Payroll refers to the payment of employees by their employer. Payroll can be a noun when it describes a business's financial records on employee pay. It can also describe a business's process of paying employees and any corresponding taxes.
Keep reading to learn all the basics of payroll, from the outline of the payroll process to some options for businesses who would rather let someone else deal with it all.
What Is Payroll?
Payroll is the function of a business paying its employees. It includes distributing money in the form of checks and direct deposits. It also includes keeping records on those payments and paying taxes on behalf of those employees. Payroll is used at the end of the fiscal year to assess annual employee wages.
A business may refer to payroll as shorthand for its total workforce or the cost of that workforce. A business may also say that it's "doing payroll," which could mean that it's processing paychecks or calculating the taxes it owes for those employees.
How Does Payroll Work?
Payroll technically starts when an employee fills out a W-4 form, which tells the business details about how they want to be taxed. Throughout the year, the information from that W-4 form will inform the taxes that the business withholds on behalf of that employee.
Before filling out a W-4, employees will strike a rate of pay for a specific job. This usually occurs during the interview process. Some employees are paid a salary, which is the same amount every payday. Other employees are paid by the hour, so their pay varies by the number of hours worked in a pay period. Either way, this amount is called the employee's "gross pay." All payroll calculations are based on the gross pay for that pay period.
With the W-4 information provided and work underway, the business will then pay the employee on a regular schedule (weekly or bi-weekly, for example) Some employees may be paid at different times, depending upon their payroll status, such as paying salaried employees one week hourly employees the next.
After the employee's gross pay for a pay period is calculated, the employer must withhold FICA taxes (for Social Security and Medicare), as well as federal and state income taxes from each paycheck. These taxes are sometimes called "payroll taxes." The employer may also deduct other amounts from the paycheck. These might include contributions to a retirement plan or health plan, as well as union dues or charitable contributions.
This process of calculating withholdings and deductions, preparing paychecks, and distributing payment is known as payroll processing. The payroll process would also track any overtime, paid (or unpaid) time off, tips, and any other miscellaneous quirks to an employee's pay.
"Doing payroll" also includes recordkeeping. A separate record must be kept for each employee with the amounts paid for each pay period. This information is used for end-of-year reports, including W-2 forms that are sent to employees. Records must also be kept of employee authorizations and any changes in pay.
Payroll calculations for an individual employee over time are called an earnings record. In addition to the earnings record, all documents related to that employee's pay, deductions, and withholdings must be kept during the person's employment.
The record of all the calculations for all employees is called a payroll register. This record shows all amounts of salary and wages for each pay period and totals for the year. If you have a payroll program as part of your business accounting system, the payroll register is part of that system. The totals are fed into the overall financial statements for your business.
- Payroll refers to how employers pay their employees.
- Payroll covers all aspects of employee pay, from preparing checks and withholding taxes to keeping records of every employee's pay throughout the year.
- Because of the complex nature and various facets of payroll, many companies choose to outsource payroll services.