Summary
Payroll is the process an employer uses to pay its employees: collecting hours worked, calculating gross pay, withholding taxes and benefit deductions, paying net wages, depositing the withheld and employer taxes with the government, filing the required returns and keeping the records. The word also means the total amount a business pays its staff over a period. A US employer's core obligations are to withhold federal income tax and the employee's 7.65% share of Social Security and Medicare, match that 7.65%, pay federal unemployment tax (effectively 0.6% on the first $7,000 of each employee's wages) and state unemployment tax, deposit taxes on a monthly or semiweekly schedule, file Form 941 each quarter and Form 940 each year, and furnish W-2s by January 31. Most payroll errors start before the calculation, in the hours data.
Payroll is only as accurate as the hours it is run on. E-Monitor's time tracking records actual hours, breaks and overtime per workweek and syncs approved timesheets to payroll through integrations such as ADP. Start free →
Payroll Meaning
Payroll has two meanings. As a process, it is everything an employer does to pay employees correctly and on time and to meet the tax and record-keeping obligations that come with wages. As an amount, it is the total compensation a business pays its workforce over a period, often the largest single operating cost. When someone says a company "runs payroll on Friday," they mean the process; when they say "payroll is 40% of revenue," they mean the amount.
Payroll covers employees only. Independent contractors are paid through accounts payable on invoice, without withholding, and reported on Form 1099-NEC rather than a W-2, as our guide to 1099 vs W-2 explains.
How Payroll Works: The Eight Steps
- Set up each employee. Collect Form W-4 for federal withholding, the state equivalent, Form I-9 for employment eligibility, direct deposit details and benefit elections. Report new hires to the state within 20 days, as federal law requires.
- Set the pay schedule. Weekly, biweekly, semi-monthly or monthly, within state pay-frequency rules. See what a pay period is.
- Collect time. Gather approved hours for non-exempt employees, including overtime, breaks, paid leave and shift differentials, plus commissions and bonuses for the period.
- Calculate gross pay. Hours times rate plus overtime at 1.5 times the regular rate for hours over 40 in a workweek, or salary divided by periods, plus additional earnings.
- Apply deductions. Pre-tax benefits, then federal, state and local income tax withholding and FICA, then post-tax deductions and garnishments. The result is net pay; our guide to gross pay vs net pay walks through a full example.
- Pay employees. By direct deposit, pay card or check on the scheduled payday, with a pay statement that meets state requirements.
- Deposit and file taxes. Remit withheld taxes and employer taxes on the required schedule and file quarterly and annual returns.
- Record and reconcile. Post payroll to the general ledger, reconcile tax liabilities against deposits, and keep the records.
Employer Payroll Taxes
| Tax | Who pays | Rate and base |
|---|---|---|
| Federal income tax | Employee (employer withholds) | Per Form W-4 and IRS Publication 15-T |
| Social Security | Employee and employer, each | 6.2% on wages up to $184,500 in 2026 ($192,300 in 2027) |
| Medicare | Employee and employer, each | 1.45% on all wages; employee pays an extra 0.9% above $200,000 |
| Federal unemployment (FUTA) | Employer only | 6.0% on the first $7,000 per employee, reduced to 0.6% with full state credit; higher in credit-reduction states |
| State unemployment (SUTA) | Employer (employee too in a few states) | Experience-rated; wage base set by each state |
| State and local income tax | Employee (employer withholds) | Varies; none on wages in nine states |
| State disability and paid family leave | Varies | Employee-funded, employer-funded or shared, depending on the state |
Withheld income tax and the employee's share of FICA are trust fund taxes: the employer holds them on the government's behalf. Failing to deposit them exposes the individuals responsible for payroll, not only the company, to the trust fund recovery penalty, equal to the unpaid amount.
Deposit Schedules and Filing Deadlines
Federal employment tax deposits are made electronically through EFTPS. A new employer is a monthly depositor, depositing each month's taxes by the 15th of the following month. Once total tax reported in the lookback period exceeds $50,000, the employer becomes a semiweekly depositor: taxes for paydays Wednesday to Friday are due the following Wednesday, and for Saturday to Tuesday the following Friday. Any accumulated liability of $100,000 or more must be deposited the next business day.
| Filing | What it reports | Due |
|---|---|---|
| Form 941 | Wages, withheld income tax and FICA for the quarter | April 30, July 31, October 31, January 31 |
| Form 940 | Annual FUTA tax | January 31 |
| Form W-2 and W-3 | Each employee's annual wages and withholding, to employees and the SSA | January 31 |
| Form 1099-NEC | Contractor payments of $2,000 or more (2026 payments) | January 31 |
| State returns | State withholding and unemployment wages | Usually quarterly; varies by state |
Payroll Records You Must Keep
The Fair Labor Standards Act requires employers to keep payroll records for at least three years and the time cards and schedules they are calculated from for at least two. For each non-exempt employee, that means hours worked each day and workweek, the regular rate, straight-time and overtime earnings, deductions, total wages and the pay date and period. The IRS requires employment tax records, including W-4s, deposits and returns, for at least four years. Several states require longer. Timesheets are the source documents, and our timesheet template shows the minimum fields.
