision-making.

Furthermore, some companies may find them hard to handle. Additionally, the cost per employee can quickly add up, which can be considered a drawback. 

What are the risks of automation?

Automation in payroll can lead to many risks. For instance, reliance on technology can ultimately reduce the efficiency of the HR department. They may not be able to solve problems without automated support. Additionally, the data becomes vulnerable to cyber-attacks and data breaches if security constraints aren’t properly measured. Thus, it is essential to have reputable and reliable payroll automation software with strong security walls. 

How does the payroll system work?

The payroll system works by automating payroll processing tasks. These tasks include direct deposit management, wages and tax calculations, employee data protection, and more. First, all the data is fed to the system, and then, with the help of software, repetitive tasks get automated.

Eva Lewis is a skilled content writer with expertise in payroll and accounting software. With a strong educational background in these fields, she brings in-depth knowledge and precision to her writing. For the past few years, Eva has been working with E Workforce Payroll, where she crafts informative, user-friendly content designed to simplify complex financial systems for businesses and professionals.

Share this post with your friends