By Tanishka Tiwari
Published on: December 23, 2023 at 19:39 IST
Payroll is one of the most essential yet challenging operations in business. It is a procedure that converts employees’ time and effort into monetary benefits, keeping them motivated and morale high.
Payroll includes a variety of responsibilities, such as calculating gross wages and deductions and adhering to tax and labour requirements. Payroll management necessitates complex calculations, regulatory considerations, and attention to detail.
A payroll management system includes all the tasks associated with paying an organisation’s personnel. It often entails keeping track of hours worked and ensuring that employees are paid appropriately. It also includes calculating taxes and social security and ensuring they are withheld and processed correctly.
A variety of different deductions may be estimated, withheld, and processed as part of payroll administration, depending on the company. Additionally, contractor payment processing may fall under the purview of payroll administration.
Meaning of Payroll
Payroll is paying a company’s or organisation’s employees’ salaries. It begins with preparing a list of employees whose salaries must be paid and ends with recording those expenses.
The payroll process calculates what employees are owed for an inevitable payroll cycle after adjusting for required deductions such as PF contributions, TDS, meal coupons, etc. The payroll cycle is the period between two employee salary distributions. Payroll is typically processed once a month in India.
The payroll process necessitates the collaboration of various teams, including HR, payroll, and finance. However, thanks to contemporary technology, organisations can easily manage all of the complications of payroll processing.
Payroll is a function that includes the following:
- Creating a payroll policy and procedure inside the organisation
- Defining pay stub components such as primary and variable pay, HRA, LTA, and others
- Calculating gross salary, statutory and non-statutory deductions such as PF, taxes, etc.
- Paying salaries and payslips to employees; depositing TDS and PF dues with proper authorities
- Payroll-related expenses must be accounted for.
Businesses formerly depended on spreadsheets or manual ways to compute and distribute compensation. Today, automated payroll software makes it simple for companies to manage these difficulties.
A payroll cycle is the period between two salary payments. Businesses may pay salaries weekly, biweekly, or monthly. In general, it is processed once a month in India.
Stages of Processing Payroll
Payroll processing is a delicate task that necessitates the collaboration of several departments, including human resources, finance, and legal. This procedure performs the following functions:
- Structure of payroll policies
- Payroll inputs are being consolidated.
- Input validation
- Payroll calculation
- Deduct taxes and other legislative requirements.
- Payroll administration
- Making the payment in full
- Make required payments
- Tax computation sheets and pay stubs
Pre-Payroll Activities
The following steps are included in the pre-payroll activities:
- Onboarding Employees The first stage in payroll processing is to onboard employees and prepare a list of employees who will be paid salary.
- Companies should outline their payroll policy and acquire management approval before executing routine payroll. Every organisation has its ideology, work culture, and strategy for employee engagement. To standardise payroll processes, a corporation must define the following policies:
- Pay policies.
- Benefits policy for employees.
- Policy on leave and attendance.
- Components of a salary, including deductions.
- Policy on pay schedules.
- Employee inputs such as bank account information, PAN, residence, income tax declarations, proof of investment, and so on are required for payroll processing. Typically, firms collect these inputs from employees when they join/onboard with the relevant department/team. Each department/team will gather and retain employee inputs required for payroll processing, such as:
- The financial staff keeps track of each employee’s variable pay, bonus, commission, deductions, payments, income tax declarations, etc.
- The HR team keeps track of each employee’s leave, attendance, overtime work hours, loss of pay reports, employee exit date, salary revision, etc.
- The administrative team keeps track of employee-related invoices, transportation costs, expense reimbursement, etc.
- After the inputs are compiled from the information provided by the employees and other teams, the accuracy and completeness of their details must be validated before they are used in the payroll process.
- Former employees must not be included in salary and compliance payments, and all existing employees must be considered for validating data. The validation of employee inputs eliminates the danger of making mistakes in payroll processing and the penalties for correcting them.
Actual Payroll Activities
The actual payroll action consists of mainly one stage, which is as follows: Employees’ validated inputs should be submitted into the company’s payroll processing system to determine each employee’s paycheck. This yields each employee’s net salary payout after deducting the necessary deductions and taxes. Net compensation is often calculated by subtracting gross deductions from an employee’s salary. Payroll computations are performed using spreadsheets or payroll software.
The following are the essential salary structure factors for determining net salary:
- CTC stands for Cost to Company.
- Allowances.
- Prerequisites.
- Arrears.
- Deductions for professional taxes, PF, and insurance.
- Leave modification.
- Payslip.
- Form-16.
- Reimbursements.
- Bonuses, incentives, costs, and one-time payouts are all possible. (if any)
- Employee financial information.
- Employee declarations of investment.
- Repayment of a loan. (if any)
Post-Payroll Activities
The following steps are involved in post-payroll activities:
- Employee salaries must be recorded because they are a company’s most considerable expense. Payroll accounting entails keeping track of the company’s accounts concerning employee salaries.
- The corporation must first guarantee sufficient funds in its bank account to execute wage transfers to its personnel.
- The companies will send the salary bank advice statement to the relevant bank, instructing it to pay salaries from the salary bank account.
