What is payroll?
Payroll covers everything from tracking hours and salaries to getting the right net pay into employees' accounts and the right taxes to the government. It's one of the most regulated parts of running a business.
Payroll steps
- Collect employee details and tax information.
- Track hours, overtime, leave and bonuses.
- Calculate gross pay.
- Deduct income tax (PAYE or [withholding tax](/glossary/withholding-tax)), employee pension and social security, and other deductions.
- Calculate net pay and pay employees.
- Calculate employer contributions (such as pension, social security and payroll levies).
- Remit taxes and contributions by the deadlines.
- Issue payslips and file payroll returns.
Accounting entries
- Debit wages and salaries expense (gross pay) and employer contributions expense.
- Credit net pay payable, tax payable, pension payable.
- When paid: debit the payables, credit bank.
Example
An employee earns $4,000 gross. Deductions: $600 income tax and $320 pension, so net pay is $3,080. The employer adds $400 of employer pension contributions. Total cost to the business is $4,400.
Common payroll mistakes
- Misclassifying contractors as employees
- Missing filing or payment deadlines
- Wrong tax codes or rates
- Poor record-keeping