Payroll is generally identified as the compensation a business pays to its employees for their effort within a given period. It is usually managed by the accounting or human resources department of a company but small-businesses owners may have to manage the payrolls directly or through an associate.
Payroll processing refers to managing all aspects of paying employees. The steps generally involve proper calculation of the employee’s compensation, tax and compliance deductions, EPF / ESI contributions, tracking and disbursement of payments.
The process of managing payrolls varies from organization to organization. Some companies may hire a specific person to manage and administer their payroll internally or delegate the task to human resources, while other companies may contract an external company or use a platform to automate their payment processing, requiring minimal internal investment, monitoring and effort.
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Significance of Efficient Payroll Processing
Payroll processing is a critical component for running an organisation successfully and maintaining employee morale, ensuring legal compliance, and promoting financial stability. Since employees are the most crucial part of the organisation that perform duties and generate revenue for earning compensation, any mismanagement or delay in payroll process calculation could result in lower employee morale and productivity.
Furthermore, any mismanagement of employee compensation can not only risk the company’s reputation but also may risk the company for legal and compliance investigation and penalties from the government.
Thus, it is imperative for the employer to manage payroll processing steps meticulously to avoid any risks of grievances from the employees and legal compliance authorities alike
Stages of Payroll Processing
Payroll processing involves several stages which are discussed in detail as follows
- Pre-Payroll
- Payroll
- Post-Payroll
Pre-Payroll
Employee Onboarding
The first step for initiating the employee onboarding process and gathering their relevant details which will be used for the compensation calculation. The onboarding process is generally a subset of multiple smaller steps which help the employer gather essential employee records as accurately as possible. Some of the steps involved in the onboarding process are as follows:
- Separating taxable, non-taxable, and partially taxable components of the salary.
- Define Payroll Policy
- Employee Data Collection – Personal Information, Tax Information, Compensation Details
- Employee Data Validation
Main payroll process calculation stage
This is the main stage of calculating the employee compensation using the data gathered during the employee onboarding process. Some examples of the data gathered from the employees:
- Bank Account Details
- PAN (Permanent Account Number) details
- Hometown and residence address details
- Income tax declarations
- Leave & Attendance data
- Shift wise calculations
- Tax and Deductions
- Expenses
- Incentives.
The main elements of salary structure for calculating the net salary include the following:
- Cost to Company (CTC).
- Allowances.
- Prerequisites.
- Arrears.
- Professional tax, PF, insurance deductions.
- Leave adjustment.
- Payslip.
- Form-16.
- Reimbursements.
- Bonus, incentives, expenses and one-time payments. (if any)
- Employee financial details.
- Employee investment declarations.
- Loan repayment. (if any)
Once the information from the employees is provided into the system, the payroll process involves calculating every employee’s net compensation accurately after adjusting the necessary tax, scheme contributions and employer compliance deductions. The payroll calculations are done using either spreadsheets or through payroll software.
The system will generate the net compensation of the employees based on the data input provided. It is also recommended to ensure that the outcome generated is valid and accurate before setting up the payment for distribution
One should always be wary and keep payroll records updated for each employee as well as be aware of potential miscalculations and mistakes that can occur during this stage.
Post-Payroll
Post-Payroll Activities in an organization consist of sending the paychecks to employees, reporting and submitting the legal compliance dues to the relevant corresponding government and compliance authorities. Some employers may have to create other reports internally for organisation and compliance regulation purposes. The activities involved in post-payroll stage are as follows:
Statutory Compliances
During the payroll processing, the payroll administrator needs to religiously adhere to the statutory compliances such as EPF, TDS, ESI as per the employer’s legal obligation. These contributions are made by the employer and the employee every month. TDS is deducted from the employee’s gross salary for calculating the employee’s net in-hand income. These deductions are then paid to the respective authorities/government bodies.
Payroll Accounting
Every organisation needs to maintain accurate records of employees and company, the employee compensation paid being one of the most important one of all. Therefore, all salary data must be carefully fed into the accounting books or ERP system for valid data.
Payroll accounting process usually involves a company’s recording of its employees ‘compensation including:
- Gross wages, salaries, bonuses, commissions, and so on that have been earned by its employees.
- Deduction of payroll taxes such as income taxes, ESI etc.
- Deduction for the employees’ expense of health insurance premiums, employees’ contributions to savings plans, garnishments of salaries and wages.
- Employer’s expense of fringe benefits such as health and dental insurance, paid holidays, vacations and sick days, pension and savings plan contributions, worker compensation insurance, etc.
This can also include keeping track of any life insurance policies with group coverage for all the employees. Doing so has two purposes – It helps the company understand how many employees are availing of group insurance coverage and it is possible for the company to keep track of the tax deductions the company can claim on the premiums paid.
Disbursement of salaries
After making the necessary employee compensation and tax deductions in the accounting books, the employer releases the net salary for the employees.
Before sending out pay checks of the employees, the company must first ensure that its bank account has sufficient funds to make the salary transfers to its employees. The companies will send the salary bank advice statement to the concerned bank instructing it to disburse salaries from the salary bank account. However, the company can automate this salary payment process to employees through software with an in-built direct deposit feature.
The companies must also distribute payslips and tax computation slips to each employee either individually or through automated software.
Compliance and Reporting
The final step in the Post Payroll process is preparing accurate reports which may include information such as department or location wise employee cost. These reports are finalized and sent to the finance department or management team for internal use of the organisation.
Steps of Payroll Processing
Payroll processing in India requires several steps. There are three main stages of payroll processing in India –
Pre-Payroll Activities
It establishes the foundation for core payroll operations. The many duties involved in payroll administration include verifying employee attendance and timesheet records, carefully checking employee data for accuracy, Including implementing necessary updates and amendments, and verifying tax deduction details and ensuring compliance with relevant local, state and federal payroll laws and regulations. Incorrect payroll calculations and ensuing compliance problems can result from any mistake or omission made in this critical step.
Payroll Processing Activities
During this phase, the payroll is actively calculated and processed. It involves determining gross pay based on work hours and salary, applying taxes and deductions, and issuing paychecks or facilitating direct deposit transfers for employees. Accuracy and attention to detail are crucial to ensure compliant payment to employees as per laws and regulations.
Post-Payroll Activities
After completing payroll processing, this stage encompasses all activities that must be undertaken. Tasks involve generating reports, reconciling payroll accounts, and ensuring compliance with tax and labor laws and regulations. Additionally, activities include filing tax returns, issuing tax forms to employees, and addressing any inquiries or issues related to payroll from employees.
It is crucial to ensure accurate and timely payroll processing, compliance with relevant laws and regulations, and the preservation of employee satisfaction and trust. Thorough planning, attention to detail, and effective communication among all stakeholders involved in the payroll process are essential for a smooth and successful payroll operation.
Conclusion
In conclusion, We’ve learnt about what is payroll, why is it important and how it is processed in an organisation. We looked at the various stages of payroll process in detail.
Effective payroll management ensures that employees are compensated accurately and on time while also guaranteeing compliance with tax and labor laws. It is the cornerstone of employee satisfaction and organizational transparency.
Ultimately, by understanding and optimizing the payroll process, organizations can foster a productive and satisfied workforce while maintaining a strong, compliant, and financially responsible business.
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