Payroll is an entity’s financial list of a total number of employees working with it during the period and amount paid to them in form of the net pay comprising of the salary, wages, bonuses, commissions, deductions, various perquisites, and similar other benefits, for a particular period of the time.
The process by which the total amount of the compensation paid by the company to its employees during a given period of time is the payroll process. This process includes all the work starting with tracking of the work done by the employees till the time when the amount is actually disbursed in the account of the employees. Along with this, the accounting of payrolls, taxes paid, and other extra pay will also be included in this. It is one of the major expenses of the company and the same is allowed for deduction from gross income in order to derive the taxable income of the company. Generally, the work is being done by the human resource development department of any company.
Below is the process:
- Firstly one should determine the gross pay rates of all of its employees.
- After that, all documents required for the purpose of the tax with-holdings as well as the deductions should be collected from the employees.
- Then calculate the amount of the taxes and the with-holdings.
- After the completion of the required calculation, the net amount is to be paid to the employees along with providing the employees with a pay stub.
- Remit the entire amount deducted from the gross pay of the employees to respective authorities or the benefits providers.
- Lastly, completing all of the paperwork and submitting the same to respective authorities.
It is composed of the following components:
- Gross Pay: It is the total amount to be paid to an employee before certain reimbursements and deductions. Sometimes, gross Pay may include bonuses, commissions, and other payments.
- Deductions: Payroll deductions can be broadly classified into pre-tax deductions and post-tax. Pre-tax deductions are not subject to tax but post-tax deductions are not.
- Fringe Benefits: Fringe Benefits are additional benefits supplementing an employee’s salary. For example, a company’s car, subsidized meals, health insurance, education assistance, retirement plans, etc.
- Tax: Employers withhold employees’ share of various types of taxes with respect to their federal or state law along with paying their portion of taxes as well.
- Net Pay: The total amount ultimately paid to the employee after adjusting deductions, benefits, and taxes.
Different Ways to Run Payroll
The different ways by which one can run include the following:
#1 – Doing by Own
One can run the payroll process by himself and without the help of any person or any software. This way is time-consuming because one has to learn each and every aspect by himself.
#2 – Hiring a Payroll Accountant
Under this entire work of the payroll is outsourced to the accountant. These accountants will take care of the entire process and thus it will save time. But this option can be availed by the person who has enough money because it might be the most expensive option out of the entire available one.
#3 – Using the Payroll Software
Nowadays there are various types of software available in the market and most of them are inexpensive. With the help of this software, one can automate a lot of payroll processing programs and the same can also be customized as per the requirement. For using and purchasing this, one-time charges need to be paid along with the maintenance charges as and when required. But the same will save time as one needs to spend less time completing the process.
Difference between Salary & Payroll
There are many differences between Salary and Payroll, important ones of which are:
- Salary refers to the fixed amount earned by an employee in the course of his employment, whereas payroll is a proper function used my employers to process and record salaries or wages paid to employees.
- Salary is a condition of employment, whereas payroll is a process.
The following are the different advantages:
- Simple Computation: Error-less and simple computations are made through the payroll system as compared to manual calculations which save time and money.
- Documentation: It helps in creating reports and financial documents easily, which are ultimately helpful in making certain comparisons (year to year, industry to industry, etc) with no stress of maintaining payroll registers.
- Safe Backup: Maintaining registers manually is not an easy task. It helps in securing backup of all payroll data online and presenting it as and when required.
- Cost Cutting: This system aids in cost-cutting. Maintaining its registers requires hiring a person to keepsake the records. This type of system is easy to use and hence can be done in-house.
The following are the different disadvantages:
- Manual Payroll System: It has a high chance of errors. It is undoubtedly a time-consuming process since every field to be filled and every calculation to be done is to be done by hand. Wrong calculation of taxes and other important fields can sometimes lead to penalties.
- Online Errors: Errors done manually can be traced easily but if errors if done online can be really tough to trace.
- Privacy Concern: Sensitive information about employees no longer remains under privacy since payroll management is usually outsourced or utilized through online services.
- Backup: Proper backup must be available in case of an accident resulting in computers or systems being damaged.
Thus it can be referred to as the amount paid by the companies to its employees in the form of the net pay after deducting all the statutory dues and other things as required. It offers various benefits and has certain disadvantages too. The process of the payroll should be adopted by the companies keeping in mind the nature of business and its size.
This has been a guide to what is payroll and its definition. Here we discuss the process, components and different ways to run a payroll along with advantages and disadvantages. You may learn more about financing from the following articles –