Glossary of Human Resources Management and Employee Benefit Terms
Payroll is defined as a list containing all of the employees that an organization pays along with the salary or hourly rate at which each employee is paid. It also may refer to the department or service responsible for paying an organization’s employees, or be shorthand for the task of payroll calculation and processing.
Keeping a payroll list is as simple as having a list of your employees and their pay information. Once you have paid them, you may want to add payroll history to your records. However, in order for your organization to run payroll, you will need:
An EIN - The number the federal government uses to identify an organization for tax purposes.
State and local ID numbers - Like an EIN, but at the state and local level.
Employee tax information - W-4 forms for full- and part-time employees, 1099s for contract employees.
A payroll budget and schedule - How much you will pay employees, and how often.
A tax payment schedule - When you will pay taxes for the organization.
During payroll processing, a payroll administrator determines how much each employee has earned and how much to pay them after taxes and withholdings. At its most basic, payroll processing involves calculating earnings, calculating taxes and withholdings, and disbursing money from a main account to various places, including the employees’ paychecks.
Depending on the size and complexity of an organization’s needs, payroll processing may be performed in-house or outsourced to a third-party payroll processing company. For very small companies, there may be a single person with other HR or finance duties who also processes payroll; however, as payroll software and services become more affordable, smaller companies are taking advantage of the time savings and risk protection provided by having an outside service process payroll.
Calculating pay involves multiplying the hours an employee has worked in a set period by the employee’s hourly wage or dividing an employee’s salary by the number of pay periods in a year, then tallying up any additional pay the employee has earned during that period. That may include overtime pay at a different pay rate or commission from sales, both of which are considered part of normal earnings and are taxed as such. This is an employee’s gross pay.
Other additional pay may include a bonus, which is taxed at a different rate than normal earnings, and reimbursement for expenses, which is part of payroll but not calculated as earnings and therefore not taxed.
The last step in payroll calculation is to subtract withholdings from gross pay for disbursement to other accounts. Withholdings include federal, state, and local taxes according to employees’ individual withholding information, taxes on any bonuses, retirement funds, Social Security and Medicare funds, any payments to an employer-paid insurance fund, and premiums for healthcare and other employer-provided benefits. The resulting amount is the employee’s net pay, which is issued in their paycheck.
After calculation, the final step in payroll processing is to submit all numbers for disbursement. The employee receives a paycheck in the amount of their net pay, while the remaining funds from the original gross are distributed to the appropriate accounts or held in reserve to be paid according to the organization’s tax schedule. The employee also typically receives a pay stub showing the amounts withheld along with year-to-date earnings and withholdings.