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 department of a business; small-business payrolls may be handled directly by the owner or an associate. 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 due to overtime, sick pay and other variables.

BREAKING DOWN 'Payroll'

Many medium- and large-sized 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 the employee 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 onsite 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 payroll method can be time-consuming, which can pose a problem for companies with small staff.

RELATED TERMS
  1. Payroll Card

    A payroll card is a prepaid card onto which an employer loads ...
  2. Payroll Tax

    A payroll tax is a tax an employer withholds from an employee's ...
  3. Split Payroll

    Split payroll is method of paying employees who are on international ...
  4. Burden Rate

    Indirect costs associated with employees, over and above gross ...
  5. Severance Pay

    Severance pay is compensation given to an employee who has been ...
  6. Aggregate Level Cost Method

    Aggregate level cost method is an actuarial accounting method ...
Related Articles
  1. Small Business

    7 Tax Savings Tips for Small Business Owners

    Small business owners should consider these year-end tax savings strategies.
  2. Taxes

    4 Ways Business Owners Can Reduce Tax Time Stress

    Business owners who implement these strategies throughout the year will find filing taxes less stressful.
  3. Managing Wealth

    Raises or Bonuses Better for Small Business Staff?

    Weigh the pros and cons of each and strike the right balance to retain a top-tier staff and a healthy bottom line for your business.
  4. Insights

    US Non-Farm Payrolls (NFP) Preview: 3% Wage Growth Is Fear Threshold

    Barring a freak payrolls print, the year-over-year change in average hourly earnings should dominate the reaction to Friday's February employment report.
  5. Personal Finance

    The Dangers of Getting a Paycheck on a Prepaid Debit Card

    Receiving your paycheck on a prepaid debit card may seem like a boon until you discover all the fees that can come with it.
  6. Personal Finance

    What's Your Employee Value?

    Have you ever wondered how much you're worth to your boss? Here's a method for calculating that value.
  7. Insights

    September US Non-Farm Payrolls Decline by 33,000, Earnings Growth Jumps To 0.5%

    US non-farm payrolls declined 33,000 for September compared with expectations of a gain around 85,000 for the month and this was the first reported decline for over seven years.
  8. Small Business

    Who are ADP's Main Competitors?

    Explore ADP's primary competitors in its two major segments, with brief descriptions of the scale and offerings of companies such as SAP, Oracle and Workday.
RELATED FAQS
  1. What impact does a higher non-farm payroll have on the forex market?

    The employment report, released by the Bureau of Labor Statistics, is an economic indicator that contains data on the employment ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center