Types of Payroll Systems

by Grace Ferguson; Updated September 26, 2017
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The payroll system provides the medium necessary for the employer to process its payroll. As long as the payroll system satisfies the employer’s payroll needs, the latter can use whichever system it wants.

Manual

A manual payroll system should be chosen after careful deliberation. This system requires the payroll person to process the entire payroll by hand; increasing the likelihood of errors. Employers should go with a manual payroll system only if they have few employees. The upside of this system is that it’s inexpensive to implement.

Employers can buy standard time-sheets from a stationary shop and have employees complete them. The employer can perform wage and tax calculations on a calculator, hand-write paychecks/pay stubs or use a typewriter and keep hard copy payroll data in storage boxes. Still, attempting to use this system if one is not knowledgeable about payroll laws, or if the payroll is too large, can result in inaccurate paycheck and tax processing.

In-house Computerized

The in-house computerized system is a viable alternative if an employer wants to eliminate manual payroll processing. This system involves the use of payroll software, such as Z-Pay, Ultipro and QuickBooks, that can store payroll data for record-keeping compliance. It calculates wages and deductions based on inputted data. For instance, the payroll person would enter the employee’s filing status, work state and allowances into the payroll software. The payroll software has the federal and state withholding tables hard-coded in the system and performs the calculations.

This system requires the employee to invest in, and maintain, payroll software. Depending on the complexity of the software, the payroll staff may require extensive training. If the payroll is small, a sole payroll person can handle payroll processing. But if the payroll is large, with thousands of employees, an employer would need to hire a full payroll staff, which can include payroll clerk/assistant, payroll specialist, payroll supervisor and payroll manager. This system can prove expensive for employers.

Outsourced

Outsourcing the payroll to a payroll service provider is often a cost-effective and time-saving alternative for employers. Payroll services have payroll professionals that process clients’ payroll, including direct deposit payments, live checks and W-2 processing. Employers pay a flat fee for this service, eliminating the need to pay an on-site payroll staff salaries and benefits. Furthermore, employers do not have to deal with payroll software glitches. Ultimately, outsourcing payroll gives an employer time to focus on other duties.

Many payroll service providers offer online payroll solutions, which allow employers to access to employee payroll data and payroll registers online. Furthermore, payroll services typically offer clients different methods of transmitting payroll hours for each pay period, such as via fax, by email or online.

The downside to outsourcing is that when employees have payroll concerns, immediate help might not be available. Furthermore, when a payroll service makes certain payroll tax errors, the IRS penalizes the employer, not the payroll service. Consequently, some employers hire an on-site payroll administrator, who works as a liaison for the payroll service and the employer.

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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