How to manage payroll (best practices, process, and software)

What is payroll?

Payroll is the process a company uses to compensate its employees for their work in a given period of time. It’s mostly handled by a company’s finance or human resource departments. 

Typically, payroll involves:

• Creating a segmented list of employees according to their employment type.
• Calculating employees' wages and incentives.
• Working out tax and benefit deductions.
• Crediting the payments to each employee on time.
• Maintaining detailed payroll records like payslips, attendance records, work time logs, calculations of earned bonuses, and tax deduction records.

Why manage payroll?

Here are a few reasons why companies should have well-planned strategies in place to manage payroll:

Better accuracy

A payroll management plan follows structured processes, and best practices, which can minimize calculator errors. It helps your system to process complex tax rules, overtime pay, and benefits deductions with precision. 

Additionally, if you use automated payroll management systems or robust softwares, it can even import data from HR and time-tracking tools, reducing manual errors like typing mistakes, duplicate entries, or miscalculated hours. 

They can be agile enough to account for salary increases, new tax brackets, promotions, and role changes in real-time, eliminating any possible payment discrepancies. 

Payments made on-time

Lack of payroll management can cause incorrect or delayed salary payments, leading to dissatisfaction, lowered morale, and potentially higher employee turnover. Outlining and automating payroll administration strategies eliminate these errors, streamlining precise wage calculations and timely salary disbursals on payday.

A scalable payroll management system can navigate the complexities of a growing workforce without causing any payment delays, maintaining consistency across your organization. 

You will be able to process Automated Clearing House (ACH) deposits for your US employees and wire transfers for your team, around the globe, on time. 

Robust reporting

If you use a payroll management system or software, it will mostly have built-in reporting features. From wages to overtime, it will track and centralize all payroll data in real time, making them accessible to all stakeholders. These tools can automate your analytics and data points to generate insightful reports at customizable intervals.

You can sync the generated reports with your accounting systems so that your financial statements accurately record all the payroll expenses. This can help you better budget, ROI calculations, and overall cash management.

Payroll reports also let you assess your benefits programs’ value by showing how the employees are using them. Such insights will help you to make adjustments that are more aligned with your budget and the employee's needs.

Faster payroll processing

Manual payroll calculations take up a lot of time and delay payment processing. Any changes in tax laws, employee benefits, and salary structures get synced automatically, saving the time your accounts team otherwise would have spent on manual calculations.

Automating such repetitive tasks can reduce administrative burdens and eliminate processing challenges. An efficient payroll management system can also process payments in bulk, accelerating payroll processing even further.  

Legal requirements

Payroll involves many complex regulations – both at the local and national levels. This gets even more complicated if you are planning to expand your workforce abroad. Not paying enough attention to the compliance rules can land you in expensive penalties and lengthy legal troubles. 

Since payroll management standardizes how your company handles employee payments, fewer discrepancies exist. Your system is updated in accordance with the changing labor laws, and wages and benefits are revised accordingly. It keeps up with federal, local, and state tax laws, makes the correct deductions, and maintains compliance.

A payroll management system can also help you save all related documents so that they are quickly accessible in potential instances of external audits. 

3 ways to manage payroll

There are multiple ways of managing your payroll. It depends on your company’s size, workforce structure, and budget. 

Here are three primary ways many people choose for managing payroll:

Do it yourself

If you are a small business owner or a medium-sized company with essentially a local workforce and a limited budget, managing payrolls without expensive tools is possible. However, for this to work, you might require detailed strategizing so that every member of your payroll management team follows consistent steps. 

Use payroll software

Investing in an efficient payroll solution or software is a good option for medium to large-sized enterprises with an extensive and growing workforce. Such systems automate repetitive tasks like wage calculations and tax filings, reducing administrative burdens. 

They also update the payroll according to changes in related regulations, upholding utmost legal compliance. 

Outsource your payroll management

If your team does not have the bandwidth, or you simply can't invest the time to set up and navigate the complexities of payroll management on your own, you can outsource it to a third-party service provider.

