What is Payroll process? What are the components and steps required to run the Payroll process online

components of payroll system

Payroll Process:

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. Startup companies often face problems while managing the components of the payroll system. 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, any company must understand the components of the payroll system and how to manage it. Any irregularities in payroll activities can reduce your employees’ confidence and efficiency. If employees are not happy, it also affects your business’s productivity.

Both startups, small, medium, and large businesses must have proper knowledge of payroll processing to manage it effectively. The company pays its staff and other workers, such as contractors and freelancers, total salaries. During processing, we consider many factors and require data from different departments like HR and accounts.

The process of payroll consists of employee payment calculations, that are based on productivity, employee benefits, and 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 System:

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 company calculates the net pay by adjusting the deductions and taxes; employees must receive this amount. When calculating the net income, the company considers factors such as attendance and leave policy, pay policy, benefits, etc. The company defines all these policies in the first stage of payroll processing to obtain 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, wage 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. Verifying whether the data adheres to the correct formats, company policies, authorization, approval, etc. During the verification process, it’s also necessary to ensure that we include the details of every active employee in the salary payment and exclude non-working employee records.

In the next stage of payroll processing, the actual payroll calculations are done.

Payroll calculation:

We send the collected and validated employee data for actual payroll processing by entering it into the payroll system. Specific local laws, such as the Payment of Salary and Wages Act, labor law, and Minimum Wages Act, etc., affect the payroll calculations. 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 payroll processing, we perform all the statutory deductions, record payroll details into the accounting system, release payouts, and complete payroll reporting.

Statutory compliance:

While processing the payroll you need to consider statutory deductions. In this process, we make EPF, ESI, and TDS deductions. After making these deductions, the company remits the deducted amount to the relevant government agencies. The payment frequency depends on the due. We make these payments through challans. After making the payments, it’s essential 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 company delivers employees’ salaries through various methods such as cheques, cash, or electronic bank transfers. To remove the payments, we submit the employee details 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 payroll TAX allowances and deductions. To meet 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, income tax saving investments, etc. Employees get tax benefits, if they declare their investments in fixed deposit schemes, company provident funds, Public Provident Funds, Equity oriented MF and insurance, etc. Have a look at the basic components of the payroll system below.

ESI – The company deducts Employees’ State Insurance from the employee’s gross pay. The gross salary represents the total income earned by the employees while performing their jobs without any deductions.

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.


The company applies Tax Deducted At Source (TDS) as a method of direct taxation applicable to various income groups. When an employee’s salary exceeds the tax-exempt limit, the company deducts TDS. Components affecting TDS include allowances like HRA, travel, and medical. Other deductions, such as supporting disabled family members and house loan interest, influence employees’ net pay.

HRA – House Rent Allowance is applicable for tax exemption depending on the location of the employee. If an employee receives HRA from the employer and pays rent for a rented house, they can claim a tax exemption.

Travel – Payment for travel up to INR 800 per month is eligible for tax exemption.

Leave Travel- Two journeys conducted within a block of four calendar years are eligible for tax exemption.

Education- The company provides an exemption of up to INR 100 per month per child for a maximum of 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:

  1. Contribution by an employee: The company deducts an employee’s contribution towards EPF from their salary, which amounts to 12% of the basic salary and applicable allowances.
  1. 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.

The 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) up to ₹21,000. If Gross is above ₹21,000 ESI will be constant.

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