Payroll is one of a series of accounting transactions dealing with the process of paying employees for services rendered, after processing of the various requirements for withholding of money from the employee for payment of payroll taxes, insurance premiums, employee benefits, garnishments and other deductions.
Payroll involves the calculation of amounts due the employee, such as hourly wages, a salary consiting of a certain amount per calendar period, or pay to salespersons on commission, as well as reimbursement for employee-paid expenses such as travel (calculated either based on actual amount paid by the employee or utilizing a per diem rate).
In addition to these payments, there are often computed amounts of paid vacation time and accrued sick leave which have been used or are available for use. These are simply carried as bookkeeping entries as available or used and accumulate until the employee actually uses them. If an employee collects vacation pay or sick leave, these amounts are then added to the amount due the employee to be paid.
All of these moneies credited to the employee are usually referred to as gross pay.
From these amounts that are credited to the employee, various debits are taken as withholding, the most significant being income tax, then other taxes such as social security and medicare (in the United States; other countries have similar programs for the collection of government-mandated retirement benefit supplement systems). There may also be additional deductions for supplemental health insurance, union dues, pension plan contributions, garnishment for nonpayment of debts, repayment of prior salary, vacation or sick leave overpayments made in error, undercollection of insurance, and other deductions.
The amount left after deductions from gross pay is generally the amount given in the employee's pay envelope, either as cash or a check. This amount is known as net pay. If the employee has their net pay deposited to their bank account (through a process known as direct deposit) then the employee may simply receive a pay stub indicating this.
In addition to amounts collected from the employee, frequently the employer is required to also pay additional monies of their own such as government taxes such as employer matching contribution to Social Security, and employer-paid systems such as unemployment insurance; employer matching for pension plans such as 401K; employer portion (or all) of employee health insurance, and additional expenses.
Organizations which have very few employees may perform payroll by hand. Business organizations which have become too large to perform such tasks by hand (or small ones that prefer not to do them by hand) will generally use accounting software or an integrated module from a Human Resource Management System on a computer to perform this task, or may pay a service bureau to perform the process of payroll calculation and writing of payroll checks.
Due to government mandated (and often severe) penalties for improper or inadequate collection of payroll taxes and paying of wages, almost all employers (other than very tiny ones having perhaps one or very few employees) either use a payroll computer program or a service bureau.
Other types of accounting transactions include accounts payable, accounts receivable, and trial balance.
