Whenever the term payroll is mentioned, the thing that comes to mind is delivering payments to employees. But the payroll is something more than just adding new hires to the payroll system or releasing salaries to them on the payday. The startup companies often face problems while managing the payroll process. Most of the people cringe at the thought of paying taxes. This happens due to a lack of knowledge and the complexity involved in understanding different taxes. So, it’s crucial for any company to understand the payroll system and the way it is managed. Any irregularities in the payroll activities can reduce the confidence and efficiency of your employees. The productivity of your business is also affected if the employees are not happy.
Both the startups, small, medium and large businesses must have proper knowledge of the payroll processing for managing it effectively. The payroll is the total amount of salaries paid by the company to its staff and other workers such as contractors and freelancers. While processing many things are considered and the data from other departments like HR and accounts are also needed. The process of payroll consists of employee payment calculations, that is based on productivity, employee benefits, regular and statutory deductions. It is done periodically by every company. Payroll is mostly done monthly, semi-monthly, weekly or bi-weekly. Calculation of payroll varies from one company to another depending on the payroll structure that contains many components.
Stages & Components of Payroll Process:
In the first stage of the online payroll processing, you need to define the payroll policy, collect inputs from other departments, and verify the inputs.
Define the payroll policy: The net pay is the amount that is calculated by adjusting the deductions and taxes. It’s the amount that employees must receive. While calculating the net pay, the company policies are considered such as attendance and leave policy, pay policy and benefits, etc. All the company policies are defined in the first stage of payroll processing to get approval from the management.
Collect inputs: To collect data for payroll processing, interacting with multiple departments is needed. The information can be related to attendance, wages revision data, leave data and others. The task is simple in the case of small organizations. But in large organizations where data is more the task can become difficult. Using good payroll software is helpful, as it comes with various features such as leave management, time and attendance, employee self-service and more.
Verify the inputs: After receiving the inputs, the next step is to verify them. It’s important to check whether the data is adhered to the right formats, company policies, authorization, and approval, etc. In the verification process, it’s also necessary to ensure that every active employee details are included in salary payment and non-working employee records are not included.
In the next stage of payroll processing, the actual payroll calculations are done.
Payroll calculation: The collected and validated employee data is sent for actual payroll processing by entering it into the payroll system. The payroll calculations are affected by certain local laws such as payment of salary and wages act, labor law and minimum wages act, etc. Mandatory components related to salaries like Basic, HRA, and DA are provided under the minimum wages act. After adjusting all the taxes and deductions the final result is the net pay. It’s necessary to verify all the values for accuracy to avoid payroll mistakes. All these calculations cannot be done in a rush when you don’t want payroll errors. Payroll software can make the payroll calculation process easy.
In the third stage of the payroll processing, all the statutory deductions are done, payroll details are recorded into the accounting system, payouts are released and payroll reporting is done.
Statutory compliance: While processing the payroll you need to consider statutory deductions. EPF, ESI, and TDS are some deductions done in this process. After deductions are done, the company remits the deducted amount to the relevant government agencies. The payment frequency depends on the due type. Dues are paid through challans. Once they are paid, it’s important to file a return.
Recording into the accounting system: It’s necessary for every organization to keep records of financial transactions. Employee salary paid by the company is recorded in the accounting system.
Payouts are released: The salary of employees is delivered through various methods like cheque, cash or electronic bank transfer. For releasing the payments, the employee details are submitted in the salary bank advice statement to the concerned bank branch.
Payroll reporting: When you run the payroll for a specific month, the finance and other management departments may want payroll reports. The payroll reports can be generated by extracting data from the payroll system. They can be then submitted to the respective departments.
Key Payroll Terms Used In Payroll Processing:
While doing payroll calculations you need to understand certain payroll terms and where to use them. For computing the payroll you need to consider all the TAX allowances and deductions. To meet the statutory compliance, the employer must make some payroll deductions from the salary of employees as TDS. The employees are asked to make an income tax declaration at the beginning of the year. In the declaration, they give details about income earned from a previous employer, additional income and commissions, and income tax saving investments, etc. Employees get tax benefits, if they declare their investments in fixed deposit schemes, company provident fund, Public Provident Funds, Equity oriented MF and insurance, etc.
ESI – Employees` state insurance deduction is done on the gross pay of the employees. The gross salary is the total income without deductions, that is earned by the employees while doing the job.
EPF – Employee Provident Fund is a retirement benefit and is available for all employees. The EPF deduction is done from a monthly salary and is saved in the EPF account.
With these inputs, the employee’s tax liability is computed and TDS is calculated.
TDS – Tax Deducted At Source is a method of direct taxation and is applicable for various income groups. It’s deducted from the employee salary when the salary exceeds the maximum limit exempt from taxes. Some components that also affect the TDS deduction include allowances such as HRA, travel, leave travel, children education, and medical, etc. The net pay of employees is affected due to other deductions like taking care of handicapped children and parents, and interest on house loans.
HRA – House Rent Allowance is applicable for tax exemption depending on the location of the employee. They can claim tax exemption if the HRA is received from the employer and pay rent for a rented house.
Travel – Travel payment up to INR 800 per month is tax-free.
Leave Travel- Tax exemption up to is available for two journeys done in a block of four calendar years.
Education- Exemption is given up to INR 100 per month per child and for up to two children of the employee.
Most of these payroll benefits impact the payroll calculations and you need to consider them for TDS deductions. Below are the current rates of each allowance and deductions in percentage:
PF (Provident Fund) Contributions from both employer & employee:
- Contribution by an employee: Contribution towards EPF is deducted from employee’s salary i.e., 12% of basic salary and PF applicable allowances of the employee
- Contribution by an employer: The contribution made by an employer is 13% of the basic salary and PF applicable allowances of the employee. However this 13% is further subdivided into:
- 3.67% of contribution towards Employees’ Provident Fund.
- 0.5% of contribution towards EPF Administration Charges.
- 0.5% of contribution towards EDLI Administration Charges.
- 8.33% of contribution towards Employees’ Pension Scheme.
Provident Fund scheme will be calculated up to ₹15,000 of the basic salary and PF applicable allowance. If the Basic is above ₹15,000 PF will be constant. The employee with a monthly salary less than or equal to ₹15,000 will have to contribute mandatory towards EPF.
ESI Employees’ State Insurance Contributions from both employer & employee:
- Employee Contribution: 0.75 %
- Employer Contribution: 3.25 %
Employees’ State Insurance Scheme will be calculated on the gross salary (Basic and LOP dependent allowances) upto ₹21,000. If Gross is above ₹21,000 ESI will be constant.