Payroll Management: Processes and Solutions

Payroll management is the practice of managing and monitoring the compensation that employees get for the service performed. It includes salaries, bonuses, deductions, and any other relevant financial activities. Payroll is considered a big part of a company’s workforce management. Having accurate and effective payroll management is critical for a positive employee experience.

In this article, we’ll explore the key steps of the payroll management process, essential components to consider for payroll systems, and best practices to optimize your payroll operations for long-term success.

….

Why wait to customize your HR ecosystem?

There’s no better time to explore the PeopleSpheres platform. Zero obligations.

Free trial

What is a Payroll Management System?

A payroll management software is a solution that automates your payroll processing and is typically how employers accurately pay their employees. It ensures every wage is delivered on time, fulfills legal and tax obligations, and keeps financial records clear and compliant.

Having a payroll system in place reduces the risk of payroll errors, and if mistakes do occur, a payroll system can detect discrepancies and alert HR managers. Modern payroll solutions can also send automated alerts to managers and employees about key dates and deadlines.

When choosing a payroll system, you can opt for either an on-premises system or a cloud-based solution, depending on your company’s size, structure, and operational needs.

What should I look for in a payroll system?

There are many advantages of using online payroll software. By handling your payroll electronically in software, you can carry out pay runs with greater efficiency, certainty, and speed.

AI-powered payroll systems can detect anomalies, predict labor costs, and provide real-time compliance updates, leading to a reported 20% improvement in payroll accuracy for organizations using AI-driven software.¹
¹ Driving impact at scale from automation and AI, Mckinsey

Are you one of many businesses that is growing and embracing digital transformation and want to switch payroll providers? In your search for payroll solutions, look for a system that includes the following key components:

Payroll calculations
Pay slips
Shift differentials
Tax calculations
Payroll and data reports
Bonuses, vacation pay, and expenses management
Possibility to connect other modules such as expenses and time and attendance

Bonus: Companies handling payroll remotely should consider the benefits of VPN for added security and data protection.

components of a payroll management system

7 Steps of the Payroll Management Process

Managing payroll requires a structured approach to ensure accuracy, compliance, and employee satisfaction. Here are the key steps:

Employee Information Collection: Gather essential data such as salary details, tax information, bank account numbers, and benefits selections.
Time Tracking and Attendance: Record employee hours, overtime, vacation, sick leave, and other absences to calculate accurate pay.
Payroll Calculation: Compute gross wages, deduct taxes, benefits, and other withholdings to determine net pay.
Payroll Approval: Review calculations for accuracy and obtain necessary approvals before processing payments.
Payment Distribution: Disburse salaries through direct deposit, checks, or other preferred methods.
Tax Filing and Compliance: Withhold, report, and pay payroll taxes to relevant authorities on time to avoid penalties.
Post- Payroll Recordkeeping and Reporting: Maintain detailed payroll records for audits, legal compliance, and internal analysis.

Each step is critical to ensuring a smooth and compliant payroll operation that supports both your business and your employees.

Payroll Management Essentials: Policies, Compensation, and Tax Compliance

To ensure precise payroll management, you need to have a well-functioning payroll system in place. Without accurate payroll management, your company can face legal action and penalties. To avoid facing these consequences, most companies choose to outsource payroll practices, with outsourced payroll growing each year.

In 2025, payroll outsourcing continues to gain traction among businesses worldwide. According to recent industry data, approximately 61% of companies outsource some or all of their payroll operations.²
² B2B Reviews, 2024

Payroll solutions should include the main processes of payroll such as managing employee information, processing pay, and deductions (taxes) as they are vital parts for a company’s payroll processing to be functioning properly.

Payroll Policy

It is necessary to have a payroll policy to help handle payroll processes. It helps you meet payroll deadlines, comply with payroll laws, and protects the company against lawsuits. The policy should be clear and concise to help your employees understand your complete payroll practices. Items to include in your payroll policy are:

Defined work week
Timekeeping processes
Breaks and meal periods
Overtime rules
Pay periods and dates
Pay frequency (weekly, bi-weekly, monthly, etc.)
Deductions
Final pay checks

Employee Information

Having accurate employee information is an important part of payroll management as this is directly linked to compensation and taxes. Employee data includes information such as the employee’s name, residential address, social security number, and more.

The employee information should be gathered during the onboarding process of an employee, if not before. When processing payroll for new hires, there is certain information that needs to be collected and documents that need to be filled out. For example, all new hires need to fill out the W-4 form which determines how much federal taxes should be withheld from their paycheck. It is also a good idea to check a new employee’s timecard information for accuracy, and to verify if the individual is categorized as an exempt or non-exempt employee.

Employee Pay

As many employees highly value their wages and pay, compensation management is a big part of payroll management. This means correctly calculating each employee’s gross income and net pay each pay period and making the appropriate deductions. If an employee does not get paid correctly, it will reflect bad light on the professionalism of your business and can lead to internal disputes.

It is the responsibility of each HR department and company executives to have a structured compensation plan to show what employees can expect from on their paycheck each pay period. When creating a compensation plan, several factors should be taken into consideration. Think about your company size, financial situation, industry, and objectives.

