While a comprehensive compensation package can include everything from health insurance to PTO, many workers prioritize pay. For businesses, that means properly managing compensation is essential to keeping employees happy.
Payroll is what makes it possible. Payroll systems make sure your business runs smoothly while meeting both employee expectations and regulatory requirements.
Payroll is much more than just paying wages. It’s a multi-faceted process, and streamlining that process is critical to any organization’s success — especially if your company manages diverse, cross-border teams.
Defining payroll and understanding its importance
If you look up the meaning of payroll in the dictionary, you’ll find two definitions:
An employer’s list of those entitled to pay and of the amounts due to each
The sum necessary for distribution to those on a payroll
What those definitions fail to demonstrate is that payroll management is complex. It includes tracking work hours, calculating withholdings and deductions, and compensating every employee accurately and on time.
To truly understand just how tricky payroll is to manage, you have to consider its core components:
Employee time tracking. Time tracking ensures accurate records of hours worked, including overtime.
Wage and salary calculation. Calculations need to include
base pay, bonuses, and commissions. This process also determines hourly wages for non-exempt employees and fixed salaries for exempt employees.
Tax withholding. Deduct federal, state, and local taxes as required by law. Withholdings also include contributions to Social Security and Medicare.
Benefits and deductions. Other deductions include contributions to health insurance, retirement plans, and
other employee benefits.
Compliance. All payroll activities must adhere to labor laws and tax regulations to avoid penalties.
Without a well-organized payroll process, your business runs the risk of errors, compliance violations, and a loss of employee trust. All of these problems can cost you time and money — and in some cases, cause your best talent to leave.
The 4 key functions of the payroll process
A payroll system involves several critical functions to compensate employees correctly and help businesses comply with standards:
1. Payroll processing and distribution
Payroll processing starts with calculating gross pay, which includes regular wages, fixed salaries, and other earnings. After deductions and withholdings such as taxes, Social Security, and benefits contributions, the remaining amount — known as
net pay — goes to employees.
Processing systems distribute payments via checks, direct deposits, or other approved methods. Many businesses prioritize direct deposit for its convenience and cost efficiency.
2. Recordkeeping and documentation
Payroll compliance, audits, and resolving employee inquiries all hinge on effective recordkeeping. To ensure transparency and compliance with labor laws and policies, your company must meticulously track and store all payroll-related documents, including payroll taxes, employee W-4 forms, and records of hours worked.
3. Determining payroll frequency
Businesses can choose weekly,
biweekly, or monthly pay schedules based on their structure and workforce needs. The length of the pay period determines how often employees receive their net pay and influences cash flow management and administrative workload.
Employees with hourly wages may benefit from weekly pay schedules, while biweekly or monthly cycles are common for those on a fixed salary. Companies using direct deposit often find it easier to manage biweekly or monthly payroll cycles due to streamlined fund transfers and reduced administrative workload.
4. Employee support and communication
Employees rely on payroll to be accurate and timely, which means support and communication are critical. Providing clear policies and communication channels, accessible resources, and a self-service online portal prevents misunderstandings and builds trust.
The types of payroll systems
Choosing the right payroll system depends on your organization’s size, budget, and complexity. Here’s a quick guide to common systems and their pros and cons:
1. In-house payroll
Managed internally, this approach is suitable for smaller companies with straightforward payroll requirements. While an in-house payroll system is generally the most affordable, it’s the most time-consuming method and may lack the advanced features of an external payroll solution. Employers who choose in-house payroll may require the expertise of a dedicated specialist or full-time accountant.
2. Outsourced payroll services
When you outsource payroll tasks, a third-party provider takes on the administrative burden, ensuring payroll compliance and accuracy. This option is often ideal for businesses that don’t have the time or resources to manage things in-house. It’s also good for those with complex payroll needs, such as managing employees across different states or regions with varied salary and wage structures.
3. Payroll software solutions
Can’t decide if running things in-house or outsourcing would work better for your company? Payroll software offers the best of both worlds, using automation to streamline payroll processing, tax filings, and recordkeeping. Businesses have the power to control the process without completely surrendering to another company.
Payroll tax compliance requirements
Compliance with payroll tax laws is crucial to avoid penalties and protect your business’s reputation. Key compliance requirements include:
Filing federal, state, and local taxes. Accurate and timely submissions ensure compliance with regulations.
