What Is Payroll in 2026?

Payroll is the process of paying your employees for the work they do. It’s how you get from hours worked to money in your bank account.

When you hear “payroll,” it covers a few things: calculating how many hours everyone worked, figuring out gross pay (before deductions), taking out taxes and other deductions, calculating net pay (what you actually get), and distributing paychecks or direct deposits.

Quick Answer
Payroll is how employees get paid. It includes tracking hours worked, calculating wages, withholding taxes and deductions, and sending out paychecks on a regular schedule. Most companies run payroll weekly, biweekly, or monthly.

How Does Payroll Work?

Here’s the basic flow:

1. Track hours worked: Employees clock in and out using a time clock or time tracking system. The system logs their hours, including any overtime.

2. Calculate gross pay: Take the total hours and multiply by the hourly rate. Add overtime pay for hours over 40 per week (1.5x regular rate). For salaried employees, divide annual salary by number of pay periods.

3. Calculate deductions: Subtract federal income tax, state income tax (if applicable), FICA taxes (Social Security 6.2%, Medicare 1.45%), health insurance premiums, retirement contributions, and any garnishments.

4. Calculate net pay: Gross pay minus all deductions equals net pay—what actually hits your account.

5. Distribute payment: Issue direct deposits, paper checks, or payroll cards on payday.

6. File taxes: Employers submit withheld taxes to the IRS and state agencies, file quarterly reports, and provide W-2s at year-end.

What’s Included in Payroll?

For employees, your paycheck shows:

Gross pay: Total earnings before deductions
Federal tax withholding: Based on your W-4 form
State tax withholding: If your state has income tax
FICA taxes: Social Security (6.2%) and Medicare (1.45%)
Benefit deductions: Health insurance, dental, vision, 401k contributions
Other deductions: FSA, HSA, life insurance, garnishments
Net pay: What you actually take home

For employers, payroll also includes:

Employer taxes: Matching FICA taxes (6.2% Social Security, 1.45% Medicare)
FUTA tax: Federal unemployment tax
SUTA tax: State unemployment tax
Workers’ compensation insurance

According to the Bureau of Labor Statistics, total employer compensation costs for private industry workers averaged $45.65 per hour in June 2025. Wages and salaries made up 70.2% ($32.07/hour) while benefits accounted for 29.8% ($13.58/hour).

How Often Is Payroll Run?

Most companies use one of these schedules:

Weekly payroll: Employees paid once a week, typically on the same day each week. Common in industries like construction, plumbing, and hourly shift work—52 pay periods per year.

Biweekly payroll: Employees paid every two weeks, typically on the same day. According to the Bureau of Labor Statistics, this is the most popular schedule, used by 43% of U.S. employers—26 pay periods per year (27 in certain years like 2026).

Semi-monthly payroll: Employees paid twice a month on specific dates (often 15th and last day, or 1st and 15th). Common for salaried employees—24 pay periods per year.

Monthly payroll: Last day of month. Less common, mostly for high-level salaried positions—12 pay periods per year.

State law sometimes dictates minimum payment frequency for hourly employees.

What’s New in Payroll for 2026?

Qualified overtime reporting requirement: Starting in 2026, employers must separately report qualified overtime compensation on Form W-2 using Box 12 Code TT. This is the half-time premium portion of overtime pay—roughly 1/3 of total overtime paid. Payroll systems need updates to track and report this separately.

27 biweekly pay periods: For companies using biweekly payroll, 2026 is a leap pay period year with 27 pay periods instead of the usual 26. This affects annual salary calculations, budgeting, and benefit deductions. Salaried employees will see slightly smaller paychecks each period to account for the extra pay period.

Enhanced compliance tracking: With new W-2 reporting requirements, payroll accuracy matters more than ever. Systems that can’t track qualified overtime separately will require manual calculations, increasing error risk and processing costs.

What Are Common Payroll Errors?

Payroll mistakes are expensive and common. According to Ernst & Young research cited by Lano, about 20% of payrolls contain errors every year, with each mistake costing an average of $291 to correct.

Common errors include:

Time tracking mistakes: Wrong hours entered, missed punches, incorrect overtime calculations. Time and attendance errors are the most frequent payroll error type.

Misclassified employees: Treating employees as contractors, or non-exempt as exempt. This can lead to expensive lawsuits and back pay.

Wrong tax withholdings: Using outdated W-4 information, calculating FICA incorrectly, or missing state tax requirements.

Missed deductions: Forgetting to deduct health insurance, 401k contributions, or garnishments.

Late payments: Missing payday due to processing delays or bank holidays.

According to Paycom, approximately 33% of employers make payroll errors each year. Even worse, 40% of small to mid-sized businesses face IRS penalties for incorrect payroll filings, with average penalties around $845.

