What is Payroll & Best Way to Manage Payroll?
Payroll is defined as the process of paying salary to a company’s employees. It starts with preparing a list of employees to be paid and ends with recording those expenses.
It’s a tangled process that needs different teams such as payroll, HR and finance to work together. But, businesses can manage all the complexities effortlessly by choosing modern technology.
Simply put, the process involves arriving at what is due to the employees for a particular payroll cycle after adjusting the necessary deductions like TDS, Employees’ PF contribution, meal coupons, etc.
A payroll cycle is the time gap between two salary disbursements. Businesses can opt to pay salaries on a weekly, bi-weekly, or monthly basis. Generally, it is processed every month in India.
- Payroll is the compensation a business must pay to its employees for a set period and on a given date.
- The payroll process can include tracking hours worked for employees, calculating pay, and distributing payments via direct deposit or check.
- However, companies must also perform accounting and record-keeping, and set aside funds for Medicare, Social Security, and unemployment taxes.
- Companies can use professional services and outsource their payroll or use cloud-based software if they do not want to do it themselves.
- Calculating payroll involves many components and can be complex.
Steps involved in executing payroll:
As a business owner, you should understand the complexities involved in payroll because it is one of your highest expenses every month and quite a time-consuming task. The teams need to monitor the entire process carefully.
Here are the series of steps involved in executing payroll successfully from ground zero.
1. Onboard employees
As the first step of payroll processing, businesses should onboard employees and prepare a list of employees to be paid.
2. Define your payroll policy
In this step, businesses should define their policies and get them approved by the management to ensure standard payroll execution. These policies include pay policy, leave and attendance policy, employee benefits policy, etc.
3. Gather employee inputs
Employee inputs like PAN, address, bank account details, etc. are important for payroll processing. Usually, these inputs are collected from employees at the time of joining by the concerned teams.
4. Validate employee inputs
Once the inputs are received, check for validity of the details with respect to company policy, approval model, etc. Also, ensure that all active employees are taken into consideration, and no former employees are included for salary and compliance payments.
5. Calculate payroll
In this stage, the validated inputs are fed into the system for processing payroll. This results in net payment calculations after adjusting necessary deductions and taxes due. These calculations are done using spreadsheets. So, it becomes difficult to reconcile and verify the values to avoid any errors. However, automated payroll software could have eliminated the risk of clerical or mathematical errors.
6. Disburse employee salaries
Then, businesses need to ensure that their bank account has sufficient funds to make salary transfers. Then, a salary bank advice statement is sent to the concerned bank directing the bank to disburse salaries. All these time-consuming tasks can be avoided with one-click salary disbursement feature of automated payroll software.
7. Pay statutory dues
At the time of payroll processing, all statutory deductions such as PF, TDS, ESI and PT are deducted. Then, these payments are made to the appropriate government departments with the due dates.
8. Distribute payslips and tax computation sheets
This step involves payslip distribution employees, along with their tax computation sheets. With an automated payroll system, businesses don’t have to distribute payslips individually. Employees can log-in to their account and access their payslips easily.
Challenges in handling payroll management process
Keeping up with compliance
Businesses in India have to follow a legal framework while disbursing salaries to their employees. This framework is made up of four components.
The process of being compliant is complex and expensive if not done the right way. Compliance is complicated because each of these is computed differently than the other. The calculations are derived from the payroll data of each employee. Furthermore, the businesses must periodically file returns on four different portals to submit such computations to the government.
Most businesses use spreadsheets and other manual methods to work on compliance, which is not the most efficient way to be compliant. The computations are lengthy, time-consuming and inaccurate.
And, laws change frequently!
Businesses had to struggle while incorporating these changes in spreadsheets and decoding the new law. Moreover, explaining the implications of such changes to their employees became a tough challenge.
The statutory compliance requires businesses to follow all regulations, and failure to do so results in unprecedented legal trouble and unavoidable penalties.
Spreadsheet complications
According to a survey, over 57% of businesses in India still rely on paper or spreadsheet-based payroll management and processing.
Data security
For processing payroll, employees are required to provide a substantial amount of sensitive data in the form of official documents to the concerned team. These include employee’s bank account details, rental agreements, PAN and Aadhaar details.
- Employee data can be compromised, and failure to protect it can seriously damage the reputation of the business
- Paper-based documents can be misplaced easily. Even if the documents are saved on spreadsheets, they are just a password away from being misused
Lack of flexibility
Employees regularly approach the payroll team to have their particulars updated. Rental agreements, bank account details and other relevant documentation are routinely brought up to date by the team to ensure that the process runs smoothly.
- Multiple updation requests demand a lot of time and efforts from the concerned teams. Failure to update these records might result in salaries being wrongly credited.
- Employees might fail to submit records on time. This halts the entire process substantially
If you, as a business owner, are managing your payroll manually, then Your Payroll Process Might be Flawed!
Various payroll processing methods
Spreadsheets
Many businesses at their initial stage of operations find spreadsheet-based payroll management convenient because they only have a handful of employees to manage.
This method involves calculations using standard templates, that have set mathematical formulas for the salary and compliance payment computations.
While this is a cost-effective method, it’s not suitable for businesses when their employee count increases. Also, the opportunity cost of using a traditional system over automated methods is very high.
Outsourcing
Payroll outsourcing means entrusting your payroll execution to a Financial Doctor. A lot of businesses that don’t have dedicated personnel opt for outsourcing.
Based on their payroll cycle, they provide the agency with salary information and other data such as attendance, leaves, reimbursement details, etc. every month. The agency then calculates dues and is also responsible for complying with statutory compliances.
Automation
Automated payroll software will do away with all the challenges of using spreadsheets or outsourcing it. There are many payroll automation tools and software available in the market which can reduce manual efforts and increase efficiency.
Apart from carrying out payroll computations, the software needs to be updated with the latest compliance laws.
Topic Participants
Team TaxaJ