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How Does a Payroll Software Work in 2024

Last Updated Dec 21, 2023

Written By Top10Ratings
Madison Testa
Reviewed By Madison Testa

Payroll systems manage everything related to paychecks — right from the process of filing employment taxes to paying employees. The purpose of using this software is to calculate wages, track working hours, pay employment taxes to the government, deliver and print checks, withhold taxes, and some other deductions.

If you are wondering how payroll software works, you should understand that the software uses minimum input from your employees to streamline the process of payments. Employers need information about wages and hours worked by an employee to perform automatic calculations and deduct withholdings. Most payroll systems available today go through automatic updates when there is a change in tax laws. They also notify an employer when they need to file a particular tax form.

What is the payroll process? The payroll process has to be planned in detail by the payroll administrator to avoid any mistakes. Even then, there are always some things that cannot be planned. These include consistent monitoring of tax with withholding and paying special attention to certain ongoing tasks. Hence, to leave as little room for errors as possible, the entire process of payroll is divided into three major steps. These steps are called pre-payroll, actual payroll, and post-payroll operations.

Detailed overview of how does a payroll system work:

Pre-payroll activities

  • Defining policy In the initial stages, establishing the company’s pay cycle, leave, benefits, and attendance policy is crucial. Moreover, you need to ensure that the policies are well-defined and approved by the concerned management of the company. This helps establish a standard process of payroll.
  • Gathering input data The actual payroll and interaction with various departments of the company are crucial to the entire payroll process. Various departments of the company can provide you with information that can refine the preliminary stages of the payroll process, like attendance data and salary revisions. The exact nature of the process depends on the company in question. While it may be consolidated for a small business, it can be highly robust for large organizations. In this stage, it is necessary that you understand how payroll software work. This is because the features of the software, like attendance and leave management along with employee self-service portals, can make the process of gathering data less overwhelming. Some of the major providers of payroll software include QuickBooks, Zenefits, Justworks, Paychex, and Gusto.
  • Input validation After you have collected the data, it is checked for its compliance with company policy and its authenticity. The use of payroll software can be of great help in this stage to ensure that no inactive employee is being paid a salary or no active employee has been left out.

Actual payroll process

  • Payroll calculation This stage involves entering the data into the system, like exact figures for salaries and taxes. This process is further refined by removing the appropriate deductions and adjusting taxes, creating an amount called net pay. Also, part of this process is the reconciliation and verification of whether the figures obtained are accurate. It is easy to understand how a payroll system works when you learn that the use of payroll software ensures little to no errors. However, the software follows the process of double-checking the figures and rectifying any errors found.

Post-payroll process

  • Statutory compliance While the payroll software processes the gathered input, it also deducts the statutory deductions from an employee’s salary. The final amount calculated by the software is then sent to the right government agencies. The frequency of this process depends on the company’s dues. Most of the fees involved can be paid using specific forms put in place by the authorities.
  • Payroll accounting If you wish to use a payroll system, you need to understand how important records of financial transactions are; this cannot be stressed enough. This is even more important for the payroll process. Salaries are a crucial part of a company’s operating cost and should be recorded properly in your accounts. Payroll software ensures that you have accurate data of salaries and reimbursements to enter into the company’s ERP or accounting system.
  • Payout The payment of salaries can be done by means of checks, cash, or bank transfers. The most common method that employers use is bank deposits to the employee’s account. Apart from making sure the payroll is correctly processed, you need to ensure if the company has enough funds to make the salary payments. Payroll software relieves both the company and its employees from the various hassles of money being transferred. If you have payroll software that includes a self-serve portal for employees, publishing payslips is easier for the management and employees, as they can log-in to the software to access payslips.
  • Reporting After the current month’s payroll has been completed, the next stage is reporting. Reporting includes notifying the departments of your company on the various associated costs. The departments relevant to this step are usually the management team or the finance department. The report that is submitted to these departments include things such as location, employee costs, and department employee costs. Payroll software helps the payroll administrator gather and extract the right data to create an accurate report.

Having payroll software has many benefits to your company. While in the long run, it makes the process of employee payments easier, it also constantly contributes to the different procedures and the overall workflow of your company. Moreover, it elevates productivity in employees, as they do not have to worry about getting paid the wrong amount at the wrong time. More than anything, the software makes the entire payment simple and reliable.

With over 200 years of combined industry experience, our Editorial Team at Top10Ratings is a diverse group of expert reviewers, product analysts, and content experts. They come from backgrounds in renowned product testing labs, acclaimed review platforms, and leading market research firms. Together, they ensure that every review, ranking, and insight offered on Top10Ratings is comprehensive, expert-driven, and trustworthy. Their dedication to authenticity and clarity guarantees that our readers always receive reliable and actionable advice.

Best Payroll Software  2024