What is Payroll?

Payroll refers to the systems through which an organization calculates, records, and manages employees’ pay. It involves the calculation of wages or salaries, deductions, taxes, and other benefits owed to employees based on their work hours, employment agreements, and applicable laws or regulations.

There are plenty of payroll activities, such as maintaining accurate employee records, processing payments, withholding and remitting taxes, and generating relevant reports. The payroll function ensures that employees are paid accurately and on time, while also fulfilling legal and regulatory requirements related to compensation and taxation.

The Payroll Process

The payroll process involves calculating earnings, taxes, withholdings, and disbursing money from the main account to different areas, like employee paychecks. A payroll administrator determines how much should be paid to each employee, including deductions like taxes and withholdings. 

Necessary Requirements for Payroll

Keeping a payroll list is as simple as having your employee list and their pay information. However, for your organization to run payroll, you require:

  • Information from Employees
  • Federal, State, and Local Tax Forms
  • Employee Identification Number
  • Address and Contact Information
  • Although there may be other requirements, this constitutes the basic necessities.

Payroll Calculations

Calculating payroll involves multiplying work hours per day by an employee’s hourly wage or dividing an employee’s salary by the number of pay periods within a year. An employee’s gross pay may include things like overtime pay, commission, and regular earnings that are taxable. Certain additional pay, like reimbursement of expenses, do not qualify as taxable. Other taxable earnings like bonuses are taxed at a different rate.

Payroll Withholdings

The last step in payroll calculation is to subtract withholdings from gross pay for disbursement to other accounts. Withholdings include federal, state, and local taxes according to employees’ individual withholding information, taxes on any bonuses, retirement funds, Social Security and Medicare funds, any payments to an employer-paid insurance fund, and premiums for healthcare and other employer-provided benefits. The resulting amount is the employee’s net pay, which is issued in their paycheck.

Payroll Submission

After the calculation process, payroll administrators must submit applicable details for a comprehensive disbursement process. The employee receives a paycheck, while the remaining funds from the initial gross are distributed to various accounts or held in reserve until paid according to the organization’s tax schedule. An employee’s pay stub typically indicates the amounts withheld, year-to-date earnings, and withholdings.

Effective payroll management drives employee engagement, improves the attraction of new talent, and enhances retention strategies. Streamlining payroll processing and leveraging technology improve time savings and risk management.