Payroll processing is a critical corporate operation that involves calculating an employee's "net pay" after deducting all applicable taxes. An HR manager plays an essential role in ensuring that everyone gets paid appropriately on time. Even a single blunder might jeopardise employee trust and the company's reputation.
Payroll processing is a critical but challenging business operation. As a result, it's essential to assure accurate and rapid calculations and adherence to policies. Businesses must better understand the complete payroll process to guarantee that their employees are satisfied with it. Let's begin with the fundamentals of payroll.
What is Payroll?
The process of paying a company's employees is known as pa yroll. Payroll is a crucial part of any business because every company has employees, and it is necessary to handle payroll based on their information. HR payroll also includes a list of employees who must be paid, the number of hours they worked, computing their compensation, disbursing the money on time, and tracking the payroll expense. There is a lot of underlying work involved in getting things done because payroll is much more than calculating pay-outs. It's a procedure that necessitates collaboration between the HR and finance departments.
Functions of Payroll
- Creating an organisational pay policy may include flexible benefits, leave encashment policies, etc.
- Determining the components of a payslip, such as basic, House Rent Allowance (HRA), Leave Travel Allowance (LTA) & variable pay.
- The process of calculating gross salary, statutory & non-statutory deductions, and determining net pay.
- Obtaining additional payroll inputs, e.g., meal amount due to the food vendor
- On-time payment of employee salaries
- Depositing TDS, PF, and other taxes with the right authorities & filing returns
What Is the Best Way of conducting Payroll process?
Payroll management is essential for ensuring workers are paid on time and that your legal requirements are satisfied. To correctly track and issue payroll, you'll need to take a few steps. Payroll software or services can assist you in processing your payroll accurately, compliantly, and on schedule. It's normally advisable to hire a payroll provider or deal with an accountant while processing payroll; you will prevent many inconsistencies if you do so.
Based on the size of your company, you must follow a few steps if you want to process payroll manually, as it can be complicated. You could also have concerns to share with the Income Tax Department if you aren't already a payroll and tax law expert.
Also Read: Meaning of Statutory Compliance in Payroll
Processing of payroll
The system for paying employees at the end of a payroll period is known as payroll processing. Payroll is a difficult process. Grasp each payroll component carefully as it may help you better understand your company's finances.
Points to remember about Payroll processing
- You must collect payroll information when you recruit a new employee. For payroll processing, employee information such as PAN, Aadhaar, ID proof, address, bank account details, and so on are important. Typically, the relevant teams collect these inputs from individuals when they first join. There could be data such as mid-year wage revisions, attendance data, and so on. These inputs come from a single source in smaller businesses. In a larger firm, however, the task of acquiring data may appear to be intimidating.
- To ensure regular payroll execution, firms should create their policies and get these approved by management at this stage. Pay, leave, attendance, employee benefits policies, and so on are examples of these policies. Ensure that only current employees, not former employees, are included.
- The net pay of an employee is the gross pay they take home. Tax, Social Security, Medicare, and any applicable local taxes are deducted before the net pay is given.
- You must pay the employee's net compensation either through direct deposit or a physical cheque.
- You must file a tax return with the I-T Department for both Central and State tax withholdings.
- Verify the information provided by employees. Once the data have been received, double-check the details for accuracy in terms of corporate policy, approval process, and so on.
- Businesses must ensure that they have sufficient funds in their bank account to perform wage transfers.
Stages to Processing Payroll
Step 1: Determine your employer's identification number: Establishing your Employer Identification Number using a Permanent Account Number (PAN), is the first step in processing payroll. The government uses these identifications to track your company's payroll taxes and make sure you comply.
You can get a PAN from the Income-tax Department’s website if you don't have one already.
Step 2: Obtain financial tax information from employees: Employees need to fill out several tax forms before the payroll processing begins so that the company can account for allowances and other tax data. The W-4 is a form that an employee needs to fill. W-4 form allows your employer to withhold the correct income tax from an employee’s pay and provides information on the employee's filing status, deduction amount or credit amount etc. You should also have the following paperwork on hand before issuing a worker's first pay.
- Job Application on file guarantees that all critical payroll information remains in one place, even if the employee did not complete a formal application.
- Employees can use workplace advantages like health insurance, a health savings account, & a retirement savings plan. The exact amounts for all these benefits are withheld every pay period, thanks to proper payroll processing.
- If your employees owe you money, you may be obligated by law to withhold their salaries.
- While you're doing this, make sure you have all the necessary documents on hand and in your files.
Step 3: Select payroll schedule:
- After you've set up the necessary tax and legal information for payroll, start by picking a payroll schedule. Salary payments are made monthly, semi-monthly, bi-monthly, and weekly basis.
- Before determining which plan is ideal for your company, it's essential to understand each one.
- Make a note of the payday after you've finalised your timetable to guarantee you don't forget to pay your employees on time.
- Include significant quarterly tax dates, holidays, & yearly tax filing deadlines in your calendar, and this must be completed at the beginning of each year.
Step 4: Calculate gross pay:
- You can begin processing your payroll now that you've established a payroll plan by determining each employee's gross compensation, which is calculated by multiplying the total number of hours worked by the hourly rate. For fixed compensation or the take-home salary, you can subtract the Income-tax, Provident Fund (PF- if provided) and Professional Tax from the gross salary.
