Payroll Accounting Procedures

by David Ingram
Payroll accountants ensure that employees are paid reliably.

Payroll accountants ensure that employees are paid reliably.

Accounting image by Guitar75 from

Payroll accounting is the specific accounting discipline concerned with calculating and disbursing compensation for company employees. Small business owners can find themselves responsible for a wide range of accounting duties, and becoming familiar with payroll accounting can help you to ensure that your employees receive their pay on time. Payroll accounting is not as simple as it may seem. Considerations must be made for payroll taxes, fringe benefits, garnishment issues and overtime pay, among other things.

Time Reporting

The first task of payroll accounting is to collect daily, weekly and monthly records of individual employees' time worked. Salaried employees begin at a base rate each month, and their pay can be adjusted for monetary bonuses and other additions or subtractions. Hourly employees, on the other hand, may work a different number of hours each week. Tools such as time cards and electronic time-clocks help accountants to record the exact number of hours worked by each employee. Payroll accounting may be concerned with paying independent contractors, as well. A large number of businesses employ independent contractors whose job duties should classify them as regular employees. This is done to curb payroll tax burdens and workers compensation insurance premiums, among other reasons.

Pay Computation

The next task in payroll accounting is to calculate the compensation owed to each worker. Calculating compensation can be relatively simple or fairly complex. Calculating pay for independent contractors, for example, simply involves multiplying the contracted pay rate by the number of hours worked. Calculating pay for a chief executive officer, on the other hand, may involve automatic distributions to investment accounts, reimbursement for business expenses and incentive bonuses in addition to base salary.

Tax Computation and Submission

Employees must submit income tax, and employers must submit payroll tax, but the employer is responsible for filing and submitting both. Payroll accountants must calculate the income tax owed by each worker after calculating the gross compensation owed. The accounting department must then withhold the taxes from the employee's pay, and submit the taxes owed to the Internal Revenue Service (IRS) on a regular basis.

Benefits and Paid Leave

If companies offer automatic distributions into 401k plans or other investment accounts, or paid vacation time for employees, the job of payroll accountants becomes more complicated. An hourly employee on paid vacation, for example, will have no record of hours worked during the vacation, but he must be compensated for 40 hours of work. Retirement account contributions must be calculated, withheld and submitted to the company holding the account. Any matching contributions offered by the employer may also be handled by payroll accountants.

Pay Distribution

Payroll accounting's final task is to distribute each employee's net pay. This can be done in a number of ways, including mailing checks, making direct deposits into checking accounts, loading prepaid debit cards and distributing cash personally.

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