What is Payroll?

According to Investopedia, payroll is “The sum total of all compensation that a business must pay to its employees for a set period of time or on a given date,” which includes salaries, wages, deductions, bonus, and net pay. In many cases, payroll is handled by the accounting department of a business. Small-business owners may also choose for payroll to be managed directly in-house or by an associate.

Payroll typically makes up the largest deductible for a business because of the expense it takes to compensate each employee’s salary or wage. Pay periods can also vary due to situations like overtime or sick days.

Besides compensating employees, payroll also involves the taxes that employees are required to pay, such as Withholding taxes. Also known as Pay-As-You-Earn (PAYE) taxes, these are taxes that employers must withhold from the wages of every employee. Income tax withholdings are assigned by the federal, state, and local governments.

Employees and employers are required to also pay payroll taxes like Social Security and Medicare. The IRS states that “The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.” Another required payroll tax would be unemployment taxes to compensate employees who have lost their job.

There are federal and state-level systems in place to assess and collect payroll taxes in a majority of the developed world.

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