Payroll Management: What Every Business Needs to Know

Payroll Management: What Every Business Needs to Know
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Payroll management directly involves and impacts the entire business. A well-managed payroll system helps an enterprise reduce employee turnover and prevent clutter and inaccuracies in its accounting.

The IRS annually issues nearly $7 billion in penalties for company payroll errors. For violations relating to fiscal 2022, the UK’s HMRC tax authorities issued over £20 million in fines to companies that repeatedly failed to report payroll correctly. 

These alarming numbers further highlight the need and importance of proper payroll management. So, let’s understand the role of payroll management and how it can be handled effectively for your business. 

What Is Payroll Management?

Payroll is the process of employers paying salaries or remuneration to their workforce for the work they have completed in a given time period. It comprises several tasks and processes accounting for employees’ wages, taxation, out-of-pocket expenses, deductions, withholdings, benefits, etc.

Employers that meticulously maintain their payroll records experience several advantages across their accounting operations and processes, like streamlined audit processes. Thus, it is essential to manage payroll efficiently, especially for businesses that plan to increase their operations by hiring more employees.

Why Is Payroll Important for Your Business?

Payroll management is one of the most critical business functions directly impacting employee satisfaction. Consider an employee’s perspective: the primary motivation is the remuneration they are entitled to monthly – which is where payroll management comes in.

The chief reasons that make payroll management excellence crucial for enterprises are:

  • Brand Reputation: Mismanagement of payroll puts an organization’s reputation at risk. It could lead to visits by local tax or regulatory authorities for compliance checks.
  • Employee Turnover: It is only fair to release employee salaries on time to enhance employee retention and satisfaction.
  • Financial Integrity: A clear and transparent payroll establishes systematic recordkeeping, helping create solid financial management systems.
  • Calculation Inaccuracies: The scope of payroll calculations increases in proportion to the scale of your business, which may lead to errors if not appropriately managed.
  • Smooth Audits: A well-managed payroll creates a transparent and organized data trail, which is easy to audit.

Types of Payroll Systems

Enterprises manage payroll by outsourcing operations or using more advanced methods like cloud-based payroll software. There are four chief types of payroll systems:

1. In-house Payroll

Enterprises manage in-house payroll systems by hiring dedicated staff to keep payroll records. These systems are cost-effective for small businesses and provide better control over data and operations.

It is suited for small businesses looking to keep their security risks at bay.

2. Cloud-based Payroll Apps

This mechanism utilizes the power of technology, automation, and centralization of services to improve payroll management through real-time insights, data consolidation, automated payroll and tax calculations, and much more. Software-based payroll management provides businesses with custom-fitted solutions that address their specific challenges effectively.

Cloud-based payroll tools are generally subscription-based, which makes them scalable, and they can work for businesses of any size.

3. Professionally Managed Payroll 

Some enterprises outsource their payroll functions to external professionals on a contractual basis. This mechanism is best suited for medium-sized enterprises seeking to redirect attention from payroll operations to more critical business functions. However, in case of inaccuracies, you are still liable if tax authorities produce any issues.

This system works well for mid-sized organizations on a very tight budget. 

4. Agency-managed Payroll 

Enterprises that require extensive payroll management services often outsource this function to payroll agencies. These service providers have teams of full-time payroll and accounting experts who manage all operations for an organization.

This payroll system is suitable for larger organizations and delivers high accuracy. In the UK, some 61% of companies favor this model.

How to Manage Payroll For Your Business

Enterprises seeking to streamline their payroll-based operations should consider the eight significant aspects discussed below for effective payroll management.

1. Select the Right Payroll System

Managing payroll well begins with selecting the right payroll system and software. Dedicated software is typically optional for businesses that outsource payroll.

When selecting the right platform, mid-sized businesses can consider user-friendly interfaces, scalability, employee self-service functions (like timesheets), automation capabilities, and software integration.

Alternatively, it also rests on the enterprise to carefully weigh information sensitivity when outsourcing payroll to professionals or agencies. That is where cloud-based payroll software outshines every other payroll system, thanks to its secure and governable access permissions.

2. Integrate a Time-Tracking System

Time-tracking with timesheets is how many companies tally the hours employees need to be compensated. Timesheet data calculates factors like overtime pay, paid leaves, time spent on various projects, and more.

Time-tracking systems need to be integrated well with payroll systems to help professionals calculate the accurate amount of remuneration to be disbursed to each employee. This feature is an employee-end input, so it’s a good idea to consider accessibility across devices.

3. Categorize Employees

Every employee has a unique salary, accounting for taxes, benefits, deductions, overtime, etc. Additionally, organizations have hierarchical structures, and salaries vary with each step.

Categorization of employees helps you identify your workforce based on hourly wage or salaried employees. It also helps establish which persons in the workforce are entitled to paid parental leave or other mandatory compliances, which brings your enterprise closer to accountability and compliance and avoids workplace accidents.

4. Calculate Employee Pay

The balance of the entire payroll system rests on the accuracy of calculating employee pay.

To calculate employee pay accurately, data from employee timesheets, benefits, taxes, deductions, penalties, etc., must be collated, and calculations must be carefully performed to achieve the correct figure for each employee. Managing this aspect using automated cloud-based payroll software drastically simplifies the functions and eliminates calculation errors.

5. Establish a Payroll Schedule

Your payroll schedule brings predictability and transparency into payroll systems. Employees remain assured that their paychecks will be accurate and credited to their accounts within specific timeframes.

Establish mandatory deadlines for submitting timesheets. You can also develop payroll policies that guide the processes and outline the protocol to ensure everything runs according to schedule. If you’re working with an external accountant or payroll bureau, consider the cadence required for them to prepare everything in time.

6. Maintain Proper Compliance

Payroll compliance pertains to the mandates that enterprises must follow regarding tax regulations, hourly wages, withholdings, etc. Compliance exists to ensure that employees are treated fairly and receive their honest due promptly. It also reduces the risk of penalties and lawsuits for employers that manage payroll effectively. 

It helps to leverage the automation capabilities of payroll apps to identify compliance issues and flag them immediately.

7. Keep Accurate Records

Establish a recurring payroll review to ensure that your company keeps records referring to the dates prescribed by authorities. The FLSA mandates that employers maintain payroll records in the US for three years, and British authorities have similar requirements. 

Check with your payroll professionals to understand these timelines.

8. Audit and Automate Your Payroll Process

Payroll functions involve managing large volumes of data, so timely audits are necessary to maintain accuracy. Establish a routine audit schedule to identify bottlenecks in your audit processes. 

Timely audits help identify payroll calculation errors before the data is forwarded for downstream processes, preventing mistakes from creeping into the company’s financials. Automation tools enhance efficiency by offloading clerical tasks, saving valuable time for your HR teams. With automation, audits can be done quicker and with more accuracy. 


Effective payroll management is a large part of your organization’s internal operational success. It begins with clocking the working hours accurately and ends with maintaining accurate payroll records.

Enterprises today require resilience and flexible dynamics in their functions, which makes adopting cloud-based payroll software a great advantage. Whether using an app, calculating everything manually, or outsourcing to a service vendor, establish a workflow that makes sense for your team.

The content published on this website is for informational purposes only and does not constitute legal advice.

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