What Is a Payroll System?

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How Stuff Works explains that a payroll system is a financial system that a company establishes to calculate employee wages, keep track of working hours, withhold taxes and other deductions, and pay taxes to federal, state and local governments. The process begins with the first employee hired.

The employee must complete a W-4 form to report the number of dependents so that the company's software can calculate the amount of income tax withheld from the employee's pay. Employees also indicate whether they wish to be paid by check or direct deposit using the same computer system, according to How Stuff Works.