Common Payroll Errors
- Inaccurate hours. Missed punches, worked lunches, unrecorded after-hours messages and rounding cause underpayment claims; padding and buddy punching cause overpayment. Our guide to payroll fraud prevention sizes the problem.
- Wrong overtime rate. Leaving bonuses and differentials out of the regular rate, or averaging hours across a two-week period instead of each workweek.
- Misclassification. Treating employees as contractors, or non-exempt staff as exempt.
- Remote employee state errors. Withholding and unemployment registered in the office state when the employee works in another.
- Late deposits. Failure-to-deposit penalties start at 2% and rise to 15% the longer a deposit is outstanding.
- Missed final pay deadlines. Several states, including California, require final pay on the last day for terminated employees, with daily waiting-time penalties.
Payroll Terms Glossary
| Term | Meaning |
|---|---|
| Pay period | The span of days a paycheck covers, such as one week or two weeks |
| Pay date | The day employees are paid for a pay period |
| Payroll register | The report listing every employee's earnings, deductions and net pay for a pay run |
| Gross-to-net | The calculation from total earnings to take-home pay |
| Regular rate | The hourly rate used for overtime, including nondiscretionary bonuses and differentials |
| Off-cycle payroll | A pay run outside the normal schedule, for corrections, bonuses or final pay |
| Supplemental wages | Bonuses, commissions and similar pay, which can be withheld at a flat federal rate of 22% |
| Garnishment | A court- or agency-ordered deduction, such as child support or a tax levy |
| Wage base | The maximum earnings subject to a tax, such as Social Security or unemployment |
| EFTPS | The Treasury's Electronic Federal Tax Payment System, used for federal tax deposits |
| Fully loaded cost | Wages plus employer taxes and benefits; the true cost of an employee |
Our guides to biweekly vs semi-monthly pay and time and a half cover two of the decisions that shape every payroll calendar.
How to Run Payroll: In-House, Software or Outsourced
Manual or spreadsheet payroll is possible for a handful of employees but leaves every tax table, deadline and filing to the owner, and errors are expensive. Payroll software such as Gusto, ADP RUN, Paychex Flex or QuickBooks Payroll calculates pay and taxes, makes deposits and files returns, typically priced per employee per month. A professional employer organization (PEO) becomes the co-employer for tax purposes and adds benefits and HR support. Large employers run enterprise payroll inside an HCM suite.
Whatever runs the calculation, the input is the same: hours. Connecting time tracking directly to payroll removes the re-keying step where most errors happen. E-Monitor exports approved hours, overtime and breaks per workweek and integrates with payroll and HR systems including ADP, Workday and BambooHR.
Related reading: How to Calculate the Fully Loaded Cost of an Employee.
Frequently Asked Questions
1. What is payroll?
Payroll is the process of paying employees, including collecting hours, calculating gross pay, withholding taxes and deductions, paying net wages, depositing taxes, filing returns and keeping records. It also means the total amount a business pays its employees.
2. How does payroll work?
The employer collects hours and earnings for the pay period, calculates gross pay, subtracts pre-tax deductions, taxes and post-tax deductions to reach net pay, pays employees, then deposits withheld and employer taxes and files the required returns.
3. What taxes does an employer pay on payroll?
The employer pays 6.2% Social Security and 1.45% Medicare matching the employee's share, federal unemployment tax (0.6% on the first $7,000 per employee with the full state credit) and state unemployment tax. It also withholds and remits the employee's income taxes and FICA.
4. When are payroll taxes due?
Monthly depositors deposit by the 15th of the following month; semiweekly depositors within a few days of each payday. Form 941 is filed quarterly, Form 940 and W-2s by January 31.
5. How long must payroll records be kept?
At least three years for payroll records and two years for time cards under the FLSA, and at least four years for employment tax records under IRS rules. Some states require longer.
6. What is the difference between payroll and HR?
Payroll pays employees and handles wage taxes and records. HR covers the wider employment relationship, including hiring, policies, benefits, performance and compliance. The two share data, which is why many businesses use connected systems.
7. Are contractors paid through payroll?
No. Independent contractors are paid on invoice without withholding and reported on Form 1099-NEC if paid $2,000 or more in a year for 2026 payments.
8. What is the most common payroll mistake?
Inaccurate hours data, which flows into gross pay, overtime and every tax calculated from them. Late tax deposits and worker misclassification are the most expensive.
Payroll that runs on recorded hours. E-Monitor records actual work time, breaks and overtime per workweek and syncs approved hours to your payroll system, so each pay run starts from verified data rather than re-keyed timesheets. 7-day free trial, no credit card. Sign up →