The term "payroll" encompasses every employee of a company who receives a regular wage or other compensation. Some employees may be paid a steady salary while others are paid for hours worked or the number of items produced. All of these different payment methods are calculated by a payroll specialist and the appropriate paychecks are issued. Companies often use objective measuring tools such as timecards or timesheets completed by supervisors to determine the total amount of compensation due each pay period.
After a payroll accountant multiplies an employee's hours by his or her pay rate, the gross income amount is entered into a calculator or computer program. Regular deductions such as tax withholdings, medical insurance, union dues, charitable contributions and so on are then categorized and subtracted. The remaining balance is then converted to a check or electronic deposit and becomes the employee's net pay for that time period. In the US, payroll departments also identify the employer and employees by a federal code and keep a running tally on total income and deductions for the fiscal year.
For small business owners, keeping enough cash to pay all employees is often one of their highest priorities. Even if the business itself hasn't become profitable, employees must still be compensated for their services. This is why many smaller companies prefer to keep their payroll obligations as low as possible until they've reached a certain level of profitability. It's not unusual for small business owners to forgo their own salaries in order pay their employees.
Setting up an effective payroll system is not especially difficult for trained accountants, but it can be very time consuming. Some smaller businesses rely on user-friendly computer software to set up a simple system complete with check printers and file storage. Larger companies may assign trained accountants to handle pay issues as part of their overall duties. Businesses without the means to maintain their own systems often choose to farm out this task to outside specialists.
Since payroll records are based on objective criteria such as timecards and federal tax forms, outside accountants can perform all of the calculations, store all of the year-to-date data, and issue pay in a timely fashion. Employers simply need to update these companies with any changes in employee pay rates or deductions.