What is payroll? A comprehensive guide for HR professionals

Factors like remote, distributed teams and shifting regulations are making payroll more complex. Without the right systems, this complexity leads to errors that are expensive to fix.

‍That’s why it’s critical to have a strong grasp of payroll fundamentals and build efficient processes to support them. With the right approach and tech stack, you can improve accuracy and ensure employees are paid correctly and on time, every time. 

This guide explains how payroll works, focusing on United States businesses. It provides definitions, components, steps, common pitfalls, and tools. It also provides links to deeper resources where you may need them.
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Leapsome’s payroll features empower HR teams to centralize employee data, automate payroll cycles, and generate payroll reports.

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What is payroll?

Payroll is the process of compensating employees for their work — but this simple definition doesn’t reflect the complexity of payroll. Payroll includes admin and compliance-related tasks such as tracking hours worked, calculating pay, managing deductions and benefits, processing tax withholdings, issuing payments, and maintaining accurate records in line with labor and tax regulations.

Payroll impacts finances and compliance, and getting it right matters. Inaccuracies can negatively affect the employee experience and may result in costly off-cycle payroll runs. Errors can also disrupt morale, incur fines, and trigger audits. That’s why many organizations adopt payroll software to streamline the process and reduce human error.
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📚🌟 Want to dive deep into payroll? Explore our payroll resources:

‍✨ Review our step-by-step payroll preparation guide to learn more about the payroll preparation process. 
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✨ Read up on the top payroll trends of the year to stay ahead of the curve and the competition.
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✨ Learn how to reduce manual work and speed up your payroll workflow with our payroll automation guide.
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✨ Determine which payment interval is right for your organization with our explainer on payroll cycles.
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‍✨ Evaluate your organization’s payroll performance with our article on payroll metrics. 
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✨ Get organized with our free, downloadable biweekly payroll calendar template.
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✨ Explore how to set up a new payroll system within your organization with our comprehensive payroll implementation guide.
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✨ Brush up on your terminology with our breakdown of common payroll terms.

What are the main components of payroll?

Several factors influence the amount an employee receives on their paycheck, including:
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Component #1: wages

Wages form the foundation of payroll. These include hourly pay, fixed salaries, and eligible overtime. The method of compensation — hourly or salaried — affects how wages are calculated. Employers generally consider hours worked, the agreed pay rate, and relevant overtime rules under applicable labor laws.
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Component #2: bonuses

Bonuses refer to compensation provided beyond base wages. These may include performance incentives, holiday-related bonuses, or other discretionary payments. It’s important to account for bonuses accurately in payroll processes, as they are typically subject to payroll tax withholding and reporting requirements.
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Component #3: deductions

Deductions refer to amounts withheld from an employee’s gross wages before net pay is issued. These can include employee-elected contributions (such as health insurance or retirement plans) and mandatory deductions like wage garnishments or union dues. Employers should distinguish between voluntary and required deductions and ensure they are handled in accordance with relevant employment laws.
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Component #4: taxes

Payroll taxes generally include federal, state, and local taxes required by law. In the United States, these commonly involve income tax withholdings, as well as Social Security and Medicare contributions under the Federal Insurance Contributions Act (FICA). 
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Additional considerations about payroll components 

This list is not comprehensive. Other factors, like reimbursed expenses, fringe benefits, or unpaid leave, can also affect net pay. These elements may be treated differently for tax or compliance purposes depending on local laws and employment agreements.

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How the payroll process works

Let’s review the most important steps of payroll, your tax responsibilities as an employer, and common mistakes to avoid. 
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Key steps in payroll processing

Processing payroll involves multiple steps; errors can affect your cash flow, financial planning, and employee morale. Nearly half of professionals say payroll mistakes hurt their satisfaction.

To support you, we’ve created an easy-to-follow payroll checklist to help you run efficient, accurate payroll cycles:

1. Establish payroll foundations — Register your business with the relevant authorities. Set up systems to manage withholdings, employee payments, and reporting obligations. Familiarize yourself with the employment, tax, and data privacy regulations that apply to your organization.
   
