Payroll management in 2024: How to manage payroll effectively (2024)

Even the greatest job in the world wouldn’t be able to keep employees if the only compensation was pride and good feelings — employees work to earn a paycheck, which is why a payroll management system is a vital part of running a business.

Of course, paying your employees is a bit more complex than simply writing them a check for a certain amount every or every other week. To handle this complexity and ensure payroll is handled as accurately as possible, many business owners rely on payroll management systems to streamline their processes.

Davey Jones, who co-founded and owns web design company Davey & Krista, has relied on software to manage payroll throughout his decade-plus tenure as a business owner. He says payroll management software is about accuracy as much as it is about efficiency.

“A small business handling [payroll doesn’t] typically have the budget to have a dedicated payroll team, so it usually falls on the owners of the business or the administrator or an admin assistant — and none of those people may be educated in accounting. [Software automates those things] and guides you through the process, [calling] out different things you’re going to need to know along the way.”

You might wonder whether payroll software is the right fit for your business. Can it handle your needs? Are there any drawbacks to investing in such a resource? To help you make an informed decision, let’s look at what a payroll management system can (and can’t) do.

What is payroll management?

Before you fully understand what a payroll management system can do for your business, it’s important to have a thorough understanding of what payroll management itself means.

The short version is that payroll management is the process of paying your employees. The long version involves collecting employee tax information, setting a pay calendar and storing financial records as required by law. Although many businesses rely on payroll management software to handle calculations and data storage, some prefer to do it manually.

Managing payroll is crucial to your business for several reasons, the most obvious being if you don’t pay your employees, they have no incentive to keep working for you, and then your business can’t operate. But on top of calculating and logging wages, you need to calculate certain deductions that are taken out of an employee’s paycheck and how much they pay in taxes. Keeping financial records as part of your payroll management process is not just helpful; it’s a requirement established by the Fair Labor Standards Act (FLSA).

Steps involved in the payroll management process

Payroll management is a multistep process, and the exact steps you take as a business owner might be unique to your specific business. However, most businesses have to fulfill most of the same requirements (or similar ones, at least).

Before you undertake payroll for your business, you will need to collect a Form W-4 and state withholding certificates for each of your employees, and you’ll need to determine what schedule your payroll will operate on. The IRS provides an annual employer’s tax guide that you can access here.

You can run payroll every week, every other week or even once a month. Before you settle on your schedule, check whether your state has any payday frequency requirements.

Once you’ve done that, here’s what you’ll do every pay period:

1. Calculate employee wages

If you’re managing payroll for salaried employees, you’ll need to calculate how much they are owed for that pay period based on how their annual salary breaks down. If your employees are hourly, you will need to calculate their pay based on the hours they worked and their hourly rate, including factors like whether they worked any overtime.

Editors’ tip: Some payroll software providers offer a free payroll calculator for you to use, like this one from Paycheck Manager.

2. Process withholdings and deductions

In addition to how much you pay employees, payroll management is also about how much you withhold from their wages. When you manage payroll, you need to deduct and pay mandatory taxes such as federal income tax, Medicare and Social Security taxes, and unemployment taxes.

Other withholdings or deductions include disability or paid family leave, as well as any court-ordered wage garnishments. Voluntary deductions could include employee benefits like retirement plans or health insurance.

Withholding can get complicated if you have employees located in different states with different tax rates and requirements. Jones manages employees working remotely all across the country, and he notes that having remote employees has become much more common for businesses since the pandemic. Because of this, more businesses are trying to manage different withholdings for different employees.

“It’s not a matter of just saying, ‘Oh, you’re going to be paid X amount,’” he says. “You know, it’s ‘You’re going to be paid X amount, and then depending on what state you live in, a certain amount is going to have to be withheld,’ and so on and so forth.”

3. Pay employees and issue pay statements

After you’ve done all the math for steps one and two, you need to issue payments. You can offer to pay your employees in several ways. You may opt to use the payment method that is preferred by or most convenient for your employees, such as:

• Printed checks: You print their check and send it to them via postal mail
• Direct deposit: You transfer the money electronically to their bank account
• Pay cards: You issue them a prepaid debit card
• Mobile payment: You send money through a money exchange/mobile payment app

Along with your payment, provide each employee a pay stub that breaks down the numbers. The pay stub will show them how much they earned based on their pay rate, along with all monies withheld or added (like a bonus).

