How to Design a Payroll System

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A payroll system is the medium through which you process your payroll so the necessary federal and state requirements can be met. Specifically, the U.S. Department of Labor requires you to compensate employees correctly and on time; the Internal Revenue Service requires federal payroll tax withholding; the state labor department requires you to apply state labor laws, and the state taxation agency requires state payroll tax withholding. When designing a payroll system, choose the one that best suits your needs.

Assess your payroll requirements to determine the appropriate system. The manual system requires payroll processing by hand. It has an increased risk for error so use it only if you have few employees. The in-house computerized system requires processing via payroll software. Use it to simplify payroll processing. The external system requires outsourcing payroll duties to a payroll service provider. Use it if you want to eliminate or significantly reduce your payroll-processing tasks.

Create the manual system, if that is the one you choose. Buy standard time sheets at an office supply store, or create them with a spreadsheet or office suite program. Purchase blank payroll checks from an office supply store, or use your bank checks. Use a typewriter to print paychecks or hand write them.

This system requires you to manually calculate wages and deductions. Stay abreast of federal withholding, tax filing and tax deposit laws via IRS Circular E. Contact your state revenue agency for state payroll tax guidelines. Triple-check the payroll before issuing paychecks. File hard copies of payroll reports in a confidential area.

Make the in-house computerized system if that is the one you choose. Purchase the payroll software that best meets your needs. Small businesses, for example, can use QuickBooks, medium-sized companies can use Ultimate Software and larger companies can go with Mangrove. You can have your hourly employees punch a regular time clock, but a computerized time clock system, such as Kronos, is more efficient because it allows you to import the time into payroll software. The software calculates wages and deductions, enables direct deposit, prints paychecks and pay stubs, has the federal and state withholding tax tables embedded in the system, and saves and prints payroll reports.

Make the external system if you choose that route. Most payroll service providers require you to upload your payroll hours via the Internet, or send them by fax or email. The provider processes your payroll and sends you the paychecks and payroll reports by each payday. Some companies allow you online access to their system, which lets you to print reports and paychecks to your own laser printer.

When establishing this system, the provider should have you sign a mutually agreed-upon contract detailing its services and give you a listing of its prices. For direct deposit purposes, give the provider your bank account and routing number. If the provider will be handling your tax and benefits affairs, it should have you sign a power-of-attorney document giving it permission.


  • You can incur IRS fees for tax errors a third party makes. Consequently, always double-check the payroll service provider’s work. Create a flowchart for your payroll system. The chart shows the tasks involved in processing your payroll from start to finish based on the chosen system.



About the Author

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.

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