Payroll

What It Means

Generally speaking the term payroll refers to the record (or set of records) a company uses to keep track of all the money it pays to its employees over a specific period of time. When an individual works for a company, he or she earns some form of monetary compensation, typically in the form of wages (a set amount of money, usually calculated on an hourly basis) or a salary (an amount of money calculated on an annual basis). In a less formal sense the term payroll is also synonymous with the total amount of money a company pays out to its employees, either during a regular pay period or over the course of an entire year.

In this latter sense payroll forms an integral part of a company’s overall budget. A budget is a detailed outline of a company’s total expenditures, including employee payroll, production costs (for example, equipment and other materials needed for manufacturing operations), administrative costs (office supplies, computers, and telephones), operational costs (energy bills and Internet service), and other expenses. In determining its payroll a company will calculate the overall cost of paying its employees over a certain period of time and measure this total against the total amount of revenue the company earns over the same period, minus other budgetary expenses. If the company is not satisfied with its final profit margin (in other words, the amount of money it retains after paying expenses), then it will consider various ways it can reduce costs or increase its revenues. In many cases a company will decide to make cuts to its payroll, either by terminating the jobs of employees it considers to be less effective or by implementing pay reductions.

A company’s payroll record typically includes a list of paid employees, the number of hours each employee has worked during a set period of time (also known as a pay period), and the amount of money each employee has earned over the course of a pay period. Pay periods vary from company to company. Most large corporations pay their employees twice a month or in some cases every two weeks; some smaller companies pay their employees once a week. Although salaried workers have their income calculated on a yearly basis, they still receive a portion of this income during the company’s established pay period. A company’s payroll will also include an account of the sums of money deducted from each employee’s earnings for tax purposes; collectively these deductions are known as a payroll tax.

When Did It Begin

Payrolls have existed, in one form or another, since people first began employing, and paying, other people. In ancient times monarchs and other rulers maintained what historians sometimes refer to as a royal payroll. A royal payroll was generally used to compensate thinkers, prophets, or other prominent personages whom the ruler considered worth paying, generally either because the ruler valued their ideas or because their presence lent prestige to his court. Emperors in ancient Greece and Rome regularly kept a payroll of philosophers, who often served as teachers to the emperor and his family. Scholars believe that Charlemagne (742 or 747–814), emperor of the Franks (a group of Germanic peoples inhabiting Western Europe between the sixth and tenth centuries), kept an entourage of priests on his payroll. During the Renaissance (a period of cultural rebirth in Europe beginning in the fourteenth century and continuing into the seventeenth century) the practice of paying great thinkers and artists to play a role in courtly life came to be known as royal patronage. A number of famous Renaissance artists and thinkers, notably Leonardo da Vinci (1452–1519), depended on this form of patronage for their livelihood.

Payroll in the modern sense first began to take shape during the Great Depression (a period of severe economic hardship, marked by high jobless rates, from 1929 to about 1939) with the passage of the Social Security Act of 1935. The Social Security Act was a law enacted by the U.S. Congress to help offset the financial difficulties suffered by retired and unemployed workers as a result of the Great Depression. Under the law all employers and employees were required to deduct a specific amount of money from their earnings, known as the social security tax, which was paid into a fund for retired and unemployed workers. With the implementation of these new taxes company payrolls became more complex, as they needed to divide the various deductions, which were paid to the government, from an employee’s net earnings (the money an employee keeps after taxes), which were paid directly to the employee. This practice continued into the twenty-first century.

More Detailed Information

A payroll record is typically divided into rows and columns. Each row will usually be designated for the name of each employee, while each column will provide information relating to a particular aspect of the employee’s work hours, compensation, and taxes. In addition to providing a list of employees, how much they work, and what they earn, a payroll record will usually contain additional subcategories. For example, next to the column indicating the number of hours an employee has worked, there might be a column dedicated to overtime hours. Overtime hours are the number of hours an employee works beyond the accepted number of hours in a standard workweek; in the United States the standard workweek is usually 40 hours. By law overtime hours entitle an employee to a higher hourly wage than a normal hourly wage, typically at least one and a half times the standard hourly amount (also referred to as time and a half).

Besides an employee’s work hours, a payroll will generally also include a column relating to an employee’s vacation time. With most full-time jobs employees are eligible for at least two weeks (or 80 hours) of paid vacation time. Sometimes an employee will take a full week of vacation at once, in which case the payroll record might indicate 40 hours of vacation and no work hours; in other cases an employee might take two days off, in which case the payroll might reflect 24 work hours and 16 vacation hours. Along with vacation hours employees are also entitled to a certain number of paid sick hours per year, which are also included on the payroll.

Following the columns relating to the various types of hours for which employees are paid will generally be several more columns, dedicated to various taxes. Each tax—for example, federal, state, and local (city or county)—will typically have its own column. In the United States all employees must pay a social security tax (also known as Federal Insurance Contributions Act taxes, or FICA for short), as well as Medicare tax (or MedFICA), which is a tax that goes toward medical care for retired employees; these two taxes generally appear in the same column, though they are broken down into two separate amounts. The payroll will also include a column for unemployment tax. There is also a column for garnished wages (a portion of wages that must be deducted from an employee’s paycheck in the event they owe money to someone and a court of law has ordered the employee to pay it back).

There are many steps involved in the preparation of a company’s regular payroll. In cases where employees earn an hourly wage, employers begin by accumulating a record of the total number of hours earned by each employee. These hours might be recorded by hand, on an employee timesheet or printed onto a time card by a time clock. A time clock is a time-keeping device used to keep track of the precise times that an employee is on the job. When an employee arrives at work, he or she places a time card into the time clock; the time clock then stamps the time onto the card. This process, commonly referred to as clocking or punching in, is typical of most manufacturing jobs.

Recent Trends

Since the late 1990s a number of specialized payroll management companies have emerged. Preparing company payroll is often a meticulous, time-consuming process, and payroll management companies are designed to spare businesses the trouble of preparing their own payroll records. Although these companies charge a fee for their services, by preparing payroll more efficiently than the company could do by itself, they can often save a business money (the money it would have to pay its own employees to manage payroll). The process by which businesses hire other companies to manage certain aspects of their operations is commonly known as outsourcing.