Written By
Paul Tracy
Updated August 5, 2020

What is Payroll?

Payroll is the total of the compensation a company pays to its employees. In the accounting world, it is also a term used for calculating and processing paychecks (as in, "doing payroll").

How Does Payroll Work?

On the income statement, payroll expenses are part of labor costs. They include employee salaries, employer payments for health insurance or similar benefits, payroll taxes paid by the employer, bonuses, commissions and similar expenses.

Doing payroll is a complicated process that involves ensuring that every employee is paid correctly, calculating the appropriate payroll taxes (which can vary with the employee's salary, whether he or she has hit the Social Security cap for the year, etc.), and correctly deducting miscellaneous items (such as court-ordered child support, gym memberships or 401(k) contributions).

Why Does Payroll Matter?

Payroll is a major expense for most companies and is the primary component of labor cost. Labor costs vary by industry, and comparing companies in different industries should be done with this in mind.

In the accounting world, doing payroll is a crucial but often thankless job. The calculations must always be accurate, the paychecks must be printed on time, new and departing employees must be added to or deleted from various processes, and the taxes must be remitted to the proper authorities on time and in the correct amount. As soon as the process ends, it begins again. Many companies outsource some of the work.