An Essential Guide to Payroll Management for Modern Businesses
Payroll management is an area of business you can't afford to get wrong. If you pay your employees late or incorrectly, they're unlikely to hang around for many more pay cycles.
Payroll is an undoubtedly complex process to manage. The question is: How can you streamline this essential business function and make it run like clockwork? This guide introduces you to the importance of payroll management, best practices for payroll management, and how to choose the right payroll software for your needs.
What is payroll management?
Payroll management is the process of overseeing and managing all aspects of employee compensation, including salaries, wages, bonuses, and deductions. Payroll managers have a range of responsibilities, including:
- Managing financial records
- Complying with legislation
- Calculating salaries and tax payments
- Ensuring accurate and timely payments
In addition to being a crucial aspect of running a business, payroll management also plays an important role in employee satisfaction and retention.
Why is payroll management important?
When companies introduce sleek and sophisticated payroll management systems into their organization, they enjoy several benefits for the overall business and its employees.
Financial management and budgeting
Payroll is often one of the largest expenses for an organization, so accurate calculations enable you to stay on top of your compensation budget. For example, if your overtime expenses are more than usual in Q1, you can plan accordingly for Q2. This financial discipline is crucial for your organization’s growth and sustainability.
Employee morale and trust
Employees who receive their pay in full and on time are more likely to trust their employer. This trust is a critical driver of engagement and retention. Research by MIT Sloan Management Review found that trusting employees are 260% more motivated to work and 50% less likely to seek work elsewhere.
Pay equity
Although the Equal Pay Act was established in 1963, pay discrimination still persists. More than any other business process, payroll management is integral to pay equity. Payroll managers have black-and-white data proving whether employees receive equal pay for equal work. With proper payroll management, companies can ensure fair compensation across all employee levels and demographics.
Compliance with legal requirements
Companies must comply with various federal, state, and local tax and payroll laws and labor laws such as minimum wage and overtime pay. Non-compliance can lead to legal consequences and costly penalties. Some states have pay transparency laws requiring employers to share compensation information with job applicants and employees openly. Each state has different penalties. For example, New York charges penalties of $1,000, $2,000, and $3,000 for employers on their first, second, and third respective violations.
Administrative efficiency
Streamlining complex payroll functions with automated systems saves administrative time and reduces the risk of error. Automation enables your teams to handle complex payroll tasks effortlessly, from calculating diverse employee benefits to adhering to collective bargaining agreements with unionized employees. Companies can guarantee consistent application of the rules, no matter how complex, to produce a slick, error-free pay cycle every time.
Case study: Coast Mental Health had previously managed payroll by manually tracking time, attendance, and pay rules for three unions. The company's payroll team had to calculate who received paid lunch and who received a premium for working certain hours and roles, all of which were impossibly time-consuming. Coast Mental Health overhauled its payroll management processes by adopting UKG Ready®, which now performs these calculations automatically. The organization has since increased its employee headcount by 30% without needing extra administrative staff.
What is involved in the payroll management process?
Payroll management can be tailored to meet the needs of your specific business. However, there are often some basic steps involved in processing payroll, which are typically executed by your back-office Human Resources department and payroll teams:
Employee data collection
Payroll teams collect a new team members’' personal and financial information during employee onboarding. This data might include contact details, bank account details for direct deposit, Social Security numbers, and respective salary information. To ensure accurate tax calculations and payments, teams must update the system with any changes in these details due to promotions, salary raises, or changes in tax status.
Timekeeping and attendance tracking
Payroll teams will track employee hours using manual methods like paper forms, timesheets, or digital time-tracking systems. This step is essential for calculating pay for hourly wages and overtime. Typically, supervisors or managers will review and approve the recorded time before it can be processed for payment.
Payroll calculations
Based on the employee data collected, payroll teams will make the following calculations:
- Employee gross pay calculation: This is the amount the employer will pay in regular pay, overtime, bonuses, commissions, and any other additional earnings before deductions are made.
