What is a payroll system and how does it work?

June 11, 2021

June 11, 2021

Every company needs to run payroll. And while it may not be the most glamorous job, it’s an essential duty nonetheless. Staying on top of business payroll allows everyone on your team to get paid the correct amount on time. However, the payroll process can be repetitive, mundane, and time-consuming. If you run a company with many employees, the payroll process can also get complicated.

A payroll system enables you to run payroll quickly and efficiently. By spending less time and effort on payroll, you can focus on other, more pressing business needs. In this article, we’ll explain what a payroll system is, how payroll is done, and how your business can benefit from a payroll process. Read on to learn more about how to set up payroll, or skip to any section by using the links below.

What is payroll?

Running payroll refers to the process of compensating employees for their work. Every pay period, an employer must calculate and distribute employees’ wages. The employer is responsible for accurately adding up the hours an employee worked and calculating their gross wages. Employers are also tasked with making deductions for local and federal taxes, Social Security, unemployment insurance, and more. Then the company must disburse paychecks to employees on payday.

As you can imagine, this process can get messy quickly. If you have more than one or two employees, running payroll can become extremely complicated and overwhelming. For the sake of time and convenience, most business owners find ways to avoid running payroll themselves. Typically, they either set up an in-house payroll system or outsource payroll to a different company.

How does payroll work?

While transferring money from an employer to an employee may sound simple, there are a variety of important aspects to be taken into consideration. Following a consistent payroll process for every employee can minimize errors and keep your business compliant with relevant tax laws. The payroll process for most companies can generally be broken down into eight essential steps:

  1. Determine your payroll system
  2. Come up with a payroll policy
  3. Collect employee information
  4. Set up direct deposit
  5. Implement a time tracking system
  6. Review employee timesheets
  7. Approve and submit payroll
  8. Create and save payroll records

As you can see, there are more steps to running payroll than you may expect. However, after you do the upfront work of setting up a payroll system, the process becomes much simpler.

What does a payroll system do?

Setting up a payroll system helps to ensure that payroll gets done accurately and on time. With a system in place, companies can better manage payroll. The last thing you want as an employer is for your team to have problems with their paychecks. Every employee expects to be paid the amount they’re owed on payday. If they receive a late payment or a light paycheck, they’ll likely be dissatisfied with management.

So what is a payroll system? As far as what a payroll system looks like, companies have a few different options. Many companies use the following types of payroll systems to manage employee compensation.

  • In-house payroll: Some companies set up an internal payroll process that must be completed manually every pay period. With this method, either the business owner or a human resources employee is directly responsible for running payroll. While this can be an economical option for small businesses, it can be hard to sustain once your team grows.
  • Full-time accountant: An accountant is a financial expert who can run payroll and file tax forms on your behalf. Outsourcing payroll management to an accountant can provide you with helpful support. They can take care of the payroll process from start to finish and give you advice and insights along the way.
  • Payroll servicePayroll providers are companies that specialize in running payroll for other businesses. They offer various payroll services, from time tracking to filing taxes on your company’s behalf. Generally, payroll providers charge a flat fee per month or payroll run.
  • Payroll software: With specialized accounting software, you can automate payroll processing entirely. One benefit of software solutions is that they minimize the chance of human error. Plus, payroll and HR software programs can usually generate detailed payroll reports and pay stubs each pay period.

If you’re not sure which payroll system is suitable for your company, see our article on how to choose a payroll management system.

Three reasons why a payroll system is essential

Payroll is a necessity for every business, no matter how big or small. Having an effective payroll system can ensure everyone on the team gets the proper paycheck on time. And while a payroll system can benefit employees, it’s also a great asset for employers. Below, we’ve listed just a few reasons why it’s essential to have a payroll system in place for your business.

  1. Save time: A payroll system can help you streamline the payroll process. Manually adding figures, entering data, and calculating taxes can be extremely time-consuming. A payroll system allows you to spend less time on payroll and more time running your business.
  2. Boost employee satisfaction: Your employees are going to want to receive the wages they’re due come payday. As an employer, even making a single mistake with a paycheck can be damaging. If a paycheck arrives in an employee’s bank account late, this can prevent them from paying bills and hurt their trust in the company. A payroll system helps to ensure employees are paid the correct amount on time.
  3. Tax compliance: One of the most difficult parts of processing payroll is accounting for tax withholdings. Each pay period, deductions need to be made for payroll taxes, federal and local taxes, Social Security, Medicare, state unemployment taxes, and so on. Failing to account for employment tax deductions can land your company in trouble with the IRS. A solid payroll system will make any necessary tax deductions or garnishments so that your company stays in compliance.

Benefits of payroll software

Full-service payroll providers and payroll software offer unique advantages over other payroll solutions. Here are just some of the benefits that come with these particular payroll services:

  • Save money: Pricing is one of the most important considerations for many small business owners. Hiring in-house payroll managers or an accountant can be expensive. You’ll have to pay for salaries, benefits, PTO, and so on. However, with a payroll provider, you typically pay a flat monthly fee, making it a cost-effective option in the long run.
  • Automate payroll: When you use payroll software, you can automate most aspects of the payroll process. In this case, you’ll just have to do some initial setup, then you can run online payroll in a matter of clicks each pay period.
  • Minimize errors: When you run payroll manually, all sorts of human errors can occur. These errors can result in employee dissatisfaction or tax noncompliance. Payroll software can complete complex calculations in no time, saving you time and minimizing the chance of human error. Many payroll companies even offer penalty protection in case you get hit with a tax penalty.
  • Access anywhere: Almost every payroll provider has a website or mobile app, so you can access payroll data no matter where you are. Many also offer employee self-service portals that allow your workers to track their hours and view HR data on the go.


If you run a small business—or any business—setting up a payroll system is essential. A payroll system makes it easy to accurately compensate your team on time. And these days, more and more companies are beginning to automate the payroll process. With software like QuickBooks Payroll, you save time and minimize errors at an affordable price point. With our payroll software, you can set up auto payroll so that it runs automatically each pay period. Our payroll software also provides tax penalty protection, free direct deposit services, and automatic payroll tax filing.

As a business owner, you likely want to spend as little time on payroll as possible. Yet, the job needs to get done right every time. Stay on top of employee compensation by choosing the best payroll software for your company.

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