A payroll system allows you to compensate your employees for their labor. You can pay via a manual processing system, an internal computerized system or an external system -- whichever way matches the company’s needs. Number of employees and scope of employee benefits and payroll tax requirements are things to consider when choosing a payroll system.

Manual Processing

A manual payroll system requires you to execute payroll tasks completely by hand. Employees fill out their time sheets or punch a time clock with blank time cards, and you calculate the results manually. Wages and deductions are manually computed. This system does not enable direct deposit; you may hand-write paychecks. Though inexpensive to establish, the system is risky if your payroll is considerable; the more manual calculations you do, the more errors you might make. Payroll tax and employee benefits processing are done by hand. This includes W-2 and annual or quarterly tax reporting with the respective taxation agency. Hard copies of payroll data must be stored in a confidential location. Paperwork can be overwhelming with this system.

In-House Software

An in-house computerized system requires that you process payroll via software at the company. This may be a stand-alone payroll system or an integrated system that includes human resources or accounting features. You may automate your timekeeping system so it records employees’ time via swipe badges or finger or palm prints. Simply make the necessary edits before entering the time into the payroll software. An in-house computerized system simplifies payroll processing. It calculates wages and deductions; enables direct deposit, report printing and record-keeping; and generates tax documents, paychecks and pay stubs. Depending on the number of employees, you might need to hire more than one payroll person. Paying salaries, wages and applicable overtime and benefits and maintaining the payroll and timekeeping system can be costly.

External System, or Outsourcing

An external, or outsourcing, payroll system requires that you entrust your payroll tasks to a payroll provider. These companies have payroll professionals who process their clients’ payroll per the client’s needs. Whereas one employer might only need paycheck processing, another might require full services that include paycheck, benefits and tax processing. This system can save you time and money. Some companies assess a per-check cost, which depends on the features you choose, such as direct deposit, benefit calculation, tax processing and online access. Because the provider is located off site, it lacks the personalized approach of an in-house manual or computerized system. It may also be difficult to monitor your payroll; you might not know about problems until payday.


The Internal Revenue Service holds employers responsible for tax errors made by a third party. If you use a payroll provider, have an on-site person double-check its work. Some states, including Arizona, hold the payroll company responsible for state-related payroll tax errors that it makes.