Payroll Management System: Steps And Benefits

Payroll is one of the essential parts of business accounting as it deals with the business’s human resources. But, managing the payroll process can be a headache, and any small inaccuracy can lead to employee disputes and other legal issues. To avoid such issues and enhance the accuracy and reliability of the payroll process, businesses have now ditched manual processing and moved on to advanced automated payroll management systems. Payroll management systems like the Gusto payroll service have made the process faster and more efficient. Let us understand the payroll management system, its benefits, and the steps of managing the process with the help of an automated system.

What is a payroll management system?

The payroll management system refers to managing the payments a business has to make to its employees. Employees get weekly, biweekly, or monthly payments for the services they offer to a business. Employee payroll includes numerous benefits and deductions adjusted to the gross payment to arrive at the net payment. Payroll is managed in compliance with the laws and regulations related to the business’s industry. Businesses can manage payroll with the help of in-house or outsourced accounting software like the Gusto payroll service.

Benefits of payroll management

Setting up a payroll management system is the best and most preferred practice these days. With the rising number of automated accounting systems like FreshBooks accounting software, payroll management has become easier for businesses. Switching from a manual to a payroll management system brings numerous benefits to the business, such as:


Every business must follow a legal framework suitable for the respective industry. Violation or non-compliance with the regulations results in hefty fines and penalties. First, the business must follow the labor laws and keep the employee payroll and payment records for a time as required by the law.

Employee ethics-

Timely and accurate payment to the employees helps strengthen their trust in the business and enhances their motivation. It boosts business morale and maintains employee ethics towards their work.


Businesses can make their payroll management faster and more accurate by using accounting software like the Gusto payroll service. Accounting software removes the manual labor and time involved in managing repetitive but important accounting tasks. It helps save time and resources that can be used to focus on the core business activities.

Managing employee details-

The law requires that businesses store their employees’ records for a certain time. The payroll management systems securely store employee details and make them easily accessible.

Producing reports-

It simplifies the payroll management process and prepares detailed reports regarding employee check-in, check-out, leaves, wage information, etc. These reports help prepare accurate employee payslips.

Ease of usage-

Many times, businesses might find it difficult to invest in a system they barely know about. However, a good payroll management system like Gusto payroll service usually provides some free trial or lesser charge package for a certain time or first few employees. It helps businesses to understand the working and features of the software, to be used later with full capacity.

Steps to managing payroll

Payroll management is a long, complicated, and important part of every business. Whatever method a business uses to manage the process, there are some simple steps that a business can follow to manage their payroll. The steps to payroll management include:

Establish employer identification number-

The first and most important step for a business is establishing an employer identification number. Having a local and state tax id is also compulsory. The government follows these identification numbers to track the payroll taxes paid by the business and ensure the requirements are met.

Collect employee tax information-

A business must fill out numerous forms before starting payroll processing. Businesses must submit two forms before processing payroll, namely W-4 and I-9 (only for new employees). Besides these forms, the business must also have three documents with them, including:

Employee job application

Salary/wages deductions

Salary/wage garnishments (deductions from employee salary as per court order like child benefit payments)

Choose a payroll schedule-

There are four payroll schedules that a business can choose from, including weekly, biweekly, monthly, and semimonthly. The payroll schedule selected by the business must be as per the business’s and its employees’ requirements. After choosing a pay schedule, a business needs to set up a calendar with appropriate paydays, holidays, and quarterly and annual tax filing dates. Automating systems like FreshBooks accounting software can make the process easier and smoother.

Calculate gross pay-

A business can start processing the first salary/wages once a payroll schedule is established. To process the payroll, the business must calculate its employees’ gross by multiplying the total number of hours worked by an employee in a period with their respective hourly pay. The gross pay must also include overtime pay, which is usually higher than the normal hourly pay per federal laws.

Determine each employee’s deductions-

Businesses gather information about employees’ salary deductions from the W-4 form. This information includes insurance requirements, state and federal requirements, and salary benefits that affect the employee’s salary deductions. Some common salary/wages deductions are social security, federal taxes, Medicare, local taxes, state taxes, worker’s compensation contributions, etc.

Calculate net pay and make the payment-

An employee’s net pay is calculated by adjusting the benefits and deductions from the gross pay. After calculating the net pay, the payment must be made per the business’s chosen payment schedule. Payments can be made via net banking, debit/credit cards, cheques, etc. Businesses using accounting software like Gusto payroll service can schedule the amount and payment day for employees in the system, link the software to their bank account, and make automatic payments to the employees on the scheduled day.

Keep payment records-

Once the payments are made, businesses must keep the payroll transaction records for audit and taxation purposes. Maintaining the records also helps present proofs or make corrections in case an employee files a dispute.

Functions of the payroll management system

Payroll management is a complicated process that transitions from one step to another while needing equal diligence on each step. These transitions are made under the careful consideration of changing regulations. Following are the functions of the payroll management system like Gusto payroll service that make the transition smoother and easier:

Calculate employee wages-

Employee wages are calculated based on each employee’s timesheet. Payroll management systems track the time and attendance of employees for the given period to calculate the accurate gross salary/wages. After calculating the gross salary/wages, businesses must make certain deductions from it to determine net pay, including:


Voluntary deductions like insurance, and

Mandatory deductions such as IRS withholding as per government agency or court order.

Process payroll taxes-

Businesses must calculate and withhold payroll taxes from their employee’s salary/wages, as local, state, and federal laws require. Besides the taxes, businesses should also match the employee’s contribution to Social Security and Medicare.

Comply with payroll recordkeeping requirements-

As per the laws, businesses must also maintain employee records, including name and address, occupation, social security number, regular hourly pay rate, gross wages/salary, deductions, benefits, etc.

Provide the employee with pay statements-

Businesses are required to issue payment statements to their employees to maintain transparency. The statement includes pay rates, hours worked for the period, gross wages/salary, deductions, and net payment.

Whether the business uses Gusto payroll service or any other payroll management system, it is important to choose the right system. Consider the business size, payment schedule, business requirements, etc., before selecting the best automation system. If a business doesn’t want to or cannot manage the payroll process independently, it can outsource it to expert payroll service providers.

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