- Please note overtime hours, as the additional time must be compensated at a higher rate.
Step 5: Calculate deductions:
- Calculate each employee's deductions using information from their W-4s; this can be complicated. You'll need to look into the policies in your state.
Step 6: Calculate pay:
- Subtract all deductions from each employee's gross salary such as tax, provident fund etc., and the remainder is the employee's net salary, often known as take-home pay. You can pay each employee on their scheduled payday once you've determined their net pay. Here are some ideas of how you might compensate your workers:
- Cheques can be mailed to the employees.
- Salary can be directly deposited into their bank accounts
- Salary can also be paid in the form of cash
Step 7: Track payroll records & modify if required:
You must keep payroll records in case an employee has a dispute about their pay or deductions. Working as a payroll accountant requires you to stay on top of your taxes. You'll also have to notify the Income Tax Department about any new hires.
What are the difficulties in handling and processing payroll?
Handling a payroll management process can be difficult. The following are some examples of challenges:
- It can be tough to coordinate with many teams because payroll employees spend numerous hours collecting data from other HR, Finance, and expense departments. It takes a lot of rushing around to get all of this information on time.
- When it comes to paying salaries to employees in India, businesses must adhere to a legal structure and comply with payroll regulations. Any problems with tax remittance could put your company at risk.
- Many payrolls are made complicated by spreadsheets, and many Indian firms still rely on spreadsheet-based payroll management. Spreadsheets can be helpful in some situations, but the computations they need are tedious & time-consuming. Multiple teams have access to the spreadsheet, and any mishandled data can negatively impact business cooperation.
- Employees are obliged to supply a significant amount of sensitive data such as PAN & Aadhaar card, rental agreements etc., to the payroll team to process payroll. There is always the possibility that employee data will be compromised, resulting in the company's reputation being harmed.
- Data that is printed on paper is easily misplaced. Spreadsheets can also be misplaced or misused as a password can be easily stolen from it.
Methods of payroll processing
There are several methods for handling payroll:
- Excel spreadsheet
- Outsourcing of payroll
- Payroll software.
The spreadsheet is the most traditional method of payroll processing. This process requires calculating salaries using standard templates and a few mathematical procedures. While excel based payroll management system is a cost-effective strategy, it is not appropriate for businesses that have a lot of employees.
- Maintaining a spreadsheet is difficult since data is entered manually, which increases the risk of mathematical errors.
- There's a potential you'll get duplicate data entries from time to time by using this method.
- You'll have to keep an eye on tax adjustments and other legislative changes like PF, PT, and so on.
Also Read: How to do Payroll Management in Tally ERP 9
Outsourcing of Payroll
Payroll outsourcing is delegating your payroll function to a third-party company. Outsourcing is used by many firms that do not have specialised departments.
Every month, these outsourcing departments report wage information, attendance, leave balances, reimbursement details, and so on to the agency. Outsourcing payroll can be difficult because the payroll department is both important and transparent. As a result, many companies are hesitant to outsource payroll.
To manage a successful payroll, you must ensure that payroll inputs are received on time from all sources. Payroll software can help you save time and money by reducing errors and human labour. You may choose the right payroll software for your company based on its size.
- Payroll software digitises payroll records & automates record-keeping, which is one of the benefits.
- It automates tax deductions and sends out filing deadline reminders.
- It also automates wage computations & reminders for payday.
The Finest Payroll Software for Your Business
There is a wide range of automatic payroll software to pick from, there are several payroll softwares on the market, but you must examine the following aspects while choosing one.
- Easy to use: You should choose to use payroll management software because managing payroll manually is difficult. The requirement for software guidance and training is reduced if the programme is simple.
- Automation: Your software should assist firms in automating their payroll operations and ensuring that their employees are paid on time. It should be able to track leave information as well as any compensation. The software should be designed in such a way that you can easily choose sophisticated features at a fair price.
- Employee self-serve: Employees should be able to view their payslips and tax records with just a few clicks if the software is user-friendly.
- Attendance, leave, and time management: The programme should track employees' time, productivity, leaves taken, and attendance.
Pagarkhata is one such app that helps in efficient staff management. You can get all these benefits by using the app. Therefore, quick and easy employee management is at your hands!
Having an adequate understanding of payroll is essential for the HR as well as employees of an organisation. By understanding the requirements of payroll, appropriate processing of payroll can be done, so that timely payment is provided to employees. Implementing a proper employee payroll management system can prove to be the most efficient option in this regard.
What is PAN?
PAN or Permanent Account Number which is a ten-digit unique numeric number provided by the Income Tax Department. It aids in linking all financial transactions made by a particular entity or an individual.
Is it legal for employers to pay employees in cash?
Yes, paying employees with cash is allowed. However, before giving employees their final take-home pay, the company must deduct the taxes.
How long should the employer keep payroll records?
All payroll records must be kept for a minimum of three years, and employment taxes must be maintained for 4yrs
What are the Best Payroll Practices?
Classifying the employees correctly, maintain a record of all relevant details such as pay, time, attendance, taxes etc