What Is Payroll? The Essential Guide for Employers

For many businesses, payroll can be a complex process. Processing payroll incorrectly can have negative consequences for your business, ranging from upset employees to regulatory fines and penalties. Processing payroll properly is key to remaining compliant and maintaining a loyal team.

However, understanding all the key terms, processes, and functions of payroll isn’t always easy. In this guide, we introduce you to all the payroll essentials and familiarize you with key terms and processes so your business can confidently and compliantly navigate payroll.

Payroll Meaning

In HR terms, payroll refers to the process of paying your employees. However, payroll accounts for much more than just distributing a check every other week (or however frequently your payroll schedule dictates).

Payroll processing also accounts for essential responsibilities such as remitting the appropriate taxes to the proper authorities and making the necessary payments to third-party benefits providers.

Payroll Glossary

Processing payroll accurately is essential to remaining compliant. But exactly how your business is required to do payroll can be confusing. Here, we’ll break down some common payroll terms so you can better navigate your business’ payroll.

Certified Payroll

Certified payroll is a unique type of payroll used in the U.S. for contractors working on federally funded projects such as:

Public schools
Highways
Government buildings
Maintenance or repairs in federal buildings

These contractors must file Form WH-347 on a weekly basis to prove that they’re paying workers the “prevailing wage,” which can vary by location throughout the U.S.

Payroll Check

Payroll checks are the checks employers use to pay their employees. Payroll checks are issued for work performed during a given pay period. Checks are typically remitted to employees as physical checks or electronic deposits into employees’ bank accounts.

Payroll Deduction

Payroll deductions are any wages that are withheld from employee payments. The most common deductions are taxes, employee contributions for benefits, and garnishments.

Payroll deductions can be separated into two categories: mandatory and voluntary deductions. Mandatory deductions will vary depending on the employee’s location but typically include income taxes and any tax-funded social programs. Voluntary deductions most often include things like health insurance, retirement plans, and any other non-statutory benefits offered by the employer.

Payroll Number

A payroll number is one of the main building blocks of any successful payroll processing system. Payroll numbers help you easily identify employees using a series of numbers and letters. Not only do payroll numbers help businesses automate and simplify the payroll process, but they also protect employees’ personal information.

Pay Period

A pay period refers to the timeframe that your payroll is based on. Employee pay, payroll taxes, and withholdings are determined according to the hours worked within the pay period’s timeframe.

Payroll Register

A payroll register, also known as a payroll statement, is a record of every employee’s pay information for a specific period. It includes information such as employees’ names, pay rates, pay dates, hours worked, gross and net pay, deductions, and tax withholdings for the specified period. The report shows these totals for each employee as well as combined totals for all employees.

Payroll registers are beneficial for helping employers manage their finances. For example, payroll registers can help you determine how much money needs to be set aside for things like employer benefits contributions and payroll taxes.

Maintaining a payroll register is also good practice for record-keeping purposes. It serves as a reliable record if you ever need to audit your payroll process. A payroll register is also a helpful point of reference whenever you need to file taxes.

Payroll Schedule

A payroll schedule is the frequency in which employees are paid. A payroll schedule is not the same as a pay date, which refers to the specific day employees receive their pay. Instead, a payroll schedule is the frequency in which pay dates occur. Most employers opt for one of the following four payroll schedules:

Weekly
Biweekly
Semimonthly
Monthly (or lunar)

Many countries and jurisdictions have laws dictating how frequently employees must be paid, so your payroll schedule must meet these requirements to comply with the law.

Payroll Software

Payroll software is precisely what its name implies; computer software that helps to automate the payroll process. The software may be installed locally on a computer or made available as a cloud-based program.

Payroll software can significantly simplify and expedite the payroll process. Employee information like hourly wages and annual salaries, hours worked, and contributions need to be manually entered into the payroll software’s system, but the process is mostly automated after that. For example, most payroll software can automatically calculate gross and net pay, tax withholdings, employer contributions, and more. Additionally, payroll software can typically remit payments as direct deposits or physical checks. Employees may also access their pay stubs and tax forms and update their information through the payroll software’s employee hub.

Many different types of payroll software are available to consumers, and while they all serve the same basic purposes, each has its own features and capabilities. Furthermore, payroll software availability varies by country. This is because payroll is a complex process and every country and jurisdiction has different laws and regulations that affect the payroll process. While some payroll software can process payroll for dozens of countries, others are restricted to a single country. If you’re working with a global team of employees, make sure you choose a payroll software capable of paying employees in every applicable country.

Payroll Stub

A payroll stub is a document that accompanies an employee’s payroll check and details their pay for the given pay period. Payroll stubs are also often called pay stubs, pay slips, and paycheck stubs. A pay stub usually contains the following information:

Employee information (name, address, identification number, etc.)
Employer information (name, address, phone number, etc.)
The dates covered in the pay period
The employee’s rate of pay and hours worked
Gross and net pay
The total amount of taxes, contributions, and deductions

Payroll stubs provide employees with greater transparency into their pay to ensure they’re paid correctly. Some countries and local jurisdictions have laws requiring employers to provide some type of pay stub to employees, so make sure you understand any obligations you have.