- Deductions: These are the various state and federal requirements to withhold taxes from employees' wages, along with retirement contributions, health insurance premiums, etc.
- Net pay calculation: This is the final amount an employee receives after all deductions have been made.
- Employee wages
Once the calculations are completed, payroll teams will distribute paychecks or initiate direct deposits to employees' bank accounts. Payroll tax filing
Payroll teams must file and pay various taxes, such as federal and state income tax, Social Security tax, Medicare tax, and unemployment insurance. Employers are also responsible for paying their relevant payroll taxes.
Recordkeeping and reporting
As part of their payroll obligations, staff must keep detailed records of all payroll-related activities, which you may need for audits or tax compliance. Additionally, companies should provide employees with pay stubs that detail their earnings and deductions for each pay period. Regularly reviewing these records can also identify any discrepancies or errors to be corrected.
Year-end payroll processes
While payroll departments have regular responsibilities throughout the year, such as filing quarterly tax returns, monitoring compliance risk, and adhering to labor laws, they also have year-end payroll tasks to complete. These include preparing W-2 forms for employees and filing annual reports such as Form 940 and Form 941 for federal unemployment taxes. Mastering year-end payroll can be time-consuming but is critical in ensuring legal compliance and avoiding penalties.
6 considerations when managing your payroll operation
The perfect payroll workflow will consider the following key points:
Payroll frequency
How often will you pay your employees? Determining the best pay cycle frequency is a decision that weighs up the value of the employee experience with administration. Each of the following options has its merits, but it's essential to consider what's possible for your specific business:
- Weekly pay cycles: 52 pay periods per year provide a consistent flow of income for employees, but this cycle frequency is enormously time-consuming for payroll teams.
- Bi-weekly pay cycles: 26 pay periods per year is still reasonably frequent but gives your payroll department more time to manage the admin.
- Semi-monthly or bi-monthly pay cycles: 24 pay cycles per year, paid, for example, on the 1st and 15th of the year. Employees experience slightly longer gaps between paydays, and payroll teams can struggle to manage overtime.
- Monthly pay cycles: 12 cycles per year are straightforward for payroll teams, but workers are paid less frequently. It's a better fit for salaried employees with consistent pay rather than hourly employees, seasonal workers, or anyone who works overtime.
Payroll compliance
Payroll professionals must navigate a complex web of tax and labor laws that vary by state, industry, and business size. These include:
- Federal Income Tax: Employers must withhold the correct federal taxes from employees' paychecks, according to the IRS. Seven brackets have different tax rates based on your taxable income and filing status.
- FICA Taxes: Employees pay 6.2% of their gross wages as Social Security tax and 1.45% as Medicare tax, and employers match these contributions for a total FICA tax of 15.3%.
- FUTA Tax: The Federal Unemployment Tax Act requires employers to pay a 6% tax on the first $7,000 they pay employees yearly.
- Fair Labor Standards Act: This FLSA governs minimum wage, overtime pay eligibility, recordkeeping, and child labor standards.
- Family and Medical Leave Act: The FMLA provides employees with unpaid, job-protected leave for family and medical reasons.
- Equal Pay Act: The EPA requires that men and women receive equal pay for equal work in the same establishment. The jobs don’t need to be identical but must be “substantially equal” based on job content rather than titles.
- Form W-2: Employers must report employee wages, tips, and other compensation paid.
- Form 1099: Companies that use independent contractors must report their payments made.
- Wage garnishments: Business owners must comply with court orders to withhold earnings for child support, tax liens, and other outstanding debts.
Real-time reporting
Pay reporting is one strategy regulators and legislators have employed to reduce pay gaps based on gender, race, and ethnicity. Some states like California and Illinois have introduced their own legislation requiring employers to provide detailed pay reports to relevant state agencies.
