In order to pay their employees for services rendered, employers must devise a payroll system. Through this system the employer performs payroll processing, which must be done in a timely and accurate manner to ensure that employees receive their paychecks accordingly. The type of payroll system used is entirely up the employer.
A manual payroll system is done by hand. This means that all wage calculations are performed on paper; this includes computation of hours, statutory deductions (taxes) and involuntary deductions (health and pension benefits). An advantage of using a manual payroll system is that it costs very little to use. However, it takes a lot of time and energy to do manual payroll processing. Additionally, there is more room for error with this method. Employees' paychecks and tax filings are susceptible to inaccuracy as a result. In particular, tax filing errors can be costly due to penalties from the government.
A computerized payroll system is when the employer purchases payroll software and uses it as her means to process payroll. This method is much quicker than a manual payroll system. Some companies hire an in-house payroll staff to process their payroll through the computerized payroll system. The payroll staff is responsible for entering all wages to be paid into the system. The system computes the wages, stores payroll information, and print checks. The payroll professional can also access payroll reports, which allows him to check for errors and correct them before the employee receives her paycheck. Computerized payroll also reduces the amount of paperwork to be filed, as most of the payroll information can be stored in the system.
Several employers prefer to outsource their payroll to companies such as Paychex and ADP. This external service allows the employer more time to concentrate on non-related payroll matters. An external payroll service is generally responsible for the entire processing of their clients' payroll, including payroll adjustments, tax filings, and W2 issuing. All the employer has to do is transmit the data to be paid each pay date to the payroll company; for a fee, the payroll company assumes the payroll responsibilities.
Choosing a System
Very small companies (fewer than 10 employees) may use a manual payroll system if the hours tend to remain the same per pay period. However, this system is becoming so outdated, many companies of this size are opting for a computerized system or an external payroll service. Larger companies generally employ a payroll staff and use an in-house computerized payroll system or use an external payroll service.
The complexity of the payroll will often determine what type of payroll system the employer needs. For example, if there is multi-state processing, several garnishments and child supports orders, and different pay rates and pay cycles involved, the employer is better off using a computerized payroll system with an in-house payroll staff or entrusting his payroll to an external payroll service.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.