Payroll Tax

Payroll tax or payroll withholding refers to the portion of an employee’s pay that’s withheld by the employer and paid to the local tax authority. These taxes are then used by governments to fund things like infrastructure, health services, and social benefits, depending on the country.

Payroll tax is a key payroll component. If your business doesn’t withhold the right amount of taxes, your business could be subject to fines, or your employees could have to make back payments to the government.

How Does Payroll Work?

Payroll is a complex process with a lot of moving parts, each requiring careful attention to keep your business compliant. Here, we give you an overview of each step of the process so you can better understand your business's payroll needs.

What Is Payroll Management?

At its most basic, payroll management is the HR term for paying employees and remitting the appropriate amounts to government authorities and social programs. Payroll management can be done in-house, but for enhanced compliance, efficiency, and expertise, in-house payroll is often either augmented with payroll software or outsourced to a payroll service for simplicity and accuracy.

How to Calculate Payroll

There are two main components to calculating payroll: gross pay and net pay.

Gross pay: Gross pay refers to the total amount earned by an employee during a pay period. For salaried employees, this is their salary divided by the number of pay periods in a year, and for hourly employees, it’s simply their wage multiplied by the hours they worked.
Once gross pay is calculated, you’ll calculate the appropriate taxes, withholdings, and other deductions that will be taken from an employee’s pay.

Net Pay: Once you have accounted for the appropriate withholdings, the remaining money that is issued to your employees is referred to as net pay. Net pay, or take-home pay, will be distributed to employees through direct deposit, paychecks, or whatever type of payment your business uses.

How to Do Payroll

Doing payroll is a critical part of your business, and ensuring it’s done properly is equally important. To run payroll compliantly, your business will need to do the following:

Register as an employer.
Establish a payroll process.
Collect payroll documents.
Collect timesheets, calculate pay, and issue employees checks.
Remit payroll taxes to the appropriate authorities and pay third-party benefits providers.

Understanding how payroll works can be complicated, but using payroll software or a professional payroll solution can go a long way to minimize stress, especially for global employers.

How to Process International Payroll

International payroll processing exposes businesses to compliance challenges they’re less likely to face when operating domestically. To process international payroll, a business needs to do the following:

Establish a local entity.
Research and understand local payroll taxes and regulations.
Establish an international payroll process, including how often payroll is run and what benefits are included.
File the correct payroll documents for each employee.
Run payroll, remit the appropriate taxes and payments, and pay employees.
Retain payroll records for compliance with regulatory bodies.

These are all significant challenges, adding to the many more complexities of global employment. However, solutions exist to simplify the experience, which makes hiring international talent a breeze:

International Payroll Providers and PEOs: PEOs are services that can take care of international payroll for your business, handling things like payroll and taxes. To use a PEO, you need to have a local entity in the country you’re hiring in.

Employer of Record: An EOR acts similarly to a PEO in many ways, but in addition to managing payroll and taxes, an EOR takes on increased legal responsibility for your talent by employing them on your business's behalf. This enables you to hire talent in countries where you don’t have a legal entity.

Benefits of Using a Professional Payroll Service

Managing payroll in-house can be a slow process and expose your business to compliance issues. Failing to remit the appropriate taxes, miscalculating wages, or missing payroll deadlines can lead to serious consequences for your business, including fines and damaged employee morale.

To remain compliant and avoid complex legal and regulatory penalties or fines, many businesses choose to use an EOR or PEO to simplify the international payroll process. Professional payroll services like PEOs and EORs simplify the payroll process and reduce the risks your business faces.

EORs help international businesses save time and money by remaining compliant, which allows you to spend more time focusing on higher ROI activities.

Other Payroll FAQs

Here we'll go over some other frequently asked questions about payroll.

What Is the Difference Between Payroll and Income Taxes?

While both payroll taxes and income taxes are withheld by employers when running payroll, they’re not the same thing. Payroll taxes are typically paid by both the employer and employee, whereas income taxes are paid solely by the employee.

Additionally, these taxes serve different purposes. In most jurisdictions, payroll taxes fund specific programs, such as healthcare. Income taxes, on the other hand, are used for general funds, as mandated by the local government.

What Is Gross Payroll?

Gross payroll is the total sum of money that a company pays out for its employees each pay period. This includes all employee wages, bonuses, and reimbursements before deductions (taxes, social programs, etc.)

What Is Payroll Withholding?

Payroll withholding, or deductions, is the amount of money that is withheld from each employee's paycheck. This includes payroll taxes, income taxes, insurance premiums, 401k contributions, and other deductions that are used to fund social programs, depending on the jurisdiction.