What is Payroll and How Does it Work?

By definition, payroll is the function of a business paying its employees. Payroll includes the distribution of currency in the form of checks and/or direct deposits into an employee’s bank account. A vital aspect of payroll also includes keeping records of these payments and paying taxes on behalf of those employees as per the guidelines determined by each state you work in. Payroll is used at the end of the fiscal year to assess annual employee wages.

A business may refer to payroll as shorthand for its total workforce or the cost of that workforce. A business may also say that it’s “doing payroll” or “running payroll” which could mean that it’s processing paychecks or calculating the taxes it owes for those employees.

How Payroll Works

Technically, payroll begins when an employee fills out a W-4 form. This form provides details on how each individual wants to be taxed.

Throughout the fiscal year, the data from that W-4 form dictates the taxes that the business withholds on behalf of that employee. Once completed, a business will pay the employee on a regular schedule (weekly or bi-weekly, for example). Some employees may be paid at different times, depending on their payroll status.

Once gross pay for a pay period is calculated, the employer must withhold FICA taxes (for Social Security and Medicare). Additionally, they must also withhold federal and state income taxes from each paycheck. These taxes are typically called payroll taxes.

Other Payroll Deductions

An employer may also deduct other amounts from a paycheck. These might include contributions to a retirement or healthcare plan and union dues, or even charitable contributions.

Calculating withholdings and deductions, preparing paychecks, and distributing payments are known as payroll processing. The payroll process would also track overtime, paid (or unpaid) time off, tips, and any other miscellaneous quirks to an employee’s pay.

Payroll Myths

There’s a lot of misconceptions out there on the payroll. If you think outsourcing payroll isn’t right for you, check out this article. We debunk many common payroll myths people have about it. It will help you better understand just how easy running payroll can be for your company –  no matter how big or small it may be!

If all this sounds a bit complicated, you’d be correct. That’s why many employers today outsource payroll. Using an automated payroll provided, such as Fingercheck, eliminates the risk of error with automation that is fully compliant, making the federal, state, and municipal tax codes we mentioned simple to deal with. It also allows businesses the freedom to concentrate more on their core services and to grow their business. Startups and small business owners can benefit greatly from outsourcing payroll for a variety of reasons. Cost is certainly one of them. Fingercheck, for example, offers a low monthly fee to automate payroll as little or as often as run payroll. We even offer a no-risk, 30-day FREE trial. So, there you have it! If you have any questions, please contact us or comment below!

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