However, the ability to generate real-time pay reports isn't just a box to check. This information also provides exclusive business insights to employers about their labor costs and financial forecasts, making it easier to react to overspending or better allocate resources. Consider using payroll solutions with built-in reporting and analytics capabilities as an easy time-saver.
Data security
Payroll management involves handling sensitive employee information, including bank details, social security numbers, and personal data. A robust payroll system ensures data is secure from breaches, unauthorized access, tampering, or loss. It also reduces the risk of human error and ensures compliance with data privacy laws.
Employee classification
Payroll teams must understand the characteristics of different employment types and apply them consistently to comply with labor laws and IRS guidelines. For example, the IRS uses different classifications:
- Full-time employees
- Part-time employees
- Independent contractors
These classifications determine how workers are taxed and what tax documents employers must file. Misclassification can lead to tax penalties, as different rules apply for withholding taxes, and can also impact employee benefits such as health insurance, retirement plans, and workers' compensation.
Global support
Companies based abroad or with a global workforce have additional considerations, including multi-country payroll compliance and the ability to process different currencies. Global payroll teams may require specialized accounting software to support multiple languages, tax regulations, and currency conversions.
5 best practices for managing payroll
The following best practices form the cornerstone for payroll management, ensuring you support your company's most valuable asset—your people—while meeting all legal requirements.
Provide employee access
Traditionally, payroll practices happened behind the scenes, without any employee involvement. Payroll professionals totted up the numbers, and employees received their wages.
The modern workplace expects more transparency. Employees want quick access to their compensation information, for example, if they need to obtain automated income verification details when applying for a loan or government benefits. Consider choosing payroll services with built-in employee portals for your teams.
Transparent communication
Workers want to understand what they earn, how much their employer spends on their total compensation, and what taxes they owe. They need reassurance that their compensation is competitive and may want to better understand how their tax status affects their wages.
Communication is key here, and it’s important to engage workers on pay-related matters. Consider sending regular communications, including total compensation statements, or offering financial education and tax advice so employees feel in control of their pay data.
Case study: Auto retailer Belle Tire modernized its payroll management by moving to UKG Pro. The company has gained back time each day, which it now uses to educate Belle Tire's employees on its 401(k) and Employee Assistance Programs. Director of Compliance Matt Pyles explains,
“Our job has evolved to advising and helping our teammates get the most out of their benefits and options that make sense for them, their families, and stage of life.”
Continuous training
Tax laws, employment legislation, and company-specific changes can all affect the payroll process. Regular training for payroll staff ensures compliance with new requirements, reduces errors, and streamlines processes.
Create a training program that includes employment law, ethics, data security, and privacy requirements. Offer training sessions and refresher courses throughout the year to keep payroll staff up-to-date on changes.
Contingency planning
A contingency plan ensures your payroll is protected even in worst-case scenarios, such as natural disasters, power outages, or the sudden loss of a key payroll team member. Contingency plans should include steps for:
- Processing paychecks remotely
- Identifying alternative resources to process payroll in case of emergency
- Backing up data regularly
Review your plan periodically to ensure it remains current and you’ve documented all relevant processes.
Obtain payroll certification
One of the best ways to demonstrate your commitment to effective payroll management is to gain certification from the American Payroll Association. Companies can hold either:
- Fundamental Payroll Certification (FPC)
- Certified Payroll Professional
Both certifications require completing continuing education credits to keep up with new developments in the field. Companies can gain APA credits by attending webinars, conferences, or through self-directed learning.
How to choose payroll management software
Although many payroll management solutions include customization options, selecting software that's a great fit for your organization is essential. Follow these steps as you research different payroll vendors and platforms.
Assess your needs
You can narrow down the sea of options by focusing on the specific requirements of your business. For example, a solution aimed at SMEs on a shoestring budget is unlikely to suit enterprise organizations. Ask yourself:
- How many employees do we have?
- Is our business likely to scale in the next few years?
- What’s our preferred payroll frequency?
- What complexities or unique compliance requirements must we consider?
