What are the three types of payroll?

Behind every thriving business are satisfied employees, and behind every satisfied employee runs a successful payroll system. It is not just about paying salaries on time, but also about keeping the records clean, taxes paid, and compliance with labor laws. One missed or delayed salary or a miscalculation, or non-compliance not just drops productivity but also creates legal obstacles. To keep your management panic-free, teams motivated, and taxes paid, it is mandatory to understand payroll systems and implement the best payroll setup. With the right payroll solutions, you not only reduce the monthly stress but also show your commitment to support your teams and strengthen your financial condition while keeping up with regulatory needs.

What is Payroll and The Three Core Types of Payroll

The payroll system trend emerged as many businesses started to understand the need to keep their finances efficiently tracked and employees satisfied while keeping up with the strict regulatory updates. In KSA, salaries are highly impacted by the labor laws, taxes, EOSB, and payment legal instructions, which have become a critical need for businesses to optimize their payroll services to stay legally and reputationally sound. A strong payroll system keeps the employees’ work hours tracked, calculates pay rates, deducts taxes, and looks after expenses. The three core types of payroll include:

1. Manual Payroll
2. In-House Payroll (Computerized Payroll)
3. Outsourced Payroll

Every payroll service comes with its own benefits and drawbacks; businesses must choose what suits them the best as per their needs, expertise, and budgets. When implemented professionally, these systems not only save time but also ensure accuracy and keep employees happy by simplifying even the most intricate responsibilities through automated systems that need minimal effort to keep up.

1.   Manual Payroll

Manual Payroll processing, which is an old-school method, includes the calculation of employees’ salaries by including the deduction of withholding taxes, benefits, and insurance, and then the distribution of pay slips throughout the business. Although many companies implement the latest tools and techs yet many legacy systems still follow the old practices since it’s not just cost-effective but also gives more control over finances and systems.

How Manual Payroll Works

In the manual in-house payroll process, the designated payroll authority or management implements the following tasks:

• Record the attendance of employees and any added working hours
• Manually compute the gross income by subtracting all deductions
• Apply any benefits, allowances, bonuses, commissions, or reimbursements
• Get the play slips ready with all the details included in wage statements
• Proceed with bank transfers or offer paychecks in some cases
• All the records are then archived for record-keeping

Pros of manual payroll processing:

• Complete direct oversight by the in-house teams, which allows them to supervise the entire payroll system and manage taxes and wages internally
• It is almost free of charge, as internal finance teams mostly oversee salaries, which is particularly a good option for small businesses already looking to cut down their expenses with small teams
• Gives better control over compliance as businesses can keep their records updated on time and evolve as the tax laws change to mitigate any compliance hurdles.

Cons of manual payroll processing:

• Manual payroll processing is prone to manual labor errors, which sometimes not just lead to financial damages but also legal queries
• It takes a significant amount of time to manage calculations precisely with timely filing and wage distributions. This process also demands skilled professionals
• Internal payroll systems are scalable and efficient enough to handle the growing teams, but they lack the speed and accuracy of automated systems, which makes it hard to expand

When is Manual Payroll Suitable?

Manual payroll services are best suited for small businesses with 5 to 20 employees or companies with simple pay structures, like no deductions or benefits of computation. They are also used by temporary businesses and organizations with very short budgets. However, once a business starts to scale up, it becomes necessary to either integrate automation tools and payroll software or outsource payroll to external firms.

2.   Payroll software solutions

Payroll software solutions serve as a central element in managing payroll by offering automation, efficiency, and scalability to businesses of different sizes. The Software as a Service (SaaS) platforms implement payroll solutions with other business departments like HR and finance to overall elevate the workforce management. This software automates routine operations like pay slip calculations, tax deductions, and employee benefit computation, which not only lowers human errors but also ensures that businesses adhere to the tax laws. Many advanced payroll software also provides personalized solutions as per industry compliance requirements. Some of the popular payroll software includes QuickBooks Payroll, Sage Payroll, SAP SuccessFactors, Zoho Payroll, Xero, and Oracle PeopleSoft.

