What is a payroll management system?

Payday. For most of us, it’s the best day of the month. It's the day our hard work finally shows up in our bank account. The moment when the month’s graft finally pays off, literally.

But if you’re a small business owner in charge of payroll management (or for HR managers or payroll officers), payday feels a little different. It's a sign that you've made it through another pay run successfully.

If that’s you, take a moment to pat yourself on the back. Not everyone gets through payroll unscathed. In fact, Ernst & Young found that around 20% of payrolls contain errors, costing an average of $291 to fix each one.

Now, there is a way to mitigate these risks. A way to not become a part of that statistic. That's by using payroll management software.

This guide gives you the 411 on what this software is and why you should consider using it.

How payroll management fits into your business operations

Payroll just means paying your employees.

However, it’s more than handing someone cash or clicking send on a bank transfer.

Payroll is the whole process of figuring out how much each person should be paid, taking out taxes and benefits, making sure the government gets its share, and keeping a record of everything.

It's how a business keeps its promises to its people and to the law.

Now, there are three parts that make it all work:

1. Payroll management – this is the process of planning and overseeing payroll. It sets the schedule for paydays, decides how salaries and bonuses are structured, ensures the company follows tax and employment laws, and handles high-level decisions about pay policies.
2. Payroll administration – the team or person that does the actual payroll work every pay period. They collect employees’ hours, calculate pay for that period, process payments, fix any mistakes, and answer employees’ questions about their pay.
3. Payroll software – the computer system or program that supports both management and administration. It automatically calculates pay (or at least helps the administrators), deducts taxes and benefits, keeps records of all payments, and reduces errors.

Think of these as the what, the who, and the how of payroll: what needs to happen, who does it, and how it gets done.

What does a payroll management system do?

Now, the payroll software we were talking about earlier, you'd access that software via a payroll management system (or just payroll system for short).

A payroll management system is the tool that helps a business pay its employees correctly and on time, without mistakes.

While not every business uses one, we think that they should. It makes payroll a lot easier, and we’ll get into exactly how in a minute.

For now, let’s just look at what a payroll system actually does. At its simplest, it:

Calculates employee wages

For hourly employees, the payroll software makes sure every single hour someone on your team has worked for you is recorded correctly. It pulls this information from timesheets or whatever employee tracking tool you use.

For salaried employees, it’s a bit simpler. Their pay is usually just their annual salary divided by the number of pay periods.

But even some salaried employees can earn overtime. In those cases, the software tracks their hours to make sure they’re paid what the law requires.

Once it has all the hours and salaries, the system applies deductions. It takes out taxes, retirement contributions, health insurance, union dues, and any legally required payments like child support.

After all that, it spits out the net pay (the amount the employee actually takes home).

Processes taxes

You’re probably aware that employees don’t take home the entirety of every paycheck. The employer has to figure out how much to send to the government. That includes federal, state, and local taxes.

Now, the exact amounts depend on tax rates and the forms each employee fills out, like their W-4 or state withholding certificates.

Employers also have to match contributions to Social Security and Medicare - that’s called FICA. In many cases, the company also pays federal and state unemployment taxes. Some states even require employees to contribute to things like state unemployment, disability, or paid family leave.

Payroll management software does this all automatically.

Keep accurate records

The government requires employers to track a lot of details for every employee. Things like their:

• Name
• Job title
• Address
• Social Security number
• When their workweek starts
• How many hours they worked
• Their pay rate
• Overtime
• Total earnings
• Deductions
• Net pay

Your payment management software generates reports with all of this information. It logs all the details, keeps them secure (because these records have to be stored for years), and makes them easy to access if an audit comes up or an employee has a question.

What used to be a mountain of paperwork is now all stored neatly in one place.

The payroll management process (step-by-step)

There's a whole payroll process that runs behind the scenes to make sure everyone is paid accurately, taxes are filed correctly, and records are kept for compliance. Here's what payroll administrators need to know about payroll operations:

Before the first pay run

Before employees get their first paycheck, there’s a lot to set up.

