Everything You Need to Know About Payroll Processing
In 2021 and beyond, irrespective of the industry your business caters to, one of the primary requirements to ensure that your business runs smoothly and efficiently is to have a payroll system in place. However, as a new entrepreneur or a small business owner, oftentimes, it can be quite taxing to navigate the complexities of payroll and understanding what each of the terminologies actually means.
Thus, in today’s article, we will share with you a rundown of the term payroll processing and help you understand the importance of it, both at your organization as well as on a general scale.
Without further ado, let’s get started.
Payroll Processing – The Definition
One of the first and most important aspects we need to understand is the meaning of the terminology payroll processing. In simple terms, payroll processing can be defined as being the process of ensuring that your employees get paid on time, with accuracy, after taking into account their tax withholdings and other deductions.
Payroll processing as a function ensures that your employees are paid consistently in a timely manner, thereby enabling them to manage their personal finances properly and allowing you to uplift their morale and motivation. Irrespective of the industry you serve, if you have employees who work with you, having a payroll processing system is crucial as any manual or legacy system arrives with shortcomings which hurt employee sentiments and company reputation in the long run.
It is an essential part of your business operations as it assists you in accurately calculating the net pay of your employees, which is their earned income, after deducting taxes and other withholdings. To simplify it further, payroll processing as a whole encompasses the following calculation and the various other stages you need to execute in order to reach this calculation.
Net Pay = Gross Income – Gross Deduction
- Gross Income/Salary = Regular Income + Allowances + One-Time Payment / Benefit
- Gross Deduction = Regular Deductions + Statutory Deductions + One-Time Deductions
The Stages of Payroll Processing
Now that you understand the essential meaning of the term payroll processing let us better understand the various other components it encompasses.
- Crafting an organizational policy which will further dictate your leave encashment policy, tax deductions, earned wages, flexible benefits and any other financial components you pass on to your employees.
- Crafting a payslip and salary slip for your employees, which contains the breakdown of their salaries, such as basic pay, variable pay, LTA (Leave Travel Allowance) and HRA (Home Rent Allowance)
- Collect information regarding all the expenses you incur for the benefit of your employees, such as transportation, food, insurance etc.
- Arriving at the net pay of your employees by first calculating the gross income and then deducting the statutory and non-statutory components.
- Releasing the employee salaries on time.
- File reports and deposit collections with government agencies such as TDS, EPF, ESI etc.
All of these payroll tasks can be broadly classified under three main categories.
- Pre payroll process
- Payroll calculation
- Post payroll process
Pre Payroll Process
As a business owner, before you arrive at the net pay of your employees, there is a lot of additional information that needs to be collected from competent authorities, analyzed and processed, and the pre-payroll process encompasses these stages.
One of the first and most important stages of payroll processing is to first craft the payroll policy for your organization. You can understand the payroll policy as being a central document which will dictate all the payroll compliances at your organization, starting all the way from how much your employees are paid on an hourly basis and the amount of TDS to be deducted, all the way to determining the social saving schemes you will contribute to as an employer to the withholdings you need to collect from your employees.
Investing time to create a payroll policy for your business or organization is immensely helpful, mainly due to the fact that it is the first stage of streamlining your payroll process, thus making it more efficient and cost-effective.
Once your organization’s payroll policy is in place, the next stage of the process is to collect relevant information from all the concerned departments. The verticals of information include everything from the attendance of your employees to their salary slabs and leave information all the way to tax declarations. Gathering all this data early on in the payroll process will ensure that you accurately calculate your employee’s net pay.
Depending on the structure of your organization, the type and data source might vary; however, shared below is a sample snapshot of what the process might look like.
|List of facilities availed from the office, personal income tax declarations, reimbursements etc.
|Human Resources (HR)
|Salary structure of your employees as per their current designations at your organization, attendance of employees, leaves taken by employees, variable pay components etc.
|Details of reimbursements claimed by employees, deductions to be made, withholdings to be collected from employees.
|Leave and attendance systems.
|Current working shifts of your employees, attendance data of all employees.
|Vendors and external contractors
|Details of services availed by your organization and the expenses incurred for the same such as transportation, canteen etc.
Although collecting this vast amount of data might seem overwhelming at first, it is absolutely crucial that this gets collected at regular intervals to ensure that you accurately calculate your employee’s net pay and also deposit the correct amount of taxes to the government.
3.Validating Your Data
Once all the data is collected, the next step is to validate and cross verify all the data you have collected to ensure accuracy. At this stage, along with validating your collected data, you need to ensure that the following are maintained.
- Record of all active employees at your organization should be present
- Record of all inactive employees should be removed from the system
- Ensure that all the data adheres to the organizational policy you crafted earlier
- Ensure that all the data is present in the right format such that it is accurately analyzed.
Once the pre payroll process is completed, the next stage of payroll processing is the actual payroll calculation, and this stage includes the following processes.
Now that all the data has been collected, it is time for you to share all these data with your payroll system. Starting all the way from your employee information and salary structure to details about taxes to be charged and deductions to be made, everything needs to be entered into your payroll system such that it can execute accurate calculations and arrive at the net pay of your employees.
In order to ensure that miscalculation and errors at this stage are kept to a minimum, it is always advisable to use a payroll software, also known as a payroll system, instead of depending on manual or legacy calculation methods. If you want to learn more about payroll systems, make sure to check out our other blog detailing the same by clicking here.
Post Payroll Process
Once you have arrived at the net pay of your employees, it is time for you to execute the final stage of payroll processing, and it includes the following processes.
As a registered company in India, there are certain statutory compliances you need to adhere to as an organization. For instance, during the payroll calculation process, you would have made several deductions such as EPF, TDS, ESI etc., and thus at this stage, you need to ensure that these collected amounts are deposited with the appropriate government agencies within the proposed timeline.
As an organization, there would be several expenses that you incur on a monthly basis; however, your payroll will be the most significant of these expenses, thus making it important for you to record and maintain an accurate account of the same. At this stage, you either need to entrust the operations of a seasoned accountant to record all your payroll expenses or manually enter all the data into your accounting software such that an accurate record can be effectively maintained.
Once the payroll accounting is complete, the next stage of the process is to actually transfer the net pay of your employees to their individual accounts. At this stage, depending upon the transaction channel you use, you may choose to issue a bank mandate, pay them via internet banking, cheques and or cash. Irrespective of the method you choose, you need to transfer the net pay of your employees to their accounts within a certain period of time.
The last stage of payroll processing is to create a detailed payroll report. This report essentially accounts for the department-wise cost of your employees and is generally shared with key management for auditing purposes and strategizing key business decisions. Generating a report is important as it essentially acts as a checklist to ensure that all the processes were diligently completed and each of your employees were paid their net dues accurately and on time.
Irrespective of the size of your organization, one of the most important aspects you need to focus on regularly is your payroll processes, and it is our hope that through this article, we have made the process easier for you to understand and execute.
If you have any questions, feel free to reach out to us, and our team of experts will be there to help you. All the best.