What is payroll?

Payroll is the process of providing compensation to employees for their efforts on behalf of a business. The outcome of the payroll process can result in one of the largest periodic cash expenditures of a business. The payroll processing function involves the following steps:

  1. Collect information about hours worked. Workers who are paid on an hourly basis should submit their hours worked, usually through a timekeeping system such as a timekeeping clock, computerized time clock, Internet-based time tracking site, or even a cell phone. This is not needed for those employees who are paid salaries, since they are paid a fixed amount in every time period.

  2. Obtain approval of hours worked. The supervisors of hourly workers review the time information submitted and approve the hours worked, or go back to the employees to correct errors.

  3. Calculate pay. For workers who are paid on an hourly basis, multiply the hours worked by their hourly pay rates, as adjusted for overtime, pay differentials for shifts worked, or hazardous-duty pay. This is a standard amount for salaried employees. The result of this step is the gross pay due to each employee.

  4. Calculate deductions. Calculate the social security and medicare tax deductions from gross pay, as well as any other deductions for income tax withholdings, pensions, medical insurance, union dues, charitable contributions, and so forth. The result of this step is the net pay due to each employee.

  5. Create payments. This usually involves entering the pay information into a computer system or third-party payroll processor, which results in either paychecks, direct deposit payments, or payments into a payroll debit card.

There is a considerable risk of large penalties imposed by the government if payroll taxes and related withholdings are not remitted to the government in accordance with a strict payment schedule. This is a major concern for small business owners, since the cash payments must be made on time. A good way to avoid the risk of missing these tax remittances is to outsource payroll to a third-party payroll processing service, which remits the funds on behalf of the business.

There are a variety of payroll best practices that can be applied to the streamlining of the payroll process, which can otherwise be a time-consuming process that requires an inordinate amount of staff time and which may result in a large number of errors.

The concept of payroll can be extended to the payment of contractors, though these payments are made through the accounts payable system rather than the payroll system.

Related Courses

How to Audit Payroll
Optimal Accounting for Payroll
Payroll Management