Payroll definition
/What is Payroll?
Payroll is the process of providing compensation to employees for their efforts on behalf of a business. It is typically handled by either the accounting department or the human resources department. Many organizations now outsource the bulk of their payroll processing to a third party that specializes in this activity.
How to Process Payroll
The payroll processing function is highly regimented, and typically involves one of the most-used procedures in the accounting department. Payroll processing requires the following sequence of steps:
Step 1. Collection Information About Hours Worked
Workers who are paid on an hourly basis submit their hours worked, usually through a timekeeping system such as a timekeeping clock, computerized time clock, Internet-based time tracking site, or even a cell phone. This is not needed for those employees who are paid salaries, since they are paid a fixed amount in every time period.
Step 2. Obtain Approval of Hours Worked
The supervisors of hourly workers review the time information submitted and approve the hours worked, or ask the employees to correct errors.
Step 3. Calculate Pay
For workers who are paid on an hourly basis, multiply the hours worked by their hourly pay rates, as adjusted for overtime, pay differentials for shifts worked, or hazardous-duty pay. This is a standard amount for salaried employees. The result of this step is the gross pay due to each employee.
Step 4. Calculate Deductions
Calculate the social security and Medicare tax deductions from gross pay, as well as any other deductions for income tax withholdings, pensions, medical insurance, union dues, charitable contributions, and so forth. The result of this step is the net pay due to each employee.
Step 5. Create Payments
The creation of payments usually involves entering the pay information into a computer system or sending it to a third-party payroll processor, which results in either paychecks, direct deposit payments, or payments into a payroll debit card. If the employer hands out paychecks, then this is usually done in person, in order to verify the identity of the recipient.
Related AccountingTools Courses
There is a considerable risk of large penalties imposed by the government if payroll taxes and related withholdings are not remitted to the government in accordance with a strict payment schedule. This is a major concern for small business owners, since the cash payments must be made on time. A good way to avoid the risk of missing these tax remittances is to outsource payroll to a third-party payroll processing service, which remits the funds on behalf of the business.
There are a variety of payroll best practices that can be applied to the streamlining of the payroll process, which can otherwise be a time-consuming process that requires an inordinate amount of staff time and which may result in a large number of errors.
Payroll Organizational Structure
Payroll is usually located within the accounting department, where the payroll manager reports to the controller. Another option is to locate the function within the human resources department, with the payroll manager reporting to the human resources director. The concept of payroll can also be extended to the payment of contractors, where these payments are made through the accounts payable system rather than the payroll system; this means that contractor payments are handled by the payables manager.