This gives you and your employees equal insights into their paychecks, so if there are any errors, they can dispute them. For example, maybe you accidentally paid your employees for fewer or more hours than they worked. A shared pay stub can help rectify this situation. Some states even require you to issue pay stubs, and your employees will often use these pay stubs when they are doing their taxes.

4. Maintain payroll records

After you’ve paid your employees every pay period, you can’t just consider it done and forget about the numbers. The last (and arguably most critical) step of the payroll management process is maintaining proper records. You have to keep them on file for three years — even if an employee is no longer with your business.

These payroll records can be maintained in several different ways, whether you prefer to keep physical printed copies on file or back them up to the cloud through your payroll software, which can organize and store them digitally.

Payroll outsourcing vs. in-house management

Some business owners prefer to have someone within their own company manage payroll (or even handle it themselves), while others find it more efficient and practical to fully outsource these processes to another company that specializes in payroll management.

Outsourcing payroll puts it in the hands of an expert who understands the ins and outs of this process, which can reduce noncompliance risks for your business. You don’t have to worry about staying up to date on the latest government regulations or what tax deadlines you need to meet because a specialist is handling it for you.

The big drawback to outsourcing (and the difference from in-house management) is that you relinquish control over (and some level of insight into) your payroll. From a business owner’s perspective, Jones said that using an external accountant or accounting firm could mean a lot of back-and-forth versus having information more readily available if a small business decides to have an internal team member or accountant handle payroll.

Payroll software vs. manual payroll management

If you keep your payroll management in-house — you can do it manually or use payroll management software.

With a manual approach, you’ll use spreadsheets to track data like pay rates, withholding and compliance; issue payments individually; and generate and distribute pay slips. There are many places to go wrong with manual payroll management, from costly typos to getting behind or overwhelmed due to how much time it takes.

That’s why we recommend (and most businesses use) payroll management software as your company grows. If you pay any number of employees, freelancers or contractors — even just a few — payroll software:

1. Frees you up to focus on other aspects of running your business
2. Reduces your risk of getting something wrong (and can alert you when something doesn’t seem right)
3. Helps with tax remittance, filing and compliance
4. Creates and stores records such as employee pay subs
5. Allows more than one payment method for employees
6. Often includes self-service portals for employees to do things like change their withholding and download pay statements and tax forms

Jones emphasized that payroll can be complex and nuanced, with varied requirements depending on where the employee lives. Because of this, no software can replace the professional expertise of an accountant. However, a software platform does provide some base-level guidance that is often better than trying to navigate everything by yourself.

Top payroll software picks

If you’ve decided to keep your payroll management in-house and use payroll management software to handle the process as efficiently and accurately as possible, the question becomes which payroll management system should you choose? To answer that question, consider which features are most important to you and how much room you have in your budget for payroll software.

When it comes to budgeting, you don’t necessarily have to spend big to reap the benefits of a top payroll solution. Here are three affordable picks from our guide to cheap payroll software options for your business.

Patriot Software

Patriot Software’s first paid tier — Basic Payroll at $17 + $4 per employee or contractor per month — blends the benefits of payroll assistance with manual control. You’ll run payroll for your employees with a fully functional tool that offers (among other features) multiple paycheck schedules and deposit options to choose from, an employee portal, customizable rates and deductions, PTO accrual and payroll reports while still managing and filing federal, state and local taxes on your own. If you want to take everything off your plate, the base monthly subscription price increases to $37 per month, but the per-employee/contractor rate stays the same.

Wave Payroll

Starting at $20 per month (plus $6 per employee and contractor paid), Wave Payroll’s offering can process W-2s and 1099s, allows direct deposit and includes an employee portal. This tool easily works with Wave’s other software options, including its free accounting and invoicing software. You’ll handle tax filing yourself on the first tier; Wave will take care of your payroll taxes for a base fee of $40 per month (same employee and contractor rates apply), but it’s worth noting that it’s only available in 14 states (Arizona, California, Florida, Georgia, Illinois, Indiana, Minnesota, New York, North Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin).

Roll by ADP

If app-based payroll that runs on generative AI sounds appealing, you can get it with ADP’s Roll. Conceived for small-business owners in particular, you can try Roll for free for a full three months before billing kicks in. At $39 plus $5 per employee per month, the cost may be slightly higher than the first two options, but Roll’s ease of use is nearly impossible to beat. You start the process by sending a text reading “run payroll” through the tool’s chat function, and your payroll run unfolds from there. Pricing also includes tax calculation and filing, reporting and any out-of-the-ordinary payments or deductions (like raises, bonuses and garnishments).