Who Does Payroll In A Company? An Overview
Understand the diverse approaches companies take to manage payroll, whether through internal teams, external providers, or comprehensive HR solutions.
Payroll is the process by which businesses compensate employees, involving wage calculation, deduction withholding, and tax remittance. This function extends beyond issuing paychecks; it includes record-keeping, regulatory compliance, and managing employee financial data. Payroll responsibility can reside internally or be outsourced, depending on company size, complexity, and strategic focus.
Internal Payroll Management
Many companies manage payroll internally, using existing departments or dedicated roles. This allows for direct oversight and integration with other business operations. The Human Resources (HR) department often plays a role due to its connection with employee data, benefits administration, and labor law compliance. HR professionals ensure employee records, like new hires or pay changes, are accurately communicated for payroll processing.
The Accounting or Finance department is also involved in internal payroll, handling financial transactions, general ledger entries, and tax reporting. This department processes payments, manages payroll software, and ensures financial records are accurate for reconciliation and audits. Larger organizations may establish a dedicated payroll department or administrator. This specialization ensures all payroll activities, from calculating wages to processing deductions and taxes, are handled with precision.
Internal payroll teams ensure compliance with federal, state, and local wage and hour laws, including minimum wage and overtime regulations. They generate paychecks or facilitate direct deposits, maintain payroll records, and prepare tax forms like IRS Form 941 and W-2s. The choice of which internal department handles payroll depends on the company’s size, payroll structure, and organizational framework.
External Payroll Service Providers
Many businesses use external payroll service providers to manage their payroll. These specialized companies offer solutions to streamline the process and ensure compliance. A typical provider calculates employee wages and deductions, handles tax filings and remittances, and facilitates direct deposit services. They also generate payroll reports for financial analysis and record-keeping.
The client company furnishes employee data to the service provider. The provider processes this data, ensuring accurate calculations and distributing payments. These providers focus strictly on payroll processing and tax compliance. They manage the timely deposit of federal, state, and local payroll taxes.
External payroll providers do not assume co-employment responsibilities or handle broader human resources functions. Their expertise lies in the administrative and compliance aspects of payroll, helping businesses avoid errors in calculations and tax filings. This specialization allows companies to offload administrative burden while retaining control over their workforce and HR decisions.
Professional Employer Organizations (PEOs)
Professional Employer Organizations (PEOs) offer a more expansive suite of services than standard external payroll providers, distinguished by a “co-employment” relationship. The PEO becomes the employer of record for tax and compliance, sharing responsibilities with the client company. The PEO files payroll taxes under its own tax identification numbers, withholds taxes, pays unemployment insurance, and provides workers’ compensation.
Beyond payroll and tax administration, PEOs provide a broader range of human resource services. These include benefits administration, such as health insurance and retirement plans, which smaller businesses might not access independently. PEOs also offer guidance on HR compliance, helping businesses navigate labor laws, and provide workers’ compensation management.
The key differentiator for a PEO is its comprehensive administrative and HR role, impacting responsibility for employment-related tasks. While the client company retains control over day-to-day operations and employee supervision, the PEO handles many administrative and regulatory burdens. This model allows businesses to access enterprise-level HR support and benefits, potentially reducing overhead and ensuring compliance.