Companies with foreign employees may consider outsourcing payroll management to local agencies of that particular region. These agencies might be more well-versed with local labor laws than your in-house team.

How to manage payroll yourself (process) 

As a business owner, you might not have the budget to invest in tools or outsource payroll management. However, with the right startup bookkeeping process, you can manage it quite well yourself. 

Here are the steps:

1. Collect (and update) employee data

Create a standard form to collect employee data. It should include the employee’s full name, age, residential address, employee identification number, and social security number.  

Make sure to collect a completed W-4 form from employees. This form will indicate the employee’s filing status and help you withhold the correct federal income tax withholding from their pay. 

Check this information every six months with a form that asks employees to inform you about any changes to their personal information. Help them understand why not informing the company about such changes may cause delays in their salaries.

2. Calculate gross pay

Gross pay for an employee is the amount that they get before tax deductions. To calculate it accurately, you should maintain manual timesheets to record attendance and working hours. Keep separate silos for overtime, sick leave, and vacation days. 

For salaried employees, if you divide their annual salary by the number of pay periods, that will be their gross pay.

If you have employees on an hourly wage structure,  multiply worked hours by their specific wage to get their gross pay.

3. Calculate net pay

Net pay is the amount that an employee will receive as their salary. To calculate an employee's net pay, subtract applicable taxes, the employee’s benefits package cost, and other necessary deductions. The remaining amount will be their net pay.

4. Determine employer payroll tax contributions

As an employer, you will have to pay some taxes on behalf of your employees, like: 

• Old Age, Survivors, and Disability Insurance (OASDI): The tax rate in 2024 is 6.2% for both employees and employers.
• Medicare tax: In 2024, the employer's tax rate is 1.45%.
• Employers Annual Federal Unemployment (FUTA) Tax: The tax rate is 6%. 
• State Unemployment Tax Act (SUTA): The rate varies from state to state. 

You may have to make more payroll tax contributions depending on regional regulations. 

5. Pay employees

Decide a payment schedule for each employee (weekly, biweekly, monthly, etc.). You may also implement a standard schedule for your workforce to simplify the process. Check whether your schedule complies with local labor laws.

Some software will also allow you to create recurring reminders while setting it up. Once you do that, you will automatically get reminders in your email or phone for every employee’s payment date. You should establish clear deadlines for submitting worked hours and processing payroll for timely payment. 

6. Pay taxes, benefits, insurance premiums, and other expenses

You can use the Electronic Federal Tax Payment System (EFTPS) to deposit federal income taxes, Social Security, and Medicare taxes withheld. You will also need to file IRS Form 941 quarterly to report Social Security tax, or Medicare tax, which has been withheld from employee's paychecks, and pay your portion of Social Security and Medicare tax. 

Once that’s done, pay State Unemployment Taxes according to state schedules.

7. Record payroll records

The standard practice is maintaining at least three years of payroll records, as you may require them for external audits and compliance checks. Organizing paper documents can become increasingly time-consuming and require much storage. 

Payroll management best practices

Whether you opt for an agency, invest in payroll software, or choose to go solo, here are some best practices you should be following:

Create a regular payroll calendar

Payroll processing often gets delayed — one of the top reasons is a lack of planning. To avoid this, create a regular payroll calendar. It is a schedule that outlines the dates when each employee should be paid and the deadlines for other payroll-related tasks like: 

• Time tracking.
• Worked hours submission.
• Payment transfer.

Here is a breakdown of some other components your payroll calendar should include: 

• Pay periods: The time frame for which you will pay the employee. 
• Pay dates: Specific due dates when employees will receive their paychecks.
• Tax filings: Important dates for filing federal, state, and local tax liabilities, and making tax payments. 
• Benefits payment dates: When you must make payments for employee’s health insurance and other benefits.

Integrate payroll and timekeeping

For employees who work hourly, it’s common for them to track the time worked using a timekeeping system. To pay employees accurately based on their hours worked, make sure your payroll software integrates with your existing timekeeping system.

Configure the timekeeping system to transfer data to the payroll system automatically at the end of each pay period. This reduces manual data entry, minimizes errors, and speeds up payroll processing.

