Overview of Payroll System

The payroll system keeps accurate employee data stored in an easily accessible database. The system has the ability to update and maintain employee information and to generate required outputs including paychecks, reports to management and reports to the government. Each week, data on the current pay period is entered into the system and verified. This data is used to update the employee master file with appropriate additions, changes and deletions and to generate required output. A payroll system provides an employer with the medium needed to process its payroll.

Types
Payroll systems include manual, in-house computerized and external/outsourced systems. A manual system means that the payroll representative completes the payroll by hand. An in-house computerized system means that she uses payroll software to process the payroll. An external system means that the employer pays a payroll service to process its payroll. The employer should use the payroll system that best suits its requirements. A payroll system provides an employer with the medium needed to process its payroll.

Establishment
The manual system is the least expensive to establish. Typically, all the employer needs are stationary, blank checks, which can be handwritten or typed on a typewriter, and a calculator to manually process its payroll. Because of its high room for error, this system is recommended only if the payroll is small. If the employer wants to make payroll processing easier but has a small payroll, it can hire one payroll representative and buy payroll software, such as QuickBooks or PenSoft, frequently used among small businesses. However, if the payroll is large, such as one with multiple pay frequencies and multi-state processing, the employer would need to invest in more complex software, such as Ultipro. Additionally, it may need more than one payroll representative. With regard to the external system, once the employer locates a payroll service provider, it needs to sign the required contracts, which should include a description of the providers services. If the latter will be handling the employers payroll tax and/or benefits affairs, the employer also needs to give it power-of-attorney. Power-of-attorney gives the payroll service the legal authority to report (and solve matters relating to) its client's payroll tax liabilities and employee benefit

plans to the appropriate institutions. Furthermore, for direct deposit purposes, it needs to give the payroll provider its bank account information.

Payroll Processing
The manual system requires manually computing hourly and salaried workers pay, statutory deductions, such as payroll taxes and wage garnishments, and voluntary deductions, such as retirement and health benefits. The in-house computerized system eliminates all manual processing. Payroll software computes wages and deductions based on the representatives input. The software also has direct deposit capabilities. Additionally, it has the federal and state withholding tax tables hard-coded in the system. The software company updates the tax tables as the withholding rates change, which is usually yearly. The external system employs a payroll staff that performs all calculations, and generates paychecks and pay stubs for the employer. All the employer has to do is send in the payroll hours via telephone, fax, email or mail.