Payroll 101: How Payroll Works and Why It Matters

Payroll is the most elemental way in which an organization honors its agreement with employees. And payroll administrators keep companies compliant throughout the year, ensuring timely and accurate compensation goes out while they safeguard a trust fund of withholdings used for taxes and benefits. Yet, as administrative responsibilities go, payroll is notorious for garnering the least appreciation in exchange for being one of the most essential, time-consuming, and stressful tasks administrators perform. By understanding how payroll works and what’s involved, administrators and executives can ensure they are taking full advantage of an opportunity to treat their employees well and to safeguard the entire organization.

How Payroll Works

Payroll was originally the term for the list (roll) of people employed by an organization; however, it’s now more commonly used to describe the total amount of money an organization pays its employees and the process of paying them.

How is payroll actually processed?

From start to finish, setting up and processing payroll follows the same basic plan for most U.S.-based organizations. It begins with obtaining an employer identification number (EIN) and ends with paychecks arriving in employees’ hands (or bank accounts). Here is how it breaks down.

Learn how to create a great compensation plan with our free guide.

Read Now

Prior to running payroll, you need:

To process payroll, you must:

To ensure compliance, you need to:

Learn how to create a great compensation plan with our free guide.

Download Now

More Payroll Questions Answered

What’s a typical pay schedule?

U.S. companies typically pay their employees on a weekly or biweekly (every two weeks) basis, but some pay monthly or semimonthly, usually as a result of how the company earns its revenue or due to the nature of the work performed. Hourly wage earners like construction workers and restaurant staff are more likely to be paid weekly, while professionals and salaried workers are more likely to be paid at less frequent intervals. After a company decides how much and when to pay employees, payroll processing follows the same plan from start to finish every pay period.

What are payroll taxes?

Payroll taxes are all the payroll-related taxes that organizations and their employees pay throughout the year. Payroll administrators are responsible for ensuring the amount paid by the organization and the money deducted from employees’ wages are accurate and, in the case of the organization, submitted on time. Payroll taxes taken out of wages are submitted automatically and then adjusted via annual tax returns. In the United States, payroll taxes include income tax and deducted funds for various kinds of insurance, as well as Medicare, Social Security, state, and local taxes.

The Importance of Payroll

Being paid for the work you do is the bedrock of the employer-employee relationship. It is an expectation that is almost entirely implicit—imagine, for example, asking in a job interview whether you’ll be paid on time and accurately—until something goes wrong, at which point the entire relationship is at risk. Payroll is therefore absolutely critical . . . but it’s also complicated, time-consuming, stressful, and never-ending. Even small payroll mistakes and payroll errors create huge headaches, and larger ones can land an organization in deep legal and financial trouble with employees or the government. Yet despite its critical nature, even basic payroll knowledge is relatively scarce outside of the groups or individuals who actually handle payroll.

That’s unfortunate because understanding what payroll really does and how critical it is increases the chances it will get the attention it deserves. Organizations should treat those responsible for payroll processing like gold, and make doubly sure to provide everything they need to process payroll accurately and efficiently. Whether that arrives in the form of plenty of time to process payroll manually, capable and integrated payroll software, or a third-party payroll service, the effort an organization spends on payroll proficiency will be well worth it in the end, for both employee satisfaction and the longevity of the organization itself.


Fast, easy, accurate payroll. It's as simple as that.

Start Your Free Trial