   
2. Collect employee information — Gather necessary documentation, such as tax withholding forms, bank details for direct deposit, and social security numbers.
   
   
3. Track time & attendance — Implement a reliable time-tracking and absence management system.
   
   
4. Calculate net pay — Start with each employee’s gross pay, then apply mandatory deductions (e.g., income tax, Social Security contributions) and any voluntary ones (e.g., retirement plans or health insurance).
   
   
5. Distribute paychecks — Pay employees using their preferred method, like direct deposit or physical check, and within any mandated pay frequency or deadlines set by your local jurisdiction.
   
   
6. Maintain records — Keep detailed payroll records for each pay period. Store them in a secure, accessible system and retain them for the duration required by law.
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7. Submit taxes & reports — Remit withheld taxes to the appropriate government bodies on time. File all required payroll reports accurately and in accordance with the deadlines that apply to your business.
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✔️ Download our full payroll checklist for free

Looking for an in-depth breakdown of the payroll process? Look no further. 

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Understanding employee vs. employer payroll tax responsibilities 

Employers and employees have distinct payroll tax obligations — and understanding these is crucial for staying compliant and managing payroll accurately.

In the United States, employees are typically responsible for:

• Income taxes, with the amount withheld from their paycheck based on information provided in their IRS Form W-4 (such as filing status and number of dependents). Employers withhold and remit this amount on the employee’s behalf, but do not pay it themselves.

• Contributions to Social Security and Medicare taxes (FICA), which are automatically deducted from their pay. As of the time of writing, employee Social Security and FICA contributions amount to 7.65%.
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US employers are responsible for several additional payroll tax responsibilities, such as: 

• Withholding and remitting employee income taxes to the appropriate tax authorities (without paying these taxes themselves).
  
  
• Matching the employee’s FICA contributions.
  
  
• Paying federal and, in many cases, state unemployment taxes.
  
  
• Depositing all withheld taxes with the relevant authorities.
  
  
• Filing accurate payroll tax forms and maintaining compliant payroll records.
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💡 We recommend consulting a tax expert for more in-depth guidance on your tax responsibilities as an employer.

Common payroll challenges & mistakes

Payroll mistakes happen, but knowing the common ones makes them easier to avoid. Here are a few to watch for — and how to prevent them:
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Employee misclassification

Incorrectly classifying employees as independent contractors (or the other way around) can result in tax penalties, missing entitlements, and compliance issues. Ensuring accurate classification helps mitigate legal and financial risks.
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Tax & compliance errors

Errors like using incorrect tax rates, missing required filings, or not meeting local employment regulations may lead to penalties. Be sure to stay informed about applicable regulations and ensure internal payroll processes are accurate and up to date.
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Missed deadlines

Late wage payments or delayed benefit contributions can lead to employee dissatisfaction and, depending on your local regulations, legal exposure. Maintaining a clear payroll schedule and using automated reminders can support timely and accurate payroll operations.
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Incorrect wage calculations

Errors in overtime pay, bonuses, or deductions can result in incorrect employee payments. Conducting regular audits and using reliable payroll software can support accuracy and reduce the risk of non-compliance. 
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Data entry mistakes

Outdated employee records or incorrect details may lead to payroll discrepancies that require administrative correction. Ensuring team member information is current helps reduce the risk of errors and supports smoother internal operations.
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Payroll systems & technology

For most organizations, basic spreadsheets no longer meet operational or compliance needs. Manual payroll processes like these are time-consuming for already stretched HR teams — over one-third of which faced hiring freezes or layoffs last year.