Deduction and Tax

Tax filings are another big component of payroll management. To ensure that companies follow tax compliance and avoid tax penalties, most HR teams have outsourced payroll tax. A payroll service provider ensures you accurate tax calculations and tax payments.

There are many taxes and deductions associated with corporate business, such as income tax, local tax, state tax, and federal taxes. The tax rates will differ depending on where your business and employees are located. There are also different aspects of the tax payment associated with employee payroll, such as pretax and after-tax. Using an efficient purchasing platform can help streamline and automate the tax-related aspect of your purchases and payments. This not only ensures smooth payroll but overall financial management across the organization.

Pretax deductions are withdrawn from employee wages before taxes are carried out. After-tax deductions are initiated when the deductions do not qualify as pretax. We have an in-depth article on the differences between pretax and after-tax if you want to learn more about it.

Common Payroll Challenges and How to Overcome Them

As you might have understood by now, payroll management is a complex practice with many important components to it. What your processes will depend on many things, such as what type of employees you have. For example, there are different laws for international employees than for US residents. There are also explicit guidelines to follow if you have service employees, such as tip credit.

It is important that your workforce management and payroll practices avoid lawsuits or any other legal actions. Below, we will list common payroll mistakes and ways to identify them:

Timekeeping

If you are using a manual timekeeping system where employee working hours are recorded by hand, the chances of inaccurate data are high. If your timekeeping system is not currently automated, consider implementing payroll software that tracks and computes the employee hours for you. Without cloud-based software, wrongful data can snowball into an incorrect paycheck, which is something all HR departments want to avoid.

International Payroll

If you are expanding internationally and hiring an international workforce, you might be facing new challenges regarding your employee payroll. Factors to look out for when dealing with international payroll include:

Employee pay by country
Laws and regulations
HR Expansion

Domestic Service Workers

Obligations regarding domestic service workers, also called household employees, differ since each state in the US has its own definition of household employment. Before hiring a full-service household employee, the first step should always be to confirm that the individual qualifies as a household employee. Once hired, you need to ensure that you are following compliance and labor law when doing payroll. Areas to be aware of when hiring and paying domestic service workers include:

Minimum wage
Overtime regulations
Payroll taxes
Recordkeeping

Payroll Withholding Tax

Effective payroll withholding is a crucial aspect of business tax management, ensuring compliance and accurate reporting. The rules regarding payroll withholding tax can be challenging for any payroll department to manage as they are very complex. But don’t worry, most payroll systems automate the calculations and deductions of tax liabilities.

Withholding tax is the amount employers withhold from employees’ wages and pay straight to the government. The tax withholding amount is a credit against income taxes the employee shall pay during the year.

There are different rules and tax laws regarding withholdings for US residents and non-residents. Below, we list the different types of withholding tax to be concerned about:

Federal income tax
Social security and medicare tax
State income tax
Local income tax
Additional state-based withholding tax

Pay Equity

Pay equity is the practice of equal and fair pay between employees despite race, gender, and other demographics. This is a heated topic and should be closely monitored by HR professionals to avoid discrimination in their workplace (whether it’s intended or not).

When you manage payroll, make sure that you are complying with the Equal Pay Act, which rules that women and men should all be given equal pay for equal work in the same workplace. If you think you many have pay equity issues, consider taking these steps to improve your workplace situation:

Increase visibility on the employee population
Conduct pay equity assessments
Implement transparent compensation practices
Provide training for upper management
Continuously monitor pay equity

Pay Transparency

If you have taken the steps mentioned above, but are still finding yourself struggling with pay equity issues, you should consider implementing pay transparency in your workplace.

Pay transparency refers to an open and communicative approach when it comes to discussing salaries within the company. It is still a relatively new trend within the HR world, but has been proven to be useful to prevent pay discrimination and pay gaps. Other benefits associated with pay transparency include increased trust in the company, better physiological safety, and improved employee performance.

Some states such as New York, California and Oregon are starting to pass pay transparency laws in hopes of reducing pay inequity. These laws also include banning requests for salary history from candidates. As new regulations are starting to be passed at a state and local level, make sure to stay informed about your state’s pay transparency and laws at all times.

Audits and IRS wage levy

Sometimes you have already conducted the HR and payroll mistake. Then you might be awaiting an employee benefits security administration audit or you are receiving an IRS wage levy, a document meant to recover unpaid federal taxes. In order to prevent employee benefits security administration audits, make sure you are conducting frequent internal assessments and maintain structured and organized records that are easily accessible.

There are also certain steps you should follow if you have received an IRS wage levy:

Verify the information
Give the employee the statement of exceptions and filing status
Inform your payroll provider or applicable third-party vendor
Consult IRS Publication 1494
Keep withholding the IRS wage levy until the full amount has been paid
Avoid violating US Code Section 1697

Benefits of Centralized Payroll Management

Is your payroll management running smoothly, yet something still feels off with your HR system? The issue might not be payroll itself—it could be your disconnected HR tech stack. When your systems don’t talk to each other, you’re left with duplicate data entry, manual workarounds, and inefficient processes.

PeopleSpheres brings it all together. Our unified platform connects all your HR tools and data in one place, streamlining your operations and giving you full control over payroll and beyond. Eliminate silos, reduce workload, and simplify your HR management.

Learn more and compare our available payroll management connectors >