What is 'Payroll'

Payroll is the sum total of all compensation a business must pay to its employees for a set period of time or on a given date. It is usually managed by the accounting or human resources department of a business; small-business payrolls may be handled directly by the owner or an associate. Increasingly, payroll is outsourced to specialized firms that handle paycheck processing, employee benefits and insurance, and accounting tasks such as tax withholding.

Payroll can also refer to the list of employees of a business and the amount of compensation due to each of them. It is a major expense for most businesses and is almost always deductible as such. Payroll can differ from one pay period to another because of overtime, sick pay and other variables.

BREAKING DOWN 'Payroll'

Many medium- and large-size companies contract outside payroll services to streamline the process. Employers keep track of the number of hours each employee worked and relay this information to the payroll service. On payday, the payroll service calculates the gross amount the employee is owed based on the number of hours or weeks he worked during the pay period and his pay rate. The service deducts taxes and other withholdings from earnings, and then provides a direct deposit to the employee's bank account or a paper check.

Advantages and Disadvantages of Using Professional Payroll Services

Professional payroll services offer many benefits and a few disadvantages. One major benefit of payroll services is their ability to produce a variety of reports that simplify accounting procedures and help companies ensure they are in compliance with legal and tax filing requirements. The payroll service may also maintain a record of how much vacation or personal time employees have used.

On the downside, when companies outsource their payroll system, they must rely on individuals outside the business for accurate accounting. In the event of an error, the company's on-site personnel must deal with upset employees. Companies might also face tax penalties for the payroll service's error. In addition, payroll services are more expensive than running payroll in-house. The services may charge a set monthly fee or offer different payment structures for varying tiers of service. Because of their cost, payroll services may not be the best option for small companies with tight operating budgets.

Payroll Software Programs

In lieu of using specialized payroll services, some companies opt to rely on payroll software programs. Once the company purchases the software, there are no additional monthly fees. Software programs usually include printable tax forms and withholding tables. In addition to the financial savings, internal payroll systems help companies keep confidential financial information private. However, this method can be time-consuming, which can pose a problem for companies with small staff.

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