Reviewed by Sujaini | Updated on Aug 27, 2020

What is Payroll?

Payroll is the total of all the compensation that a business must pay to its employees on a given date or for a set period. It is usually managed by an enterprise's accounting or human resources department; small business payrolls can be managed directly by the owner or an associate. Payroll is increasingly outsourced to specialized firms handling paycheck processing, employee benefits and insurance, and accounting tasks such as tax deductions.

Payroll can also refer to a company's list of employees and the amount of compensation each has to pay for. For most companies, it is a high cost that is almost always deductible, meaning that the price may be excluded from gross profits, which reduces the company's taxable gain. Because of overtime, sick leave and other factors, payroll can vary from one pay period to another.

Understanding Payroll

Payroll is the method of paying employees of a corporation, which may involve monitoring the hours worked, measuring the employee's pay and issuing compensation directly to their account or by check. But companies also have to perform accounting functions to record payroll, withheld taxes, bonuses, overtime pay, sick time and holiday pay. Companies must also put aside and record any amount of money for Medicare, Social Security, and unemployment taxes to be paid to the government.

Most small and large-sized businesses contract to streamline the process outside of payroll services. Employers keep track of each employee's number of hours worked and sent this information to the payroll service. On payday, the payroll company determines the total amount owed to the employee based on the number of hours or weeks employed over the pay period and the rate of pay. The company deducts payroll taxes and other withholdings, and only pays the workers.