Payroll Overview

Payroll is defined as a list containing information on all the employees the organization pays, as well as the salary or hourly rate paid to each employee. It can also refer to the department or service responsible for paying an organization's employees, or be an abbreviation for the act of calculating and processing payroll.

What is needed for payroll?

Keeping a payroll list is as simple as having a list of your employees and their salary information. Once you've paid them, you may want to add payroll history to your records. However, for your organization to run payroll, you'll need:

• EIN - The number that the federal government uses to identify an organization for tax purposes.
• State and Local Identification Numbers - Like an EIN, but at the state and local level.
• Employee tax information - W-4 forms for full-time and part-time employees, 1099s for contract employees.
• Salary budget and schedule - how much you will pay employees, and how often.
• Tax Payment Schedule - When will you pay tax for the organization.

How is payroll processed?

During payroll processing, the payroll administrator determines how much each employee has earned and how much to pay them after taxes and withholding. At its most basic, payroll processing involves calculating income, calculating taxes and withholding, and distributing funds from the main account to various locations, including employees' paychecks.

Depending on the size and complexity of an organization's needs, payroll processing may be done in-house or outsourced to a third-party payroll processing company. For very small companies, there may be a person with other human resources 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 external service process payroll.

Calculation of income

Calculating pay involves multiplying the hours worked by the employee in a given period by the employee's hourly wage or dividing the employee's salary by the number of pay periods in a year, then adding any additional pay the employee earned during that period. This can include overtime pay at a different pay rate or commissions from sales, both of which are considered part of ordinary income and are taxed the same way. This is an employee's gross pay.

Other additional pay can include bonuses, which are taxed at a different rate than ordinary income, and expense reimbursements, which are part of pay but do not count as income and therefore are not taxed.

Calculating Payroll Withholding

The final step in the payroll calculation is to subtract money withheld from gross pay for disbursements to other accounts. Money withheld includes federal, state and local taxes, any bonuses, retirement funds, Social Security and Medicare funds, any payments to employer-paid insurance funds, and premiums for healthcare and other employer-provided benefits, according to the employees' personal withholding information. The resulting amount is the employee's net pay, which is issued in their paycheck.

Payroll submission and payment

After calculations, 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 make payments according to the organization's tax schedule. The employee also typically receives a pay stub showing year-to-date earnings and amounts withheld along with withholdings.