The Significance of a Payroll System

payroll service

Employees usually represent the largest expense in companies. Business owners usually spend copious amounts of time hiring, training and maintaining sufficient employment for their business operations. The payroll system represents an accounting or finance function business owners use to pay employees for their labor. Payroll systems can be internal or external, depending on the business owner’s knowledge and experience.


Payroll systems often involve several moving parts in a company. Business owners must follow federal, state and local laws when hiring employees, offering compensation and withholding payroll taxes, deductions or garnishments. Small business owners can use professional accounting software to help them maintain payroll information. Most accounting software packages offer customizable payroll modules that help business owners keep accurate records regarding employee information.


Small businesses usually run their payroll systems similar to larger organizations. Payroll systems outline when the company will pay employees (weekly, biweekly, monthly), the use of manual checks or direct deposit, benefit deductions from paychecks and the work requirements for salary or overtime employees. Business owners develop policies regarding these issues to ensure employees understand the company’s payroll process. Payroll systems allow business owners to create a function that is easy for them to understand and use.


Business owners use payroll systems to save time and create structure in business operations. Payroll systems save time because business owners can repeat payroll tasks in a timely manner as needed. Structure is also important in payroll due to the legal liabilities involved with employee payroll. Small businesses can face payroll audits from government agencies. Business owners must present employee information and payroll documents to verify the business owner is following government requirements when paying employees.


Outsourcing payroll is a common activity in small business. Business owners can avoid setting up a payroll system by using a temporary employment agency or third party payroll processor. Temporary employment agencies usually handle all payroll issues for employees. Business owners simply pay a fixed hourly dollar amount to the employment agency for these individuals, similar to other business expenses. Payroll processors require business owners to provide information relating to employee payroll. The processor will cut payroll checks and withhold taxes according to federal and state laws

Expert Insight

Business owners should consider consulting with a public accounting firm or an attorney when setting up their payroll system. These professionals usually have specific expertise and experience with payroll systems. Business owners can limit their legal liability to employee lawsuits by using professionals to conduct an internal payroll audit. An internal audit helps business owners discover if any issues exist in the payroll system and how to best correct the problems. Read more: