Explaining Payroll Systems

May 17, 2017

In basic terms, a payroll system incorporates everything involved with the paying of employees and the filing of employment taxes. The number of hours worked must be tracked, wages must be calculated, taxes and other deductions must be withheld, pay checks printed and delivered to staff, and all appropriate taxes must be paid to the government. 

The payroll system adjusts gross pay by calculating or subtracting taxes as applicable, and other withholding amounts. When payday comes around, the payroll system will issue checks or payroll deposits to each employee and then as the business owner, you will be given a summary of that information which can be used to calculate their gross and net wages.

When should the payroll system commence? 

As soon as a company takes on its first official employee, payroll should begin and every new employee from there on in, must be reported to the state along with a correctly completed W-4 form. 

What is a W-4 form? 

This form is used to establish how many allowances each employee qualifies for, calculating the federal income tax that needs to be withheld from each pay check. 

For employers, this form is the first of many that must be completed and filed, and kept as part of your payroll system. It must be kept filed securely for up to four years after the employee leaves your company, and for whatever reason that should happen to have been. 

What information should be stored within payroll? 

Such details as the address to which each employee wishes their pay check to be sent to, and bank details for money to be wired to, must be kept track of and stored securely within the payroll system. 

What else does a payroll system do? 

Complying with your taxes as a business owner, is made easier with the use of a payroll system, which processes tax information automatically. The system then goes on to adjust employee pay based on the withholding status that they provided when they completed the W-4 form, and a W-2 form is then generated at the end of the year. 

Withholding and paying taxes is among the most important responsibilities for any business owner, and in the US, Federal Income Tax, State and Local Income Taxes, Social Security Tax and Medicare tax are the major withholdings that the government require. 

Payroll tax can also be calculated within the system, and payments can be automated to the taxing authorities, along with other deductions such as bonuses or wage garnishments and voluntary deductions. 

A good payroll system can also help generate reports, and these are one of the best ways of helping a business to manage its labor costs. The system generates many reports for all employees, whether they’re paid by the hour or salaried, and some systems will have reporting templates that make finding payroll costs for any given period, quick and easy. It also enables business owners to check other important data, such as headcounts, vacation days and enables them to see who are their highest and lowest earners.

At the end of each year, the employer will use its payroll system to process all the data from the previous year, such as wages and withholding information, and round it up on a W-2 form for full time staff, or a 1099 form for those employees who work on a contract. Copies of these forms must then be sent off to the employees in question, the IRS and the SSA. 

So, as you can see, payroll plays a major factor in all businesses and without the help of a professional company/individual who specialize in payroll, getting to grips with its many elements can be tricky and time consuming. Online payroll systems have certainly made things easier for business owners, but outsourcing is the only way to ensure that payroll remains consistently accurate and timely.

Back to List