Why Do Payroll Errors Matter?

For employees: According to G2 research, nearly half of employees (49%) consider leaving after just two payroll mistakes. And 86% of Americans would suffer a negative impact from just one missing or delayed check.

When you’re living paycheck to paycheck, a payroll error can mean bounced checks, late fees on bills, or not having money for groceries. Even one mistake damages trust.

For employers: Beyond the $291 average cost per error, mistakes can lead to IRS penalties, legal fees, employee turnover, and damaged reputation. Companies with 1,000 employees could spend up to $922,131 annually just correcting payroll errors, according to Ernst & Young.

Additionally, 14% of companies face litigation or compliance issues from payroll errors, with average annual legal costs of $13,000 and 120 hours of lost productivity.

How Can You Avoid Payroll Errors?

Use automated systems: Time tracking software automatically calculates hours and reduces manual entry errors. Automated systems can significantly reduce payroll processing errors compared to manual entry.

Review before processing: Have someone double-check hours, rates, and deductions before finalizing payroll.

Keep employee records current: Update W-4s, addresses, and benefit elections as soon as changes happen.

Stay compliant: Keep up with tax law changes, minimum wage increases, and new reporting requirements. For 2026, employers must report qualified overtime separately on Form W-2 using Box 12 Code TT.

Train your team: Make sure everyone handling payroll understands the process, compliance requirements, and common mistakes.

Establish clear policies: Create a timekeeping policy that explains how to record hours, request corrections, and get overtime approved.

What’s the Bottom Line?

Payroll is how employees get paid, and getting it right matters. In 2026, with 20% of payrolls containing errors and each mistake costing $291 to fix, accurate payroll processing is more important than ever.

Here’s what you need to know:

Payroll includes tracking hours, calculating pay, withholding taxes, and distributing paychecks
Total compensation averages $45.65/hour, with wages at 70.2% and benefits at 29.8%
Common schedules are weekly, biweekly, semi-monthly, or monthly
33% of employers make payroll errors each year, costing an average of $291 per mistake
49% of employees consider leaving after just two payroll mistakes
Automated time tracking can reduce errors by up to 80%

Ready to automate payroll and reduce errors? ShiftFlow’s time tracking tools automatically calculate hours, flag overtime, and integrate with payroll systems. Explore our solutions or view pricing.

Sources

U.S. Bureau of Labor Statistics – Employer Costs for Employee Compensation
People Managing People – Understanding Bi-Weekly Payroll: An Ultimate Guide
Lano – What Is the True Cost of Payroll Errors?
Paycom – The Real Cost of Payroll Errors in 2026
G2 – 50+ Payroll Statistics Shaping Employee Experience in 2025

Frequently Asked Questions

What is payroll?

Payroll is the process of paying employees for their work. It includes calculating hours worked, gross wages, deductions (taxes, benefits, etc.), and net pay, then distributing paychecks or direct deposits on a regular schedule (weekly, biweekly, or monthly).

What does payroll include?

Payroll includes gross wages (regular pay plus overtime), federal and state tax withholdings, FICA taxes (Social Security and Medicare), benefit deductions (health insurance, 401k), garnishments, and net pay. For employers, it also includes employer taxes and workers’ compensation costs.

How often is payroll processed?

Most companies process payroll weekly (every Friday), biweekly (every other Friday), semi-monthly (15th and last day of month), or monthly (last day of month). The schedule depends on company policy, state requirements, and whether employees are hourly or salaried.

What’s the difference between gross pay and net pay?

Gross pay is your total earnings before any deductions. Net pay (take-home pay) is what’s left after subtracting federal tax, state tax, FICA taxes, and benefit deductions. Net pay is what actually deposits into your bank account.

What are payroll taxes?

Payroll taxes include federal income tax, state income tax (if applicable), Social Security (6.2% up to wage base limit), and Medicare (1.45%, plus 0.9% for high earners). Employees pay these through withholdings, while employers pay matching Social Security and Medicare taxes plus unemployment taxes.

How much do payroll errors cost?

Each payroll error costs an average of $291 to correct, according to Ernst & Young. For a 1,000-employee company, payroll errors could cost up to $922,131 annually. Additionally, 40% of small to mid-sized businesses face IRS penalties averaging $845 for incorrect filings.

Can I fix a payroll error?

Yes. Contact your HR or payroll department immediately if you notice an error. Most companies can issue a corrected check or adjust your next paycheck. Document the error (wrong hours, missing overtime, incorrect deduction) and the correct amount. The longer you wait, the harder it gets to fix.

What happens if payroll is late?

If your employer misses payday, state law may require penalty payments in addition to the owed wages. Contact your HR department first, then your state labor department if the issue isn’t resolved. Keep records of missed payments and communications.