Employer contributions. Social Security and Medicare taxes, along with unemployment insurance, are mandatory contributions for employers.
Employee tax withholding. Employers must handle income tax deductions based on the withholding information provided by employees on their W-4 forms.
Frequently asked questions
Here’s more information about payroll and how it works.
What is the difference between gross pay and net pay?
Gross pay is the total amount an employee earns during a pay period before deductions and withholdings. Net pay, also known as take-home pay, is the amount employees receive after all required deductions come out. Ensuring employees understand this distinction can help them better manage their finances.
What is the difference between wages and salary?
Wages are typically based on the number of hours worked, making them variable from pay period to pay period. A salary, on the other hand, is a fixed amount that employees receive regardless of the hours they work.
How can businesses ensure employees receive accurate net pay?
Accuracy in calculating net pay depends on proper recordkeeping, applying the latest tax rates, and accounting for employee-specific deductions like health insurance or retirement contributions. Payroll software can automate these calculations, reducing errors and ensuring employees are paid correctly.
How often should payroll records be updated?
Update payroll records with every pay period to ensure accuracy and compliance. This includes recording hours, applying tax updates, and adjusting for changes like new hires or benefit elections. Regular updates help avoid errors and support timely employee payments. Many businesses use automated payroll systems to make this process more efficient.
What are the best practices for choosing a payroll provider?
Selecting a payroll provider depends on your company’s size, complexity, and specific needs. Key considerations include:
Ease of use. Look for intuitive systems that minimize the learning curve for HR teams.
Scalability. Choose a provider that can grow with your business, offering features like international payroll or advanced reporting.
Compliance tools. Ensure the system includes automated tax filing, labor law updates, and support for multi-state or cross-border regulations.
Customer support. Reliable assistance for troubleshooting or customization needs is crucial.
How can businesses ensure compliance with payroll regulations?
Payroll compliance requires a combination of thorough recordkeeping, regular training, and proactive monitoring of tax laws and labor regulations. To remain compliant, your business should:
Maintain accurate records. Store payroll data, including tax filings and employee deductions, for the legally required time. Check the standards in your area.
Conduct audits. Periodically review payroll practices to identify and correct errors.
Leverage technology. Use payroll software with built-in compliance features to stay current with tax codes and labor laws.
How does EarnIn’s Earned Wage Access complement payroll?
EarnIn offers employees Earned Wage Access
without disrupting existing payroll cycles. With our no-integration solution, this means that your payroll team can continue to process payroll as usual. Meanwhile, employees can enjoy
on-demand access to their earned wages where they can get up to $150 per day, with a max of $750 between paydays, starting at $2.99 per transfer. By providing this financial flexibility, your company can reduce employee financial stress and enhance engagement.
Supporting employee financial wellness with EarnIn
Modern payroll systems are about more than just processing paychecks. They’re an opportunity to enhance the employee experience.
No matter what payroll frequency you choose, EarnIn can help bridge the gap between paydays, giving your people the financial flexibility they deserve without impacting your operations.
EarnIn’s
Earned Wage Access (EWA) works alongside your existing payroll setup, providing employees with access to earned wages when they need them most — with no changes to your payroll operations required.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
EarnIn is a financial technology company, not a bank. Banking services are provided by our bank partners on certain products other than Cash Out.
A pay period is the time between your paychecks, such as weekly, biweekly, or monthly. EarnIn determines your daily and pay period limits (“Daily Max” and “Pay Period Max”) based on your income and financial risk factors as outlined in the
Cash Out Maxes section of our
Cash Out User Agreement. EarnIn reserves the right to adjust the Daily Max and Pay Period Max at its discretion. Your actual Daily Max will be displayed in your EarnIn account before each Cash Out.
EarnIn does not charge interest on Cash Outs or mandatory fees for standard transfers, which usually take 1–2 business days. For faster transfers, you can choose the Lightning Speed option and pay a fee to receive funds within 30 minutes. Lightning Speed is not available in all states. Restrictions and terms apply; see the
Lightning Speed Fee Table and
Cash Out User Agreement for details and eligibility requirements. Tips are optional and do not affect the quality or availability of services.
