Although the smallest companies can pay their employees with a manual payroll system, most organizations do payroll on a computer. A computerized payroll system automatically calculates and prints paychecks based on a variety of rates, deductions and taxes -- work that used to take a small army of bookkeepers to do by hand. Companies can choose to have an in-house system or have an outside company do it for them.

Software Programs

A computerized payroll system is comprised of a set of software programs. The programs have various screens into which managers and clerks enter employee data and time sheets; other programs calculate check amounts and produce reports. The programs contain formulas that take the input data, such as hours worked and pay rates, and compute the gross and net pay amounts. Payroll software typically also has a password-based security to restrict access to confidential information.

Database

The payroll software interacts with an underlying database. The database is a set of structured files containing employee records, time worked, commissions and other related information. When the software generates checks or direct-deposit transactions it adds records to a payment table in the database. As with the software, the database contains security features to prevent spying and snooping by malicious or unqualified users.

Reports and Forms

Software in the payroll system generates a variety of reports for management, such as total payroll outlays by week and month, hours worked, and lists of employees according to exempt, non-exempt, union and other classifications. In addition to printing checks, the system produces W-2 and 1099 forms at the end of the year for employee taxes.

Service Bureau

Service bureaus are organizations that specialize in performing accounting services for client companies. By paying a service bureau to handle payroll, a company saves the expense of doing it itself. Although some companies prefer to develop their own accounting systems, payroll is one area in which it is rarely necessary to "reinvent the wheel." The service bureau has the responsibility of getting checks and tax forms out on time; the client company provides the time sheet data and receives the reports.

Human Resources Interface

A computerized payroll system software typically shares data with a human resources system; these functions are related but not the same. A computerized HR system helps the company handle performance reviews, benefits packages, government labor reporting requirements and other management issues. Sharing the same employee database between the two software systems helps keep information consistent and minimizes data entry labor.