Payroll is the comprehensive system businesses use to compensate their employees for work performed. At its core, payroll involves calculating how much each employee has earned during a specific pay period, whether that’s weekly, bi-weekly, or monthly.
The process starts with tracking employee hours, factoring in regular wages, overtime pay, bonuses, and commissions. From these gross earnings, employers must subtract various deductions including federal and state income taxes, Social Security and Medicare contributions, and any voluntary deductions like health insurance premiums or retirement plan contributions.
Beyond basic calculations, payroll encompasses several critical administrative functions. Employers must maintain detailed records of all payments and deductions, generate pay stubs for employees, and ensure timely distribution of paychecks or direct deposits. The system also handles year-end tax documents like W-2 forms.
Compliance represents a major component of payroll management. Businesses must follow federal regulations such as the Fair Labor Standards Act, which governs minimum wage and overtime requirements. State and local laws add additional layers of complexity, with varying tax rates, disability insurance requirements, and paid leave mandates.
Many companies choose between handling payroll internally using specialized software or outsourcing to professional payroll service providers. Accurate payroll processing protects businesses from costly penalties while ensuring employees receive correct, timely compensation. Mistakes can result in employee dissatisfaction, legal issues, and significant financial penalties from tax authorities.