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Payroll defines 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 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 organization’s size. Payroll plays a crucial role in a company’s Human Resource Management (HRM)
Pre-Payroll Activities
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.
1. Employee benefits policy.
2. Leave and attendance policy.
3. Salary components, including deductions.
4. 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 by the concerned department/team.
Actual Payroll Activities
Calculation of payroll
The validated inputs of employees should be fed into the system maintained by the company for processing payroll to calculate every employee ‘s pay check. This results in the net salary payment of each employee after adjusting the necessary deductions and taxes due. Net salary is usually arrived at by deducting the gross deductions from an employee’s gross salary. The payroll calculations are done using spreadsheets or through payroll software.
The essential 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)
Post-Payroll Activities
The post-payroll activities involve the following steps:
Step 6: Accounting
The salaries paid to employees must be recorded as they are the biggest expenses for a company. Payroll accounting involves maintaining the company accounts with regard to employees’ salaries.
Step 7: Pay employee salaries
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 directing 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 to each employee either individually or through automated software.
Step 8: Compliance and reporting
During payroll processing, all statutory deductions of an employee such as TDS, PF, Employees State Insurance (ESI) and professional tax are deducted. These payments should be made to the appropriate government departments within the respective due dates. The deductions must be reported to the government departments by filing the respective forms prescribed by each department.
Statutory Compliances for Payroll Management
In India, companies have to follow the legal regulations in their payroll management while disbursing salaries to their employees. There are many statutory requirements that Indian companies must adhere to, and they must ensure compliance with these legal regulations. If companies fail to adhere to these statutory compliances, they will have to face heavy penalties.
Thus, detailed knowledge of legal expertise and compliance is required to minimise the risk associated with the non-compliance of statutory requirements. The general statutory compliances that every company has to follow for their payroll management in India are:
ESI fund and PF funds
Professional tax
TDS (Tax Deduction at Source)
Gratuity
