What Is Payroll?

Payroll is the process of companies paying employees for the work they put in. This includes gathering employees' names, tracking their hours, calculating their pay, and distributing their salaries at regular intervals. In addition, payroll management involves calculating the earnings of employees and factoring in federal and state payroll taxes.

Payroll can refer to:

  • The employees’ financial records in a company. 
  • The process of distributing the paychecks to the employees. 
  • The annual record of employee wages.

How Does Payroll Work?

There are several elements to payroll: 

  • Running payroll: The actual process of calculating and distributing taxes and wages. 
  • Employees on payroll: A list of all the names and information about the employees in a company. The list doesn’t include independent contractors. 
  • Payroll expenses: The amount a company spends on wages and taxes. Employers or accountants must record the expenses in the accounting records.

With payroll, employers can make payments via direct deposit or by check. Companies must also keep records of payroll, withheld taxes, and bonuses. 

The technical aspects of payroll processing are usually handled by the finance department of a company or manually by employers, depending on the company's size. They calculate different tax deductions and subtract them from each employee's gross pay. 

Tax deductions can differ based on national and local labor laws and regulations, so employers are often advised to check with their local labor department. After determining the net salary for the employees, the finance department processes payroll to distribute payslips. In addition, the finance department maintains payroll records and data to ensure payroll compliance.

Many large and medium-sized companies often use payroll services to streamline the process. The payroll service provider receives information about the hours worked by the company’s employees and calculates the gross amount owed to the employees based on the number of hours worked during the pay period. After deducting taxes and withholdings, the payroll company transfers the funds to the company or directly to the employees’ bank accounts.

How Is Payroll Managed?

A few options are available when companies set up payroll to pay employees. Financial departments and upper management will need to spend some time deciding which option is best for both the employees and the company.


This method is the cheapest but very time-consuming, as it requires managers or employers to be familiar with payroll basics to calculate taxes and other deductions manually. 

For this, companies need to keep detailed payment records. They typically do this with the help of spreadsheets, which show the gross pay, taxes, deductions, and net pay in a single document. 

Lastly, employers are responsible for filing and depositing taxes at the IRS and any other state or local agencies, if applicable. Therefore, managers usually set reminders on a work calendar to avoid penalties and late-tax fees.

Outsourcing or Establishing a Financial Department

A payroll accountant or professional employer organization (PEO) might be the best option for outsourcing employee payroll. The outsourcing company usually handles the entire process, from calculation to wage distribution.

On the other hand, establishing a financial department within a company goes a long way, as career accountants have extensive training that allows them to handle large amounts of data efficiently and with minimal errors. Moreover, since the department will be in-house, employers and managers can keep a close eye on the ins and outs of payroll.


Payroll software is the modern solution to running payroll. The software will automatically calculate wages and taxes without consuming much time. There are many choices regarding payroll software, from free apps to some premium providers requiring a monthly subscription.

What Are the Steps in Processing Payroll?

Payroll processing is a chain of links where an employer pays employees after taking appropriate deductions for various reasons. In the United States, the payroll process can be broken down into five main steps.

Employee Data

To ensure taxes are automatically deducted when payroll is processed, employers or managers must fill out payroll information using the W-4 form once the organization has hired a new employee. The paper holds employee details, such as their name and address, social security number, salary, and other information.

Calculating Net Pay

Employees' net pay is the difference between their gross salary and tax withholdings. These withholdings and deductions typically include healthcare, social security, and any other state-mandated taxes.

Distributing Payment

After the deductions have been calculated, the company sends the payment to the employee via direct bank deposit or a cheque, depending on the company policy.

Filing Taxes

After distributing the payments to its employees, the company submits a tax file that contains any withholdings to state authorities.

Paying Taxes

This step involves forwarding benefits and taxes to the appropriate authorities. These are usually healthcare insurance providers and retirement plan companies.