How to Create a Payroll System

Pay employees through the payroll system.

A payroll system is the channel used to process the business’ payroll. You cannot process payroll without a payroll system. You do not have to use a specific system, but the one you choose should be effective—one that ensures accurate and timely paychecks. Furthermore, it should ensure payroll tax and benefits compliance. When creating a payroll system, tailor it to match your needs.

Instructions

1. Implement a manual payroll system if you have less tan 10 employees. This payroll is done completely by hand; therefore, use it only if you have a small payroll.

   Manually figure wages based on the employee’s time card data and pay salaries. Use the IRS Circular E and the employee’s W-4 form to compute federal income tax and to determine the social security and Medicare tax rates from the relevant tax year. Check with your state taxation agency for state income tax guidelines. Print the paychecks/pay stubs on a typewriter or hand-write them. File all hard-copies related to each pay period in a storage area. This includes time cards, wage and deductions for each employee; and quarterly and/or annual payroll tax reports.

2. Establish an in-house computerized system if you would rather to use payroll software. Examples include a standalone payroll system for mid-size businesses, such as PenSoft; payroll accounting software for small businesses, such as Sage Peachtree; and HR/payroll software for large corporations, such as Ultipro. Choose the software that can most capably process your payroll’s volume.

   Payroll software makes payroll processing easier; it eliminates manual wage and tax computations, generates paychecks and pay stubs quickly, prints various payroll reports, and has direct deposit capability. Furthermore, it reduces paper filing.

3. Use a payroll service provider to handle your payroll tasks. Many employers use this method because it allows them time to focus on other tasks. The payroll company does the entire payroll processing and ensures that employees are paid appropriately. When payroll errors or concerns arise, the employer notifies the provider, which makes the corrections or addresses the inquiries.

   Some providers also offer benefits and payroll tax services, which includes payroll tax and retirement benefits reporting to the government. Outsourcing the payroll is cost-effective. The payroll provider charges a flat fee, which is generally inexpensive when compared to investing in a payroll staff and payroll software. If you would be more comfortable having an on-site payroll staff, you can hire an on-site payroll administrator who serves as a liaison between you and the payroll company.

Tips & Warnings

• You must have a timekeeping system in place, regardless of which payroll system you use. If you have hourly employees, purchase standard time sheets from a standard stationary shop. You can also install a time clock or create your own time sheet via a spreadsheet program, such as Microsoft Excel. Have each applicable employee complete a weekly time sheet. A manager or supervisor must always endorse the time sheet.

• If you use a payroll service provider to process your payroll taxes, you are still ultimately responsible for making timely and correct tax deposits to the government. You receive the penalty for noncompliance, not the payroll company. Consequently, have an on-site personnel monitor such tasks.

References

• Media Wiley: Creating a Payroll System
• U.S. Department of Labor: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA)

Resources

• Payroll Service Providers
• State Revenue Sites
• PenSoft
• Sage Peachtree
• Ultimate Software