What Is Payroll?

Payroll is the 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, meaning the expense can be deducted from gross income lowering the taxable income of the company. Payroll can differ from one pay period to another because of overtime, sick pay, and other variables.

Understanding Payroll

Payroll is the process of paying a company's employees, which can include the tracking of hours worked, the calculation of employee's pay, and the distribution of payments via direct deposit directly to their account or by check. However, companies must also perform accounting functions to record payroll, taxes withheld, bonuses, overtime pay, sick time, and vacation pay. Companies must also put aside and record any amount of money to be paid to the government for Medicare, Social Security, and unemployment taxes.

Key Takeaways

  • Payroll is the total of all compensation a business must pay to its employees for a set period of time or on a given date.
  • The payroll process can include tracking hours worked for employees, calculating pay, and distributing payments via direct deposit or check.
  • However, companies must also perform accounting and record-keeping as well as set aside funds for Medicare, Social Security, and unemployment taxes.

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 worked during the pay period and the pay rate. The service deducts taxes and other withholdings from earnings and then pays the employees.

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. Also, 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, software programs can be time-consuming, which can pose a problem for companies with a small staff.