What Is Payroll?

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

Many payroll fintech firms, including Atomic, Bitwage, Finch, Pinwheel, and Wagestream, are leveraging technology to simplify payroll processes. These solutions pay employees with greater convenience and speed and provide digital payroll-related documents with innovative technology-enabled services that are required by the gig and outsourcing economies.

Payroll can also refer to the list of a company's employees and the amount of compensation due to each of them. It's a major expense for most businesses and is almost always deductible. The expense can be subtracted from gross income to reduce the company's taxable income.

Payroll can differ from one pay period to another because of overtime, sick pay, and other variables.

Key Takeaways

• Payroll is the compensation a business must pay to its employees for a set period and on a given date.
  
  
• The payroll process can include tracking hours worked for employees, calculating their pay, and distributing payments via direct deposit or check.
  
  
• Companies must also perform accounting and record-keeping tasks and set aside funds for Medicare, Social Security, and unemployment taxes.
  
  
• Companies can use professional services and outsource their payroll or they can use cloud-based software if they don't want to deal with payroll themselves.
  
  
• Calculating payroll involves many components and can be complex.

Understanding Payroll

Payroll is the process of paying a company's employees. It includes tracking hours worked, calculating employees' pay, and distributing payments via direct deposit to employee bank accounts or by check. Companies must also perform accounting functions to record payroll, taxes withheld, bonuses, overtime pay, sick time, and vacation pay. They must put aside and record the amount to be paid to the government for Medicare, Social Security, and unemployment taxes. Many companies use software solutions to manage their payroll. The employee inputs their hours through an API and their pay is processed and deposited into their bank accounts.

Many medium- and large-size companies outsource payroll services to streamline the process. Employers track the number of hours each employee works and relay this information to the payroll service. The payroll service calculates the gross amount the employee is owed based on the pay rate and the number of hours or weeks worked during the pay period. The service deducts taxes and other withholdings from earnings and then pays the employees.

Special Considerations

Employers with gross sales of $500,000 or more per year are subject to the requirements of the Fair Labor Standards Act (FLSA), passed in 1938.

 This U.S. law protects workers from certain unfair pay practices. The FLSA sets out various labor regulations, including minimum wages, requirements for overtime pay, and limitations on child labor. FLSA rules specify when workers are considered to be on the clock and when they should be paid overtime.

The law requires that overtime hours over 40 hours per week be paid at one-and-a-half times the regular hourly rate. Some employees are exempt from the FLSA and the Act doesn't apply to independent contractors or volunteers because they're not considered employees.

Some hourly workers aren't covered by the FLSA but they're subject to other regulations. Railroad workers are governed by the Railway Labor Act and truck drivers fall under the purview of the Motor Carriers Act.

The FLSA also sets out how to treat jobs that are primarily compensated by tipping. An employer must pay the minimum wage to tipped service workers unless they regularly receive more than $30 per month from gratuities.

Advantages and Disadvantages of Using Professional Payroll Services

One major benefit of payroll services is their ability to produce a variety of reports that simplify accounting procedures and help companies ensure that they comply with legal and tax filing requirements. The payroll service may also maintain a record of how much vacation or personal time employees have used.

A drawback is that companies must rely on individuals outside the business for accurate accounting when they outsource their payroll systems. The company's on-site personnel must deal with upset employees in the event of errors. Companies might also face tax penalties for errors made by the payroll service.

Another disadvantage is that payroll services are more expensive than running payroll in-house. The services might charge a set monthly fee or offer different payment structures for varying tiers of service. Payroll services may not be the best option for small companies with tight operating budgets because of their cost.