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Payroll is a business accounting function that takes care of all financial records pertaining to the salaries and bonuses disbursed to the employees of the organization for the services provided by them. Payroll also keeps track of the deductions from their salaries on account of taxes, loans taken by them, etc.

How it Works

In a smaller business concern with a few numbers of employees, payroll may be just one of the activities taken care of by the book keeper and/or accountant. But in a large company, a whole division in the accounts department may be devoted to the payroll activity.

The accounting software available in the market includes the payroll calculation function as well and makes this task a breeze. It automatically allows for maintaining the employee information, calculation of payroll tax, and any employee payment deposit details.

Whenever a new employee is hired, the concerned manager or any other designated personnel will provide the information on the new employee's designation, nature of work, wage, expected hours, and details like the type of vacation he/she is allowed, sick pay, and other benefits.

If the employee is scheduled to work on an hourly wage, then payroll is responsible for tracking and collecting the daily and weekly hours put in by the employee. This is usually accomplished by using time sheets, time clock, biometric access, etc.

Once this information is collected, payroll calculates the total amount due to the employee after the taxes and deductions. The checks are printed for the salary disbursal, deposits are made to employee tax accounts, employer tax accounts, and money is set aside for any health insurance or other benefit premiums. Many employers maintain separate financial accounts for payroll payments in order to avoid the mixing of funds with other accounting functions. This also makes it easier to track the payroll expenditures.

It is very essential that this whole process takes place smoothly and any problems are resolved along the way. In other words, it is imperative that the employee's hours of service are collected in a timely manner, calculations are made within the stipulated deadline, and employee checks are distributed on a routine schedule and only after the necessary amount has been deposited in the account.

Some companies may find that an in-house payroll division is not cost effective and, therefore, may decide to contract out the payroll task to companies specializing in payroll services. The process is quite similar except for the fact that payroll information is transmitted to the outsourced company and payroll checks arrive to the employer via courier service for distribution to employees.


Payroll is an essential accounting function and it is responsible for tracking employee hours, calculating their compensation, making tax payments, preparing and distributing the pay checks, and completing any other payroll functions in a proper and timely manner.


The costs for maintaining an in-house payroll function is the salary paid to the employees taking care of the process and the cost of purchasing and maintaining the resources used to track the time devoted by an employee at the organization like timesheets, time clocks, etc. The cost of the resources usually cost around $100.


Ideally, the payroll function must be in place well before any employee is recruited. Gradual and essential modifications to the process may be made along the way as and when the need arises.

Last Updated: December 19, 2011
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