What is payroll? Definition and FAQs

Published Monday 13 October 2025

Table of contents

• Payroll definition
• Types of payroll systems
• Getting started with payroll
• FAQs on payroll

Key takeaways

• Payroll encompasses five core steps: calculating pay, applying deductions, processing payments, paying authorities, and maintaining records for compliance.

• Choose the payroll management approach that fits your business size and complexity—manual processing for very small teams, payroll software for automation and accuracy, or outsourcing for complex situations.

• Prioritize accuracy in payroll processing since it represents one of your largest monthly expenses and errors can result in tax penalties, compliance issues, and employee dissatisfaction.

• Register with relevant tax authorities and establish proper employee records before hiring your first employee, as payroll obligations begin immediately upon employment.

Payroll definition

Payroll is the process of paying your employees for their work. It includes calculating wages, deducting taxes, and making payments on scheduled dates. Payroll can also refer to the list of employees who receive pay, or the total amount spent on employee compensation.

Payroll can also mean:

• A list of employees who receive pay
• The total amount spent on employee compensation

A payroll system helps you pay your employees accurately and on time, and keeps your business compliant with tax laws.

The payroll process involves five key steps:

1. calculate pay, including wages, overtime, benefits and reimbursements
2. apply deductions, such as taxes, KiwiSaver contributions and insurance premiums
3. process payments to employee bank accounts
4. pay authorities, including tax payments and employer contributions
5. maintain records by keeping detailed payroll documentation for compliance and auditing In New Zealand, for example, you’re required to keep full and accurate wage records for seven years.

Getting payroll right helps you keep your employees happy, stay compliant, and avoid tax penalties. For example, one PwC estimate found that Australian workers are underpaid by A$1.35 billion each year.

You have three main options for managing payroll:

1. Manual processing: Suitable for businesses with one or two employees, but it can be time-consuming and error-prone
2. Payroll software: Automates calculations and compliance, reduces errors and saves you time
3. Outsourcing: Bookkeepers, accountants or payroll specialists handle payroll for you

For most small businesses, payroll is one of your largest monthly expenses, so accuracy and efficiency are crucial for managing your cash flow.

Contractors are paid differently from employees. You usually pay contractors based on their invoices, not through your regular payroll, and you do not deduct taxes from their payments.

Payroll is what happens each payday and involves sending the correct amounts to your employees and to government agencies.

Types of payroll systems

You can choose between two main approaches to handling payroll, each with its own advantages.

In-house payroll systems

In-house payroll means you manage all payroll tasks yourself, using software or manual processes.

Benefits:

• control your payroll timing, processes and employee data
• avoid monthly service fees to external providers
• make changes and run payroll whenever you need

Best if you have a simple pay structure and time to manage payroll tasks

Outsourced payroll services

Outsourced payroll means a payroll specialist or accountant manages your payroll calculations, payments and compliance for you.

Benefits:

• stay compliant with changing tax laws
• save time to focus on your business
• reduce errors by letting specialists handle complex calculations and filing

Best if your business is growing, has complex pay structures, or you have limited time for payroll administration

Getting started with payroll

Starting payroll for the first time is easier when you break it into simple steps.

Get an Inland Revenue Department (IRD) number: Register with Inland Revenue for pay as you earn (PAYE) tax and employer obligations Set up employee records: collect tax codes, bank details and KiwiSaver information Choose your payroll system: decide between manual processing, payroll software or outsourcing Establish pay schedules: set up weekly, fortnightly or monthly pay cycles Create payroll processes: set up approval workflows and payment authorisation procedures

Ready to streamline your payroll? Try Xero payroll for free and see how automation can save you time and help you stay accurate and compliant.

FAQs on payroll

Here are answers to common questions about payroll for small businesses.

What are the two types of payroll systems?

The two main types are in-house payroll, where you manage payroll yourself, and outsourced payroll, where a payroll specialist or accountant manages it for you.

How much does payroll cost for small businesses?

Costs vary by method: manual processing is free but time-consuming, payroll software typically costs $10 – $50 per month, and outsourcing ranges from $25 – $100+ per month depending on employee count.

What's the difference between payroll and payslips?

Payroll is the process of paying employees. Payslips show each employee’s pay and deductions.

When do I need to start doing payroll?

You need to start payroll as soon as you hire your first employee, which means registering with Inland Revenue and setting up pay as you earn (PAYE) tax obligations.