What Is the Definition of the Term "Payroll"?

What
What "Doing Payroll" Means. stockstudioX/Getty Images

You may have heard your accountant talk about "doing payroll," or "payroll taxes." Payroll is a generic term used for several types of operations related to paying employees. 

What is Payroll? 

The term payroll has several different meanings:

  • The distribution of paychecks (physical or electronic) to employees each payday, as in "I finished doing payroll yesterday."
  • The financial records for employee wages/salaries, withholding, deductions, bonuses, pay for time not worked (holidays, vacations, sick time, etc.) and other items on employee paychecks.
  • It can also mean the record of total earnings of all employees for a company in a fiscal year.

How to "Do Payroll" - An Overview

Payroll is for the most part an action that is performed by companies with employees. It's the process the company goes through to pay the employees. 

First, employees are hired to do a specific job at a specific rate of pay. 

Then, on a regular date determined by the company, these employees are paid. (Some employees may be paid at different times, depending upon their status. For example, salaried employees may be paid twice a month, while hourly employees may be paid every week.

To prepare employee paychecks, the employer first calculates the pay for that pay period. Then the employer must withhold FICA taxes (Social Security and Medicare), and Federal and State income taxes from each paycheck. The employer may also deduct other amounts from the paycheck. These might include retirement plan and health plan contributions, union dues, and charitable contributions.

 

But "doing payroll" isn't complete yet. After the employer distributes paychecks (or uses direct deposit), other calculations must be done. 

The employer must calculate and set aside amounts deducted from the employee's pay, to be paid later. The employer must also set aside an amount for the employer's contribution to FICA taxes and for unemployment taxes.

 

Payroll Record Keeping

"Doing Payroll" also includes record keeping. A separate record must be kept for each employee, showing amounts paid for each pay period, for end-of-year reports.  Records must also be kept of employee authorizations and any changes in pay.

If this all sounds complicated, it is. That's why many employers outsource payroll, sending it to a payroll processing service or to a bookkeeper or accountant. 

Related Payroll Terms 

  • Payroll taxes are those taxes required to be paid to federal and state taxing authorities as a result of paying employees (such as FICA taxes and unemployment taxes). The IRS strictly defines payroll taxes as FICA taxes (Social Security and Medicare), but the term is often used in the general sense.
  • Payroll processing describes the preparation of paychecks (including withholding and deductions), distribution of paychecks, and payment and porting of payroll taxes. Options for payroll processing include doing it yourself with accounting software, hiring a bookkeeper, or engaging a payroll service.