Before implementing the integration fully, we suggest running a test payroll cycle to see whether everything works as expected. Check for discrepancies in hours, pay rates, and deductions and adjust configurations accordingly. 

Operate a separate payroll bank account

Making salary payments from your regular business account can get very chaotic since separating payroll transactions from other business payments will be difficult.  That’s why it’s better to have a dedicated bank account for payroll only.  

As your company grows, payroll will become more complex, with more employees, benefits, and deductions.  Having a separate account for this will help in keeping payroll processing straightforward and manageable in the long run. It also offers better visibility into your expenditure on payroll and other liabilities. 

Hire an experienced payroll administrator (even part-time)

Payroll management can be complex, especially for a founder with no background or experience in the field. So,  consider hiring an experienced payroll administrator to oversee the process. 

Even if you don’t have the budget to hire them on a full-time basis, find a freelancer or a part-time consultant. 

Payroll involves complex calculations, including wages, overtime, bonuses, taxes, and deductions. An experienced payroll administrator can minimize mistakes that could lead to underpayments, overpayments, or compliance issues.

Moreover, payroll taxes are complicated and ever-changing. A payroll administrator is well-versed in these complexities and can adjust your processes on par with current regulations. 

Regularly audit your payroll

Conduct periodic internal audits to check compliance with current regulations. If your team doesn’t have the expertise, you can hire a third-party payroll service to run these audits as well. This way, you can identify and eliminate compliance issues and gaps in your payroll that could have landed you in legal trouble.

Gusto and Rho: manage your payroll and expenses with ease

While managing payroll manually is possible, the agility and efficiency a payroll management software can provide can be very useful — especially for a scaling company.

Gusto is one of the leading payroll and HR solutions available today. It is a great option for SMEs (Small and Medium-Sized Enterprises) who need an easy-to-use payroll with simple and quick onboarding: 

Here are the key features of Gusto:

• Files your payroll taxes automatically.
• It lets you run payroll with just a few clicks.
• Offers built-in benefits and time-tracking tools.
• Syncs with your timekeeping system.

To make managing your payroll (and expenses) even easier, Rho has a direct integration with Gusto, making the process frictionless. Just connect your Rho account with Gusto, and you can look forward to saving time thanks to a streamlined payroll with one of the best solutions on the market today. 

FAQs about how to manage payroll

What is a payroll management system?

A payroll management system allows businesses to manage employee payments. It calculates wages, incentives, and deductions according to salary agreements for individual employees. It also accounts for the applicable taxes and automates payment processing. 

Plus, payroll management software generates reports for internal accounting purposes and government filings.

What is meant by pay management?

Pay management is the process businesses use to handle employee compensation. It adheres to the best practices of how the company compensates the employees for their work while maintaining fairness and compliance. Besides calculating wages, it also manages bonuses, raises, and tax deductions.

What are some payroll best practices?

Some of the payroll management best practices include: 

• Ensuring every employee is segmented accurately as full-time staff, part-time workers, and contractual workers. 
• Storing detailed records of paid salaries, incentives, and tax deductions for future reference and documentation
• Designing a payroll calendar aligned with your pay cycles. 
• Implementing self-service portals that let employees access pay stubs or pay slips, tax information, and update bank account details. 
• Adding encryption, secure passwords, and two-factor authentication in payroll management systems to protect sensitive employee data.
• Investing in scalable, automated, and secure payroll software to streamline the process.

Conclusion: Simplify payroll with Gusto and Rho

There is no denying that payroll management is quite an intimidating process, especially if you are a startup founder. But with thorough planning and quick adjustments, you can master the process in no time. 

Create a payroll calendar to make payments on time. Familiarize yourself with the changing labor laws and local and federal tax regulations. You can also consider hiring an expert to manage the process without hiccups. 

Rho integrates with over 50 HR platforms, including Gusto, making payroll even easier. With Gusto, you can onboard employees, run payroll in just a few clicks, and automate payroll tax filings, all while maintaining compliance.

Want to get more organized with your business finances? Book a demo with a Rho expert today!

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Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management Co. and its partner banks.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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