• You need to register your business with tax authorities so you can file payroll taxes correctly.
• You set up earning codes (basically labels for different types of pay, like regular hours, overtime, or bonuses).
• You create pay schedules to decide when employees get paid.
• You also tell the system which states employees work in, because tax rules can differ.
• Finally, you connect your bank accounts so employees access their salary.

Each pay period

Once payroll is running, you repeat a few key steps every pay period.

First, you collect employee hours, either from time sheets or time-tracking systems, and make sure managers approve them.

Then you process payroll, which means the system calculates gross pay, applies deductions like taxes and benefits, and works out net pay.

You check for exceptions or errors, like missing hours or incorrect pay rates. Finally, payments are sent via direct deposit or checks, and the system ensures everything is compliant with tax and labor laws.

Month, quarter, and year-end

At the end of each month, quarter, or year, there’s more work to make sure everything stays accurate. You reconcile payroll accounts, checking that what was paid matches what was calculated.

Taxes are filed with the government and forms like W-2s or 1099s are prepared for employees.

If mistakes are found, amendments are made. Finally, the system generates reports for leaders so management can see labor costs, trends, and other payroll insights.

Cloud-based systems vs on-premises: what to know

Now, there are two types of payroll systems you could choose:

1. Cloud-based payroll system: Software that lives online. You access it through the internet. You can log in from anywhere, and it’s easy to scale as your business grows.
2. On-premises payroll system: Software that is installed on your company’s computers or servers. Your IT team is responsible for updates, security, and backups. It usually works only at the office.

Here's a full breakdown of the differences between the two:

Benefits you can measure

Trying to become an expert in payroll is tough. That’s why many business owners rely on payroll management software. It not only saves time but also brings a bunch of key benefits:

• Accurate calculations – Automated payroll software makes sure wages, deductions, and taxes are calculated correctly.
• Compliance assistance – Some payroll systems keep track of changing tax and employment rules and notify you when something affects your business via their reporting capabilities.
• Access to tax forms – Payroll software gives you easy access to important documents like W-4s, W-2s, 1099s, and I-9s.
• Flexible payments – Beyond traditional paychecks, payroll systems usually support direct deposits and alternative options like pay cards.
• Detailed recordkeeping – Digital payroll systems create complete employee profiles. You can store and download all payroll records to meet regulatory requirements.
• Employee self-service – Employees can log in via a computer or mobile app to update personal info, change deductions, submit tax forms, and view pay statements. This reduces admin work for payroll administrators.
• Reduced payroll errors – Integrations with time tracking, HR, and accounting software reduce repetitive data entry and help prevent mistakes.
• Automatic alerts – Many systems detect errors and send notifications so you can fix problems before payroll is processed.

Payroll management software helps businesses pay employees accurately, save time, reduce errors, stay compliant, and lets you just focus on business growth.

How to choose a payroll management system

Payroll affects everyone in your business, so choosing the right system is important. Here are some things to think about:

1. Types of payroll systems: There are different options: PEOs, payroll service providers, reporting agents, and more. Understand how each works and which fits your business best.
2. Do similar businesses use it? Check reviews, ask for referrals, and see how businesses like yours handle payroll with the system.
3. Is the provider trustworthy? Look for a provider with a track record of accuracy and reliability. Do your homework before committing.
4. What support is offered? Payroll is too important to leave to chance. Make sure the system offers help when needed, like phone support, a single contact, or regular check-ins.
5. How easy is the technology? Test the software. Can you access it from a smartphone or tablet? Is it user-friendly? Ask how often the system is updated to stay current.
6. What’s the cost? Look for clear pricing. Ask about hidden fees and extra charges. Make sure the cost fits your budget and check if prices could change.
7. Is it secure? Payroll has sensitive employee information. Make sure the system has strong security, encrypted data, reliable servers, and regular updates.

Payroll made easy with Epos Now

That’s it from us. We hope you now have a clearer picture of how payroll management systems work.

At the end of the day, managing people and payments should never feel like a burden, and that’s where Epos Now comes in. Our point of sale system is so much more than a POS cash register. It connects seamlessly with our Payroll App, our Workforce App, and even QuickBooks, giving you one central hub to run your business.

With everything connected, you can spend less time worrying about errors and more time focusing on growth, your team, and your customers.

Because payday should be everyone's favorite day.