A payroll system is an electronic system that electronically calculates and provides an individual’s gross pay for a given period of time. A payroll system usually calculates the exact amount you owe to your employees based on several factors including their hourly rate, the number of hours they worked, their average salaries or wages, and when they took paid leave or vacation time during the period of pay. The system deducts payroll taxes and other withholdings from gross salary before adding the net amount due to your company. It can also provide the balance of your individual tax withholdings for you. A payroll system can be used to automatically deposit your employee payroll taxes (payroll deposits) electronically into your company bank account, giving you instant access to your employee payroll. This eliminates the need to manually calculate and deposit your employee’s payroll taxes.
Most small businesses cannot afford to have their own payroll system. However, it can be very helpful to many companies. For small businesses that do not handle cash or cheques, a payroll system is especially beneficial. Since most employees’ pay dates are based on weekly or biweekly schedules, a payroll system can help you ensure you get your money fast, even if most of your employees take time off for vacations or sick days.
There are many components that make up a modern payroll system. You have to consider the needs of your company, its employees, your competition, and software licensing and other issues to decide on which component will work best for your business. One of the key components in a payroll system is the payroll software. There are many types of payroll software to choose from. These include:
A payroll system must collect tax information from your employees. You may need to collect this information on an individual basis or collect it all at once. If you decide to use a single method for all employees, you can set up the software to email the tax information to your employees. However, if you want to automate the collection of tax information, you should use software that automatically e-mails the tax information to your employees’ personal mailboxes. This feature is very useful for payroll systems that automatically deducts federal income tax from an employee’s pay check.
The second component is to calculate the overtime rates for your employees. To determine overtime rates, you need to know the gross wages of each employee during his pay period, as well as the percentage of overtime the employee is eligible to earn. You should also have this rate determined for the entire payroll period, so that you don’t have to deal with rounding to the nearest whole pay period. Many businesses also track their employees’ vacation time and sick time, and these should also be included in the calculation of overtime rates.
Your payroll system should have provisions for recording absences from work. Absence data will help you calculate the number of hours that an employee has worked and determine the overtime requirements for the remaining time. This is especially important for small businesses that often hire part-time employees and let them work eight hours or more per week. The absence data will allow you to calculate an employee’s weekly average and establish the maximum number of hours he can work in a week. In addition, you will be able to calculate the weekly salary of the part-time employees and provide them with a prorated amount based upon their weekly earnings.
One aspect that many small business owners do not consider when they establish their payroll system is the inclusion of a time-off policy. You must have a time-off policy in place, whether you hire employees on a contractual basis or not. It is important that you carefully consider the effect of a time-off policy will have on your employees’ availability to work. For example, if you establish a pay schedule that requires employees to work a specified number of hours per week, it is likely that employees will use time-off opportunities to offset the cost of the workday. If you have a time-off policy, you must ensure that your employees understand how much time is available to them and that they take the time-off opportunity when it is scheduled.
Time-off policies can be implemented using automated payroll systems, which require minimal management. If you want to keep administrative costs low and ensure that your employees take their time-off correctly, you should create and maintain human resource calendars to track time-off accruals and deductions. A good payroll system will automatically generate employee time-off accruals and deductions each week based on a predetermined schedule. Other payroll systems provide employees with a mechanism for managing time-off accruals and deductions themselves. These systems allow employees to schedule days off and automatically deduct the days of in-work time from their paycheck.