Compare software features
Payroll management software comprises a range of bells and whistles that may appeal (or not) to your organization. To understand what you need, imagine the most complex payroll environment you'll likely encounter and select features capable of handling it. Ask yourself:
- Does it assist payroll processing for your international employees?
- Can you manage multiple payroll frequencies or locations? Is there a built-in employee portal to provide easy access to pay-related information?
- Does it offer advanced reporting capabilities?
- Does the software include benefits administration?
Evaluate user experience
Your chosen platform must be easy and intuitive for your team to use. If you're switching payroll providers, choose a solution with comparable functionalities to your existing software and ensure the transition is smooth for payroll staff and employees. Ask yourself:
- Is the platform easy to navigate?
- Are its features and functions well documented?
- Is there a steep learning curve?
Consider integration capabilities
Depending on the software's functionality, you may need it to integrate with other key systems in your tech stack, such as your accounting software, HRIS, or time and attendance platform. Ask yourself:
- Does the software offer native integrations with your specific tools?
- How seamless is the integration process?
- Is it easy to set up automated workflows between your integrated systems?
Review customer support availability
Payroll professionals want the peace of mind that comes with having access to support if they have any queries or issues. Ask yourself:
- Does the vendor offer 24/7 support to all customers?
- Are there additional training resources available?
- Is there access to a dedicated customer success manager?
Understand pricing structure
Pricing is a huge consideration when researching different payroll management platforms. You'll need to understand the specific models used by the vendors and any additional payroll costs you may incur. Ask yourself:
- Is pricing per employee or based on usage?
- Are there any setup fees, hidden charges, or costs for additional features?
- Does the vendor offer a free trial or demo?
Read customer reviews
Customer reviews offer useful clues about what it's like to use a particular vendor. Read reviews on trusted third-party websites, such as G2 or TrustRadius, and social media platforms to gain insight into real-life customer experiences. Ask yourself:
- How do customers rate the platform’s ease of use, setup, quality of support, and overall care?
- Are there any recurring complaints or issues?
- How does the vendor respond to negative reviews or feedback?
Test-drive your new payroll management system
Use free trials to test the software's functionality firsthand and gauge the ease of use and features against your company's requirements. Consider piloting the software with a small group of employees to get honest feedback on their user experience. For example, enterprise organizations may trial the software in a specific branch before rolling it out company-wide. Ask yourself:
- Did the software meet our needs and expectations?
- Were any issues or challenges encountered during implementation?
- How do employees rate their experience with the platform?
Optimize payroll management with UKG
Payroll management isn't something to put off or approach half-heartedly. With the right tools and processes, payroll can be an efficient engine that benefits your employees and organization.
UKG offers a suite of solutions to help you manage payroll with ease, including powerful payroll processing capabilities, advanced reporting, and integration options to fit your unique business needs. Choose from the following options:
UKG Pro is an award-winning payroll solution for medium to large organizations. With an emphasis on efficiency and accuracy, UKG Pro is engineered to simplify complex payroll tasks by:
Effortlessly managing payroll calculations in US and Canadian currencies without the need for additional calculations or custom programming.
- Keeping up-to-date with the fluid regulatory and compliance environment.
- Ensuring consistent and fair compensation for every employee during every pay period.
- Providing employees with immediate access to pay information from any device.
- Cultivating a culture focused on financial well-being and pay equity that’s fundamental to driving purpose within your entire workforce.
UKG Ready offers a tailor-made solution for small to medium-sized businesses where every minute and dollar counts. This agile tool simplifies payroll, compliance, and people processes by:
- Maximizing their resources efficiently.
- Implementing uniform and equitable timekeeping policies.
- Issuing flawless paychecks consistently
UKG brings an adaptable and forward-thinking approach to payroll management, enabling businesses of any scale to refine their workflows and enhance the employee experience. Whether your business is on the rise or a well-established entity, explore UKG’s award-winning payroll software solutions today.
