What is payroll? A complete guide

Payroll administration is a fundamental aspect of business operations. Nearly every company uses a payroll system to compensate its team members for their hard work.

However, payroll involves more than just paying your people. The payroll system encompasses a collection of processes, including:

• Payroll taxes, such as Social Security and Medicare in the U.S.
• Overtime pay
• Compensation documentation
• Wage calculation methods
• Compliance with national and local laws 

In this guide, we’ll explain how payroll works, key steps in payroll processing, payroll software systems, and more.

What is payroll?

An employer’s payroll is a list of the wages and salaries it owes to employees based on hours worked over a standard pay period. Payroll administration involves compensating people, withholding deductions, and maintaining accurate records for tax and compliance purposes. 

Accounting or People Operations departments typically manage payroll. In a small company, the owner might handle the payroll process or outsource it to an accounting firm to ensure employees get accurate and timely paychecks. Team members must be paid on time and in full with proper withholdings to ensure that businesses comply with local tax and labor laws. 

The payroll process in 6 steps

We’ve broken down the payroll process into six steps:

1. Define your payroll process

Select a payroll system that suits your organization. You can manage payroll in-house, use automated payroll software, outsource it, or use a global payroll service provider. This decision depends on your business’s size and industry.

2. Calculate wages

Work out each team member’s total compensation. This is their base salary plus additional payments like bonuses, overtime, and commissions.

3. Withhold taxes and other deductions

Account for any deductions based on their employment contract and benefits package. Deductions in the United States may include income taxes, Social Security and Medicare contributions, and employee contributions for health insurance and retirement funds.

4. Pay your employees

Calculate employees’ net pay by deducting withholdings and expenses from their gross pay. You can pay your team members electronically or with a physical paycheck. 

5. File and deposit taxes

Be careful to pay the correct taxes on each employee’s salary. If you pay people worldwide, a global payroll service provider will streamline the procedure to ensure you comply with local laws.

6. Keep records

Maintain accurate records of payroll processes in case of an audit, discrepancy, or dispute with an employee. Store records securely, as they contain sensitive payroll information. 

Professional payroll services: Pros and cons for your business

Imagine never worrying about payroll processing again. Professional payroll services can make that dream a reality. These companies remove the headache of paying people accurately and compliantly—it’s all done for you.

However, these aren’t a one-size-fits-all solution. Weigh these pros and cons for your business:

Advantages of professional payroll services

• Access to detailed reports: Payroll services simplify accounting procedures with monthly reports that track employees’ tax deductions and time off. Many providers also offer self-service reports so team members can view their personal stats.
• Simplified tax compliance: Keep things simple with payroll services that calculate all your deductions and compliance obligations for you. Many retain legal experts who understand local laws and stay up to date on changes.
• Reduced administrative workload: Payroll can present a significant administrative burden—especially if you employ people globally. Outsourcing payroll will save you time on calculating benefit deductions, wage garnishments, paid and unpaid time off, and state and federal taxes.
• Direct deposit: Pay your people electronically via direct deposit to make life easier for everyone. Professional payroll services can handle electronic payments on your behalf, so you’re not stuck handing out physical paychecks.

Drawbacks of professional payroll services

• Outside access to company data: You must share your employees’ sensitive personal and payroll information with external providers. Although payroll service companies tend to have high security, you still take a risk when handing over data.
• Errors are out of your control: Your internal People Ops or accounting team can’t anticipate service provider mistakes, but they’ll still be the ones answering to employees.
• Businesses remain liable for tax penalties: You may be liable if the service provider makes an error during tax calculation and payment.
• Unnecessary benefits: You may not use all the benefits offered by a payroll service, but you will likely still have to pay for them.

Should you consider a payroll software instead?

Some companies choose payroll software over external payroll services. 

What’s the difference between the two payroll systems? External payroll service providers process payroll, and the business has little involvement. Conversely, payroll software helps the business handle payroll internally. It simplifies calculations, automates processes, reduces errors, and provides compliance support, often with experts on hand to offer advice. 

Want the ease of a payroll service with the control of payroll software? Sign up for Oyster today.

Tips for running payroll successfully

Payroll administration is a critical part of business operations that companies can’t afford to mess up. Here are our top tips to keep things running smoothly:

• Stay current on payroll regulations: Tax and compensation laws change frequently. Hire experts to keep up with these changes so you remain compliant.
• Use a payroll calendar: To streamline your monthly and annual expense calculations, set up a calendar for payroll. Examples of calendar items include monthly payments and yearly bonus deadlines.
• Document the payroll process: Maintain accurate employee and payroll records to ensure that you’re prepared for errors, discrepancies, and audits.
• Automate payroll when possible: People make mistakes. Automating payroll systems reduces the chance of an error affecting your team members’ paychecks.

Ready to simplify your business’s global payroll operations?

Oyster’s Global Payroll minimizes opportunities for human error, enhancing accuracy. It seamlessly integrates with other systems, such as your HRIS and expense management software, to make monthly payroll cycles a breeze. Oyster can help your business stay compliant across multiple countries by automating tax calculations, adhering to local labor laws, and managing deductions. 

This combination of compliance expertise and user-friendly features empowers businesses to easily handle complex payroll operations. With Oyster, you can ensure your team is paid accurately and on time, no matter where they are in the world.

FAQs

Learn more about the payroll processes that get paychecks into your employee’s hands.

What is a payroll tax cut?

During a payroll tax cut, the Internal Revenue Service (IRS) stops collecting payroll taxes (e.g., Social Security and Medicare) from a person’s paycheck. Such a tax cut may be a temporary policy and may be limited to specific industries.

Is payroll a part of HR or accounting?

Payroll is an accounting function, but it deals with people. Some companies handle payroll in the finance or accounting department, whereas others delegate this function to HR. Sometimes, the two departments share the responsibility, or the business has a distinct payroll team within its organization.

What is a payroll tax holiday? 

A payroll tax holiday is a type of tax deferment. For example, the IRS might stop collecting Social Security taxes for four months, but those taxes must be repaid eventually. The holiday aims to provide temporary financial relief by increasing workers’ take-home pay.