Payroll
Payroll
Payroll means the company’s financial record of payments made by the employer to the employees, including wages, bonuses, salaries, incentives, etc. The company must prepare an employee’s payroll for all its employees from the time they are hired till retirement/resignation. Processing payroll without delays in accordance with various statutory compliances is a significant activity of a company.
In India, payroll processing refers to the steps involved in calculating the total remuneration of each employee of the company/organisation. It is an overwhelming process as it consists of calculation of gross salary, bonuses, net salary, daily wages, Provident Fund (PF) payment, professional tax payment, Tax Deduction at Source (TDS), allowances, etc., that are part of each employees’ monthly salary payment.
Payroll processing is one of the essential yet complicated business processes. Thus, errors might happen while processing and executing salaries that might hamper the employees’ morale and productivity. Employees rely on the company’s process to get paid without delays, irrespective of the organisation’s size. Payroll plays a crucial role in a company’s Human Resource Management (HRM).
Payroll is defined as the process of paying salary to the employee of a company/organisation. It starts with preparing the list of employees to whom salaries must be paid and end with recording those expenses.
The payroll process involves calculating what is due to the employees for a specific payroll cycle after adjusting the required deductions like employees’ PF contribution, TDS, meal coupons, etc. The payroll cycle is the gap between two salary disbursements of an employee. Generally, payroll is processed every month in India.
The payroll process requires different teams, such as HR, payroll and finance, to work together. However, due to modern technology, businesses can effortlessly manage all the payroll processing complexities
Pre-Payroll Activities
The pre-payroll activities involve the following steps:
Step 1: Onboarding Employees
The first step of payroll processing is onboarding employees and preparing the list of employees to be paid salaries.
Step 2: Defining Payroll Policy
Companies should define their payroll policies and get them approved by the management for processing standard payroll execution.
Every company has their own approach to employee engagement, philosophy and work culture.
A company needs to define the below policies for standardising payroll processing:
Pay policy.
Employee benefits policy.
Leave and attendance policy.
Salary components, including deductions.
Pay schedule policy.
Step 3: Gather Employee Inputs
Employee inputs like bank account details, PAN, address, income tax declarations, proof of investment, etc., are essential for payroll processing.
Usually, the companies collect these inputs from employees at the time of their joining/onboarding.
Each department/team will collect and maintain employee inputs necessary for processing payroll.
Finance Team
Variable pay
Bonus
Commission
Deductions
Income tax declarations
HR Team
Leave details
Attendance
Overtime work hours
Salary revision
Employee exit details
Admin Team
Employee bills
Transportation bills
Expense reimbursements
Step 4: Validate Employee Inputs
After compiling employee information, the validity of their details must be checked for accuracy before payroll processing.
Validation eliminates payroll errors and compliance issues.
Actual Payroll Activities
Step 5: Calculation of Payroll
The validated inputs of employees should be fed into the payroll system to calculate every employee‘s paycheck.
Net salary is arrived at after deducting deductions and taxes from gross salary.
Payroll calculations are usually done using spreadsheets or payroll software.
Essential Elements of Salary Structure
Cost to Company (CTC)
Allowances
Prerequisites
Arrears
Professional tax, PF and insurance deductions
Leave adjustment
Payslip
Form-16
Reimbursements
Bonus, incentives and one-time payments
Employee financial details
Employee investment declarations
Loan repayment
Post-Payroll Activities
Step 6: Accounting
Salaries paid to employees must be recorded as they are among the biggest expenses of a company.
Payroll accounting involves maintaining employee salary accounts.
Step 7: Pay Employee Salaries
The company must ensure sufficient bank balance for salary transfers.
Companies send salary bank advice statements to banks for salary disbursement.
Companies can automate salary payments through payroll software.
Payslips must also be distributed to employees.
Step 8: Compliance and Reporting
During payroll processing, statutory deductions such as TDS, PF, ESI and professional tax are deducted.
These deductions must be paid to government departments within due dates.
Companies must also file prescribed forms with respective departments.
Statutory Compliances for Payroll Management
Companies in India must comply with legal payroll regulations while disbursing salaries.
Failure to comply may lead to penalties.
Detailed legal and compliance knowledge is essential for payroll management.
General Statutory Compliances
ESI fund and PF funds
Professional tax
TDS (Tax Deduction at Source)
Gratuity
Payroll Processing Methods
Spreadsheets
Many companies at the initial stage use spreadsheet-based payroll management.
Spreadsheet payroll uses templates with mathematical formulas for salary calculations.
Though cost-effective, it becomes difficult for medium and large companies.
It is difficult to reconcile and verify values to avoid errors in this method.
Outsourcing
Payroll outsourcing means entrusting payroll execution to a third-party agency.
Companies provide employee salary information, attendance, leave and reimbursement data to the outsourced agency.
The outsourced agency calculates dues and handles statutory compliances.
