What Is Payroll? Everything Business Owners Need to Know
Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
Robie has more than five years of content writing experience and specializes in writing about payroll and human resources software for small businesses.
This article is part of a larger series on How to Do Payroll.
Payroll is the process of employers paying their employees for work they’ve completed. That process, as a whole, encompasses many things—from calculating gross and net wages to making payments to tax agencies (including the IRS) and vendors that provide employee benefits. In some cases, such as when a court garnishment order is received, it even includes withholding money to pay an employee’s creditors.
Handling payroll the right way is important. Employers need to be diligent to ensure that their employees receive the funds they’re legally entitled to in a timely manner. There are also many labor laws that affect payroll, such as overtime pay and minimum wage.
Need to know how to do payroll? Check out our How to Do Payroll guide for details on the steps you need to take.
What Happens When You Run Payroll?
While many people may define payroll as “just” paying your workers, processing payroll really consists of much more. Here are some of the basic things you’ll need to do when running payroll:
- Determining your employees’ gross wages, either a flat rate if they’re salaried or by multiplying hourly wages by hours worked; don’t forget about overtime for your non-exempt employees
- Withholding all required payroll taxes (federal, state, and local) and remitting taxes to the appropriate agencies on time
- Withholding all employee benefit premiums—medical, 401(k), life insurance, etc.—and ensuring that payments are made to the appropriate vendors
- Issuing payments to employees on time via their preferred method of payment (adhering to state laws) and providing them with pay statements for both their records and yours
And that’s just to make sure that your team is paid properly each pay period. You’ll also need to ensure that you stay on top of maintaining your payroll information and complying with all filing requirements.
These are just some of the responsibilities you need to handle when managing payroll.
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.
Tip: If you’re looking to learn more about payroll or how to do it, we recommend starting with learning some basic payroll terminology. This will help make your payroll training much more effective and efficient since you won’t have to stop often to do a search.
What You’ll Need to Run Payroll
Payroll is a process that requires many documents, tools, and resources to handle appropriately. Some of the things employers will need while running payroll include:
- Employer Identification Number (EIN)
- Business bank account (not required, but definitely best practice)
- Payroll legal compliance resources (federal, state, and local)
- Tips for effectively managing payroll
- Knowledge of how to calculate payroll and/or a calculator tool
- Time sheets and a time card calculator (if employing hourly workers)
- Payroll deduction amounts (such as taxes, benefits contributions, and wage garnishments)
- Payroll forms
All-in-one payroll software, like Gusto, is also a great tool to have. It automates your process and takes the liability off the business owner. If you’re not quite ready for advanced payroll software, you may want to check out our article on the best free payroll software.
How Is Payroll Different from HR or Accounting?
Since payroll, human resources (HR), and accounting are often very closely related when discussing running a small business, it can be confusing to know the difference. Here are some of the most important components that can help you better understand what each of them encompasses:
Payroll | HR | 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 policies 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) |
Payroll for Contractors vs Employees
Many people associate payroll with the process of issuing payments to W-2 employees only. However, it can also include contract (or 1099) workers.
The primary difference between paying W-2 employees vs 1099 contractors is that you don’t need to withhold payroll taxes for contractors. You pay them what they earn and give them a 1099 form at the end of the year detailing their earnings; they then handle paying their own tax bills.
Bottom Line
Payroll can be a pretty confusing topic depending on the rules and regulations that apply to your business, but it’s essentially the process of paying your workers. It 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 payroll software when you reach a certain number of employees.