How In-House Payroll Works

A trained payroll team is needed to look after payroll software, present employee data, and manage the complete cycle. The entire process covers:

• Starting by preparing the employee’s profile in the software
• Updating the attendance and biometrics
• Configuring salary structures, allowances, bonuses, and tax slabs
• Preparing the automated payroll summaries
• Managing salary transactions through salary files and merging with banks
• Building statutory compliance documents and archiving everything in the cloud

Pros of payroll software:

• Payroll software automates the calculation, sends error notifications, and gets the reports ready as per the compliance requirements, which lowers the errors and boosts the proficiency
• The scalability option not only assists businesses in scaling operations hassle-free but also facilitates growth and expansion
• The software can be customized as per business needs and specific industry requirements. They can end direct deposits and update everything on employee self-service portals for better clarity
• It reduces the demand for detailed IT infrastructure, top-notch tools, and a committed payroll staff with a fixed package price that covers it all.
• The incorporation with HR software helps to merge the data and reporting in real time, which not only helps the authorities in decision-making but also keeps employees satisfied

Cons of payroll software:

• Setting up payroll software demands expert oversight who can customize and look after everything, which can be burdensome and time-consuming
• It requires fast-speed internet connectivity all the time; any interruption not just leads to delays but also errors
• Storing the confidential payroll data in the cloud or through payroll software can increase the risks of security, which requires strong security protocols
• It needs training and support to utilize all the features properly and to troubleshoot any problems present

When is Payroll Software Suitable?

Payroll software works best for SMEs with over 30 employees and a consistent workforce, as it not only gives the company internal control but also better clarity. However, it needs stable payroll teams and businesses that are willing to invest in the latest tools.

3.   Outsourced payroll service

One of the most common types of payroll services used today is hiring an outsourced payroll team. This gives both the oversight of professionals and integration of smart payroll software. They handle every single payroll function and all sizes of businesses proficiently. This not only cuts the burden on internal teams but also gives the advantage of payroll expertise and compliance knowledge that payroll providers offer. Outsourcing may seem like a costly option; however, it is more economical if we do the math, as it eliminates the need to hire staff and deploy the latest technology to penalties. Therefore, 57% of businesses outsource their payroll operations to cut costs.

How Outsourced Payroll Works

Outsourced payroll is an effortless solution that just needs the business to share the employees’ data with the service provider, who then handles everything from calculations and managing attendance to tax compliance, preparing pay slips, to pay processing as per instructions. They also represent the authorities in case of any legal query and maintain precise pay records.

Pros of an outsourced payroll service:

• Access to specialist opinion and complete compliance, which is important to adhere to the legal laws
• Cost-effective practices that don’t need any extra hiring or payroll tools and software
• Businesses can scale up without any stress by just adding on the services
• Clear SLAs and routine internal audits to forecast any risks present and to handle sensitive payroll effortlessly

Cons of an outsourced payroll service:

• Reliance on a third party gives less control over the critical payroll operations
• Many payroll providers come with hidden charges that need to be addressed clearly before hiring
• Oftentimes, the initial costs are high for some small businesses to afford
• There is a possibility of sensitive data security risks if the provider is not using the right data protection measures

When is Outsourced Payroll Suitable?

Outsourced payroll services are best suited for:

• Small and Medium businesses with a limited or less skilled HR staff
• Businesses that are struggling to keep up with the ever-changing compliance instructions
• Companies that are growing rapidly and want to reduce the burden on internal teams
• Multi-location business that needs accuracy around every location
• Traditional businesses with no expertise in software implementation or operation

SSCOKSA Payroll solutions are designed to facilitate the businesses of all sizes, from startups to large enterprises. Being one of the best accounting firms in Saudi Arabia, our experts are aware of every legal need and understand how to keep your workforce always satisfied and productive. With the advanced payroll tools integration and cybersecurity protocols, we make sure that your data is not just up to date but always secure. We offer fixed payroll packages with no hidden surprises, which has made us the top choice of many clients around the KSA and GCC region. Get in touch today and let us take care of your every payroll need.