Future-ready payroll software can help HR teams streamline routine tasks and reduce the likelihood of administrative errors. These tools also support more efficient workflows for post-payroll reporting and analysis and can be a key part of your evolving payroll operations.
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Key payroll software features to look for in payroll software

There’s no shortage of payroll software options on the market. But, as always, the best option for your organization depends on your needs. The following capabilities are useful to most modern organizations: 
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Integrations & core HR offerings

Integrated time tracking and absence management features make it simple to sync worked hours and employee data with payroll runs. Better yet, a comprehensive human resources information system (HRIS) will make it easier to find, update, and analyze payroll information and reduce your tech stack.
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Employee self-service portal

Self-service capabilities reduce administrative burden, foster transparency, and boost empowerment. They make your life much easier as an HR professional and help team members access important information whenever they need to.
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People enablement features

If you’re looking to centralize your HR processes and streamline your tech stack, choosing a payroll tool that comes with integrated people enablement capabilities is ideal. These kinds of solutions are developed with the employee experience in mind and help People teams work more strategically. 
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Scalability

Think about the features your HR team needs now and the ones you may require down the road. Adopting a software that can accommodate current and future needs — for example, through modular offerings — will future-proof your investment and prevent a complicated software (and data) migration down the line.
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Security & data protection

Payroll software hosts sensitive employee information and company data. So, make sure your solution of choice has rigorous, transparent security standards and compliance certifications like ISO 27001:2022.
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Choosing between in-house, outsourced & PEO payroll solutions

There are three main payroll management approaches. You can opt for in-house (with the help of payroll systems and technology), outsource it, or choose a professional employer organization (PEO) to take care of it on your behalf.

In-house payroll works best for businesses that have an HR team with the bandwidth to handle things like payroll preparation, payroll cycle management, and reporting. This option provides maximum control and flexibility, and it’s often cost-effective if you leverage the right software. 

For businesses that have HR teams with very limited bandwidth or don’t want their internal team to focus on core processes like payroll, outsourcing can be a good option. PEO is best suited for businesses that don’t have HR teams at all but still need to pay their employees and comply with tax and compliance regulations. 
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Payroll best practices for today’s HR teams

The best payroll processes are accurate and scalable — but how, exactly, can HR teams achieve that? These best practices will get you started on the right foot.
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Standardize your payroll processes

Wash, rinse, repeat. That’s how simple your payroll process can be after iterating with the right system. For example, Leapsome Payroll enables HR leaders to centralize and enforce custom policies across multiple employee groups based on factors like geographic location and tax liability.
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Clearly communicate payroll processes to your people

Employees should know how their pay is calculated, when they’ll be paid, and how deductions work. Deviations from the schedule should be avoided as much as possible and always communicated in advance where absolutely necessary. As previously suggested, consider adopting a solution with self-service capabilities so team members can access this information on their own.
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Implement a scalable payroll system

Multiple pay structures? New overtime requirements to track? Office opening in a new country? No problem. The right payroll software can adapt to your scaling business needs without missing a beat.
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Leverage AI & automation

Automating payroll calculations, tax filings, and compliance checks reduces human error and saves time. AI-powered insights can also help HR teams identify payroll trends and optimize compensation strategies — for example, by helping identify employees who are due for a raise or eliminating potentially prejudicial pay discrepancies. 
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The payroll tool that’s built for today’s HR teams

Payroll is a multifaceted and often complex process. But with the right toolkit, it can transform from a headache into a competitive differentiator.

At Leapsome, we’re committed to building tools that support the modern HR team’s payroll strategy. Our HRIS is built with time tracking, absence management, and document management tools that put the employee experience first.

Leapsome’s payroll tool enables you to take care of key tasks like payroll preparation, launching payroll cycles, generating reports, distributing payslips, and exporting data to your payroll processor of choice. The result? A payroll system that you and your people love.
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🦸 Turn payroll headaches into a problem of the past

With Leapsome, it’s easy to automate repetitive but effort-intensive processes like payroll preparation.

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Disclaimer: This article is for informational purposes only and doesn’t offer legal, tax, or financial advice. While we’ve done our best to ensure accuracy and completeness, we can’t guarantee everything is up-to-date or error-free. For tailored advice, we recommend consulting a qualified lawyer or tax advisor.