What is payroll management?

Even with a sound understanding of payroll and all the related concepts and processes, payroll management represents a challenge for organizations of any size. A well-working payroll management system is crucial for ensuring that payroll is accurate and that employees are paid on time. But what does payroll management entail? And how can businesses develop a successful payroll management system?

Payroll management refers to the administration of all the processes, data, taxes, and records linked to payroll. It encompasses all the stages of processing payroll (i.e. pre-payroll activities, payroll calculation, and post-payroll activities) and even goes well beyond the tasks that need to be completed in the actual payroll process. Managing payroll spans from setting up a payroll and compliance calendar to ensuring payroll security to putting into place the necessary payroll KPIs to monitor how well payroll is handled in the organization.

There’s no denying the importance of payroll. Organizations that fail to pay their employees correctly (and on time) will be out of business faster than they could imagine. But managing payroll efficiently and without mistakes is not only vital because it keeps employees from jumping ship and looking for a new job. There are several other reasons why managing payroll is essential:

• Ensuring payroll compliance, including compliance with tax laws and timely reporting of withheld payroll taxes

• Enhancing financial forecasts and workforce planning with transparent and accessible payroll data 

• Improving employee performance and engagement through financial well-being and reliable payments

• Creating a positive employee experience

• Reducing the error frequency in payroll

• Being better prepared for audits

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A payroll management system is the sum of processes, procedures and tools a business uses to ensure smooth payroll operations for every new payroll run—the term is also often used interchangeably with payroll software (or payroll management software), but we’ll employ the term in its broader sense. 

It outlines how the organization pays its employees, handles payroll taxes, processes payroll data, and guarantees compliance throughout the entire process. Setting up a proper payroll management system isn’t easy though. Here are a few pointers to help you get started: 

• Decide how you want to manage payroll, i.e. manually, with software or through payroll outsourcing

• Choose a pay period and develop a compensation structure

• Gather the necessary employee data needed to process payroll

• Research different salary payment methods

• Know your reporting obligations and payroll responsibilities

• Work out clear protocols and procedures for what needs to happen during each stage of the payroll process

• Involve other departments and business functions to create the necessary links between payroll management and the rest of the organization

• Define roles and responsibilities

• Provide training for your employees

• Consolidate your payroll due dates in a payroll calendar 

• Collect all the different deadlines for mandatory payroll reporting

• Keep up to date with changes in tax laws and payroll regulations

• Define which targets you want to achieve through payroll management and how to measure your success

• Integrate your payroll system with your other workforce management tools

• Consider payroll automation

• Don’t forget about payroll record keeping

One of the first decisions businesses need to make before they can implement their own payroll management system is how they want to manage the payroll process. There are three different options to choose from.

Manual payroll management

Managing payroll manually means not using payroll software, automation or integration. Instead, payroll is processed and handled manually with the help of spreadsheets, payments to employees are issued one by one via direct deposit, and payslips are generated one at the time and then sent to each employee via email or post. 

Relying on manual processes for payroll processing comes with several drawbacks. The most prominent ones being longer payroll processing times, increased risk of error, low level of security, and dependence from the person who processes payroll in the organization. 

Needless to say that manual payroll processing becomes increasingly difficult the more employees are on the payroll, which is why it’s definitely not an option for medium-sized businesses and enterprises. On the plus side, using manual processes for payroll doesn’t lead to any additional costs.

Payroll management software

There are many different payroll softwares on the market which allow businesses to manage their payroll in-house in an efficient and cost-effective way. The available software solutions range from simple payroll calculation and payslip issuance to full payroll automation and integration with time tracking and attendance systems as well as with the business’s HRIS. 

The most basic functionalities of a payroll management software include: 

• Calculating employee pay, payroll taxes, and other deductions

• Generating and distributing payslips

• Paying employees automatically

• Collecting payroll data and making it accessible

The more you automate, the more efficient and less time-consuming your payroll process becomes. The big advantage of using software to calculate employee wages and salaries is that, as long as the data input is correct, your employees will always get paid accurately. 

Outsourced payroll services

The last option businesses have to manage their payroll is to completely outsource the process to an external payroll service provider. Payroll outsourcing might be the most expensive option for payroll management, but the elevated costs provide the business with the peace of mind that their payroll is taken care of by experienced payroll experts. 

In fact, outsourcing payroll is the safest option in terms of payroll compliance. Having an external party handle payroll for you means you don’t have to worry about missing important deadlines for statutory payroll reports anymore. However, it comes at the cost of not being in control of your own payroll process anymore, which is an issue for many businesses.