- On the other hand, the corporation can automate the employee wage payment process using software that includes a direct deposit capability. Payslips must also be distributed to each employee individually or by automated automation.
- All mandatory deductions of an employee, such as TDS, PF, Employees State Insurance (ESI), and professional tax, are deducted during payroll processing. These payments must be made to the proper government departments by the due dates.
- The deductions must be reported to the government departments by completing the appropriate paperwork.
Statutory Compliances for Payroll Management
Companies in India must follow regulatory standards in their payroll administration when disbursing salaries to their employees.
There are numerous regulatory standards that Indian enterprises must follow, and they must ensure that these legal restrictions are followed. Companies that fail to comply with these statutory requirements will risk severe fines.
A detailed understanding of legal expertise and compliance is essential to reduce the risk associated with non-compliance with statutory obligations.
The following are the general legislative compliances that any company in India must follow for payroll management:
- The ESI and PF funds
- TDS (Tax Deduction at Source) for professionals
- Gratuity
Payroll Processing Methods
Payroll processing is a critical aspect of managing an organization’s finances, ensuring employees are compensated accurately and on time. There are various methods for processing payroll, each with its own advantages and considerations.
Here are some common payroll processing methods:
Spreadsheets
Many organisations in their early stages of existence use spreadsheet-based payroll management. Spreadsheets are convenient because they will only have a few staff to manage initially. Spreadsheet-based payroll management entails performing calculations using standard templates, including pre-programmed mathematical salary formulas and compliance payment computations.
Although cost-effective, it is not appropriate for enterprises expanding and hiring additional personnel or for medium and large-sized businesses. Furthermore, the opportunity cost of using a traditional system over an automated one is relatively substantial. It is also challenging to reconcile and validate the values in this manner to avoid errors.
Outsourcing
Payroll outsourcing entails transferring the company’s payroll execution to a third party or outside agency. Many businesses that do not have dedicated payroll people opt for payroll outsourcing. Every month, they give the outsourced agency compensation information and other data, such as leaves, attendance, reimbursement details, and so on, based on the company’s payroll cycle. The outsourced agency calculates dues and is also in charge of ensuring legislative compliance.
Automation
Many payroll automation software and solutions are available that perform payroll computations and reduce manual efforts while enhancing efficiency. Automated payroll software eliminates the problems associated with spreadsheets and outsourcing. It removes the possibility of clerical or mathematical errors. However, the software must reflect the most recent compliance rules.
Advantages of Payroll
While manual payroll has advantages, computerised payroll is the way to go today. This is why:
- Improved accuracy: Automated payroll systems lower the possibility of payroll calculation errors, resulting in fewer disparities in employee payments.
- Cost savings: Because automated solutions lower the chance of payroll errors, penalties, and fines are reduced. They also save time and resources, which results in decreased labour expenses.
- Enhanced compliance: Automated systems can calculate and withhold taxes automatically and create information that can be utilised to check compliance.
- Increased employee satisfaction: Employees value getting paid correctly and on time. Automated payroll systems ensure that employees are paid appropriately and on time, which can contribute to higher employee satisfaction.
Challenges in Handling Payroll Process
- Keeping Up with Compliance: Businesses in India must adhere to a legal framework while paying their staff. This framework consists of four parts. Compliance is complex because each tax is calculated differently. Businesses must also regularly file returns on four separate portals or face costly penalties. Most firms work on compliance using spreadsheets and other manual methods, which is not the most effective approach to being compliant. The computations could be more efficient, efficient, and accurate. Employee rules in India change regularly, making it even more challenging to stay current.
- Spreadsheet Complications: According to a report, more than 57% of Indian businesses still use paper or spreadsheet-based payroll management and processing. Manual payroll is simple and inexpensive, but it is also time-consuming and prone to errors. Information can also be tampered with and mistreated. Spreadsheets are also incompatible with changing tax legislation.
- Data Security: Employees are required to present sensitive data in the form of official documents to the payroll team for payroll to be processed. These include employee bank account information, leasing agreements, PAN, and Aadhaar information. This data can be compromised; failing to protect it can harm the company’s brand and employees’ security. Paper documents are easily misplaced. Even if the documents are saved on spreadsheets, they are only passwords away from being accessed by unauthorised parties.
Conclusion
“The global business environment is buzzing with the most important issue of Building a competitive edge by creating and retaining a larger number of Employees than their goods and services. Every organisation is seized by sustaining its worth to the customer, who has been rendered unpredictable by competition.” As a result, every organisation is making a continual effort to achieve Employees endeavour to earn Employees loyalty. In short, overall organisational culture and brand equity are under threat.
As a result, there is a perpetual war amongst organisations to maintain their existence in the marketplace. Thus, to endure the fierce competition, the company must conduct market research regularly to learn about the changing wants and preferences of the employees. This enables the corporation to redefine its policies to provide cutting-edge technologies that will satisfy employees and keep them for life.
References
- What is Payroll? Definition of Payroll, Payroll Meaning
- What is Payroll? – Basics, Process, Compliances and Methods (cleartax.in)
- What is Payroll? Processes, Solutions & Taxes – RazorpayX
- A STUDY ON PAYROLL-MANAGEMENT (jetir.org)
- jespublication.com/upload/2020-110822.pdf
