Payroll accounting involves a company's recording of its employees' compensation including:

gross wages, salaries, bonuses, commissions, and so on that have been earned by its
employees. withholding of payroll taxes such as federal income taxes, Social Security taxes,
Medicare taxes, state income taxes

What is meaning of payroll system?

If your business has one or more employees, you should have a payroll system in place. An automatic
payroll process helps you comply with legal and tax requirements and simplifies the process of paying
your employees. Many employers outsource the payroll function to an outside vendor or use payroll
system software instead of relying on manual processes.

What are the Benefits of Automating a

Payroll System?
An automated payroll system enables the employer to process its
payroll through a computerized system. A manual payroll system
requires that the payroll be processed by hand and is therefore a
considerably slower procedure than an automated system. The former
makes payroll processing simpler, and reduces errors, which are more
likely with the manual system.
Time-keeping Transportation
Hourly workers are paid according to hours worked during the pay
period. The employer uses a time-keeping system to track hours and
pay hourly employees accordingly. It is critical, therefore, that each
employee’s time is computed accurately. Many employers
use a time clock to track work hours. A manual payroll system requires
computing the time clock data by hand; this increases the likelihood of
mistakes. The automated time-keeping system allows the employer to
import time clock data into payroll software. Specifically, the employee
uses a swipe card or badge, or the hand print or fingerprint method, to
clock in and out. Once the entries are transported into the payroll
software, the software computes the time worked. All the payroll staff
member has to do is ensure the time is transported appropriately and
make the necessary edits.
Payment Calculation
The automated payroll system uses payroll software to compute all
wages. Payroll software, such as QuickBooks, PenSoft, Z-Pay, Ultipro
and Sage Peachtree calculate gross-to-net earnings based on the data
the payroll representative inputs. Therefore, the result depends on the
accuracy of the input. Thus, if a terminated employee is due severance
pay but the payroll representative neglects to make the entry, the
system will not pay it. Typically, the system is reliable so long as the
entries are correct. The automated system performs all types of
payments: hourly, overtime, double-time, salaries, commissions,
bonuses, pay raises, retroactive pay, wage deductions, auto payments
and tuition reimbursements. Notably, the automated system eliminates
manual paycheck writing. The system automatically generates
paychecks and stubs and enables direct deposit.

Deduction Calculation
Salary and wage deductions are a necessary part of payroll processing.
The employer must take mandatory withholding from employee
paychecks, including federal income tax, Social Security tax, Medicare
tax and usually state income tax. These taxes can be time-consuming
and perplexing to compute manually. A number of rules are attached to
withholding tax calculations. With an automated payroll system, the
software has the tax rates hard-coded in the system. It calculates the
withholding tax for each employee based on the withholding conditions
data input. This reduces the likelihood of payroll tax errors, which can
result in fees from the IRS and the state taxation agency.
Record-keeping
The IRS requires employers to keep employment tax records for a
minimum of four years. Furthermore, the U.S. Department of Labor
requires payroll records to be kept for at least three years. The manual
system requires filing the necessary payroll data by hand, which
consumes time and increases clutter. Payroll software generates and
stores payroll and employment tax data.

Disadvantages of Payroll system

A distinct advantage of a payroll system is that it allows the
employer to process its payroll and comply with payroll tax and
record-keeping laws. The payroll system can be manual,
outsourced or in-house computerized. Each system enables
payroll compliance, but each also has its disadvantages.
Manual
The manual payroll system requires payroll processing to be done
completely by hand. Therefore, time card, wages and payroll tax
computations; wage garnishments; and voluntary deductions are
done manually. Furthermore, paychecks and pay stubs are
handwritten or printed on a typewriter. The main disadvantage
with this system is its high room for error. The more manual
computations the payroll representative has to make, the more
errors she’s prone to make. Furthermore,
it’s time-consuming because to ensure the payroll is
accurate, she has to triple-check the data before printing checks.
Even then, it’s possible to miss errors. Paper filing is
required with this system, which can create clutter. Furthermore,
if the payroll representative does not understand how to calculate
payroll taxes manually, erroneous tax withholding, reporting and
payment occur. This can result in penalties from federal and state
tax agencies.
Outsourced/External
The employer uses the outsourced or external payroll system
when it hires a payroll service provider. The latter has a payroll
staff that, for a flat fee, processes its clients’ payroll.
Services vary by provider, but most payroll service providers
perform paycheck and direct deposit processing. Many also offer
payroll tax and benefits administration. Because the employer is
entrusting its payroll tasks to an off-site company, it can suffer
from not having immediate help when needed. If the payroll
service provider has many clients, the employer may have to wait
in line to get any problems resolved. Depending on the urgency of
the situation, this can be frustrating to the employer.
Furthermore, according to the Internal Revenue Service, if the
payroll service provider makes a tax error, the employer alone
incurs the penalty. With the payroll being processed off-site, if
there’s a problem with it, the employer may not know
about it until payday.
On-Site Computerized
The in-house computerized system enables the employer to use
an on-site payroll staff and payroll software to process its payroll.
The employer must invest in and maintain the software, which
can be expensive. Depending on the complexity of the software,
the employer may have to pay for training for the payroll staff.
Furthermore, depending on the size of the payroll, the employer
may have to employ a full payroll staff. This system can prove
expensive in that may require the employer to pay salaries and
benefits to the payroll staff, plus pay for technical support when
software glitches occur. The employer has to also pay overtime (if
worked) to payroll personnel who qualify for it.