What Is Payroll? Everything Business Owners Need to Know

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.

Showing a graphic of important payroll and tax filing responsibilities.

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 is more focused on the calculations and process of paying your employees, whereas HR covers policies and labor laws affecting different aspects of payroll. The main focus of HR is to manage employees, including functions such as employee onboarding, interviewing candidates, and employee conflict resolutions.

HR professionals will also create employee handbooks, establish workplace policies, train new staff members, and work to ensure that existing staff is engaged.

Overall, HR is the process of managing employees (which includes salary amounts and PTO policies), while payroll is the process of actually paying those employees for work completed.

Although payroll amounts need to align with accounting records and are vital to ensure the accuracy of financial statements, payroll processing and accounting are two very different roles. Accounting is defined as the process of keeping financial records and then analyzing, verifying, and reporting the results. A big component of accounting is creating and managing financial statements (balance sheets, income statements, etc.).

Keeping these financial records is the overall purpose of accounting, while payroll is the process of issuing payments from the company account to pay employees.

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.

Independent contractors are people you hire to perform work for you, usually on a case-by-case or project basis. They’re not employees. 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, and employee benefits don’t apply to them.

For more guidance, check out our guide to paying independent contractors.

Learning how to manage payroll for employees requires more work than contractor payroll. You are 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.

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.