What Is Payroll?

Payroll expenses are the total salaries and wages that a company pays its employees for their services. In the accounting world, “doing payroll” is also a term used for calculating and processing paychecks.

Why Is Payroll Important?

Payroll is a major expense for most companies and is the primary component of labor cost. It is important to remember that labor costs vary by industry, so it’s important to use caution when comparing companies in different industries.

Where to Find Payroll

Payroll expenses are part of labor costs and can be found on the income statement. They may include employee salaries, employer payments for health insurance (or similar benefits), payroll taxes paid by the employer, as well as bonuses and commissions.

What Payroll Requires

Payroll is a complicated process that involves ensuring that every employee is paid correctly (and on time), new/departing employees are added to/deleted from various processes, and the taxes remitted to the proper authorities.

It’s also necessary to calculate the appropriate payroll taxes (e.g. whether the employee has hit the annual Social Security cap) and correctly deduct miscellaneous items (e.g. court-ordered child support, gym memberships, 401(k) contributions).

It is common for many companies to outsource some of this work.