Payroll definition
/What is Payroll?
Payroll is the process of providing compensation to employees for their efforts on behalf of a business. It is typically handled by either the accounting department or the human resources department. Many organizations now outsource the bulk of their payroll processing to a third party that specializes in this activity.
How to Process Payroll
The payroll processing function is highly regimented, and typically involves one of the most-used procedures in the accounting department. Payroll processing requires the following sequence of steps:
Collect information about hours worked. Workers who are paid on an hourly basis 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.
Obtain approval of hours worked. The supervisors of hourly workers review the time information submitted and approve the hours worked, or ask the employees to correct errors.
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.
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.
Create payments. The creation of payments usually involves entering the pay information into a computer system or sending it to a third-party payroll processor, which results in either paychecks, direct deposit payments, or payments into a payroll debit card. If the employer hands out paychecks, then this is usually done in person, in order to verify the identity of the recipient.
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.
Payroll FAQs
Does payroll include equity based compensation?
Payroll can include equity-based compensation when compensation reporting is defined broadly, but equity awards are not usually processed as ordinary cash wages. Stock options, restricted stock, and similar awards are recorded as compensation expense under applicable accounting rules, while payroll systems often handle related tax withholding and reporting requirements.
What is the organizational structure of payroll?
ayroll is typically organized within the accounting department or human resources function, with responsibilities divided among employee data maintenance, timekeeping, payroll calculation, review, payment, tax reporting, and recordkeeping. Strong structures separate authorization, processing, custody of funds, and reconciliation duties to reduce errors and payroll fraud risk.