What is a Payroll Account?

A payroll account is a bank account that is set aside for the purpose of managing all disbursements that are associated with the payroll of an employer. Funds are transferred into the account from other business accounts in order to fund a payroll, set aside funds for paying employer taxes and any withholdings from employee pay, and to disburse payments in the form of electronic transfers or paper checks. Maintaining a separate bank account for payroll purposes is usually recommended, as it makes the process of tracking activity in the main accounting books much simpler.

Along with providing an organized means of implementing transactions that are related to the payroll, a payroll account also makes it easier to determine which of those transactions have been successfully completed. Payroll disbursements, either in the form of a paper check or by transferring the balance to an employees payroll card account, can be identified with ease, making it simple to track the date the initial transaction took place and when that transaction posted to the account. This allows payroll personnel to quickly determine in real time which disbursements have and have not yet cleared.

While maintaining a payroll account can be managed with the use of a basic payroll ledger and check register, many companies today make use of payroll software. Software packages of this type make the process of calculating payroll, including the application of overtime pay for hourly employees and the withholding of taxes, a simple process. In addition, the software can be used to automate the process of making electronic funds transfers from the payroll account to the bank accounts of employees. Many of these packages are also capable of submitting electronic payments to tax agencies, as well as transferring funds to designated accounts in situations in which any employee is currently under a garnishment order or a standing order such as a child support payment.

Along with the more common definition of the payroll account as a bank account used for payroll purposes only, the term also refers to an account that is established with a national revenue agency, such as the Internal Revenue Service in the United States or the Canada Revenue Agency. This account serves as the point of destination for any payroll activity reported by a given business. Activity relevant to the account includes the total payout of wages and salary, the amount of withholding on each employee, and a breakdown of the taxes and other forms of withholding that were done on behalf of the employee. In this application, the payroll account also tracks the amount of payroll taxes owed by the business proper, and applies payments to that amount as the funds are received from the business.