Payroll is a process where the employer pays its workers, applicable tax agencies (including the IRS), and vendors that are under contract to provide employee benefits. In some cases, such as a court garnishment order, it even includes withholding money to pay an employee’s creditors.
Handling payroll the right way is important. Employers must perform careful calculations, ensuring that employees and other stakeholders receive the amounts they’re legally entitled to. There are also labor laws that affect payroll accuracy, such as regulations governing overtime pay and minimum wage amounts.
What Happens When You Run Payroll?
Although payroll is essentially paying your workers, doing payroll consists of much more.
- Paychecks are cut.
- Taxes are withheld and paid to federal, state, and local tax agencies.
- Data is recorded for reporting purposes.
- Money is withheld to pay employee benefit premiums and paid to vendors owed.
- Quarterly tax reports must be sent in with payroll tax payments.
- Employees receive annual tax reports, and the IRS receives a copy along with a summary form.
- Pay raises are applied.
- Paid time off (PTO) is tracked and paid accordingly.
Some components of payroll are different depending on the type of work you do. For example, if you’re working on a federal contract, you may be responsible for submitting weekly certified payroll documents with details of all hours worked and amounts paid to the agency that’s funding your project.
How Does Payroll Differ From HR?
It’s a legit question–payroll and HR are closely related, and although there is some overlap, they fulfill different needs for the business.
Payroll is more focused on the calculations and process of actually paying your employees whereas HR covers policies and labor laws that affect different aspects of payroll and beyond such as employee onboarding, training, engagement, interviewing.
Example: You could hire a bookkeeper as your employee to work a 40 hour workweek and agree to pay her $5.25 an hour. If you were to calculate her weekly paycheck to be $210, your payroll figures would be correct, and any taxes you apply to that amount would also be OK, calculation-wise. However, from an HR point of view concerning labor laws, you’ll see that the federal minimum wage is $7.25 an hour. That means you will have broken a federal labor law and shorted your employee $80 a week, not to mention the IRS and any state or local tax agencies.
Is Payroll the Same as Accounting?
This is another legit question. Businesses get it confused all the time when trying to build out different departments. Payroll transactions and accounting records need to align, but they both include vastly different processes. It’s not uncommon for small businesses to assign both payroll and accounting to the same person, but I caution against this because they require different skill sets; although payroll is different from HR, people running payroll need to have a strong HR foundation.
Here’s a table to help you see a quick summary of the differences between payroll, HR, and accounting. Please note that the table is not exhaustive; it’s just meant to give you an overview of areas where they’re related.
What Is Payroll vs HR vs Accounting
Paycheck and tax calculations
Employment and labor laws
Balancing cash movement in the bank account to the general ledger (books)
Process of withholding money for employee benefits
Implementing HR laws like offering insurance benefits when reaching 50 full-time equivalent employees
Classifying money withheld from employee paychecks as liabilities until payment is made to benefit providers and tax agencies
Calculating holiday pay according to company policy
Creating and managing holiday pay policy
Correcting payroll errors on the books
Accurately paying employees for their PTO
Setting up and implementing a PTO policy
Keeping a log of outstanding PTO as a liability on the books (in states like California where PTO must be paid out upon termination)
What Employers Must Have to Do Payroll
Payroll is a process that requires many documents, tools, and resources to handle appropriately.
Employers running payroll need:
- Payroll forms
- Knowledge of how to calculate payroll and/or a calculator tool
- Time sheets (if employing hourly workers)
- Payroll legal compliance resources, federal, state, and local
- Business bank account
- Employer Identification Number (EIN)
Payroll software that runs payroll with the click of a few buttons, like Gusto or QuickBooks, is also good to have, although some businesses with a handful of employees run payroll on their own in the beginning.
Payroll for Contractors vs Employees
When thinking about payroll, many people only associate it with paying employees. However, it can also include contract workers. The primary difference between paying the two is that you don’t need to withhold payroll taxes for contractors; you pay them what they earn, give them a 1099 form at the end of the year detailing their earnings, and they handle paying their own tax bills.
What Is Payroll for Contractors?
Independent contractors are people you hire to perform work for you, usually on a case-by-case or project basis. They’re not employees, which means you can’t control how or what they do to deliver the finished product or service. You pay them at an agreed-upon rate and shouldn’t withhold money for taxes or insurance. Contractors are responsible for paying their own payroll taxes, such as FICA, and employee benefits don’t apply to them.
What Is Payroll for Employees?
Learning how to manage payroll for employees requires more work than contractor payroll. You control their finished products and/or services in addition to how and what they need to do to complete them. You are also responsible for withholding and paying their payroll taxes. Instead of paying them the total money they earned, you must deduct Social Security, Medicare, income taxes, garnishments, and so on.
If you offer benefits, like insurance or 401(k), you must also withhold funds to pay for them. This requires a lot of tracking and calculating to ensure you are paying the correct amounts to your employees and tax agencies. Your payroll expenses are usually higher when it comes to employees vs contractors, because you have to pay a percentage of the money your employees earn out of your own funds as employer payroll taxes.
Frequently Asked Questions (FAQs) About Payroll
In this section, you will find answers to the most frequently asked questions about payroll.
How do you define payroll?
Payroll includes the workers you pay, both contractors and employees, and how much you pay them. In addition, payroll taxes (income taxes and FICA taxes), benefits like insurance and 401(k), and paid-time-off (sick and vacation time), can be huge components of managing payroll.
How do you calculate payroll?
To fully calculate payroll, you should multiply an employee’s hourly rate by hours worked or use salary per pay period to find gross pay. Then, deduct taxes, benefit contributions, garnishments, and any other deductions. Taxes are a percentage of employee earnings, and deductions for benefits are usually a flat premium. Employers pay taxes on employee pay as well.
Who is exempt from overtime pay?
Workers who earn at least $455 a week in salary are exempt from overtime if they perform office (non-manual) work. Typically, their work will fall under the Department of Labor’s (DOL) executive, administrative, or professional exemption categories. Other jobs that are exempt from overtime are news editors, live-in domestic service workers, taxi drivers, and railroad employees.
How often do I have to pay my employees?
Payday frequency is generally regulated by the states in which businesses operate. Federal law mentions establishing a consistent schedule but doesn’t have strict guidelines to govern how often you have to pay. If you’re in Arkansas, you have to pay at least semimonthly, and if you’re in California, it depends on the job—some require weekly payroll payments while others require a minimum of biweekly. Check the DOL’s website for more detail about your state.
What are employers required to withhold from employee paychecks?
Employers are required to withhold money for Social Security and Medicare taxes, federal and state income taxes, and court-ordered payments, like garnishments and child support. Deductions for insurance, charity, and retirement plan contributions are voluntary.
Payroll can be a complex topic, depending on what rules and regulations apply to your business, but it’s essentially the process of paying your workers. Payroll also affects other areas of a business, from human resource management and labor laws to payroll accounting and taxes. The more employees you have, the more oversight you’re subjected to so you may want to consider a payroll provider when you reach a certain amount of employees.