What is payroll?
An organisation or company’s process of paying its periodic dues to their workers is called payroll. It is a gigantic task that involves a lot of collection, analysis, validation and processing of data for a particular pay period before paying the amount. Any employee’s salary isn’t just decided on a whim and given to him in a jiffy. Extensive calculations and compliances are a part of every organisation that pays its employees. In India, the payroll cycle is usually monthly.
What is the history and meaning of the word payroll?
The word payroll can be traced back to the 1750’s where it simply meant a paymaster’s list with names of workers and their respective salaries. A paymaster was a person in the army or other important organisations in the 16th century Europe who was responsible for the distribution of wages to employees.
Originally payroll was the total amount of money a company should pay its employees over a period of time (weekly, monthly etc.) Now the meaning of payroll has evolved to contain the complex procedures involving data collections, intensive calculations, various deduction and compliances. Of course the original meaning too still remains as payroll is the process of calculating and distribution of salary to employees.
What is payroll policy of a company?
Every firm needs to establish a payroll policy to execute payroll successfully every month. These set policies should be approved by the management. Payroll policy generally means the policies followed by the organisation in matters of leaves, attendance, incentives, allowances etc.
How is payroll processed?
In order to ensure efficiency in the salary disbursement a clear cut Payroll system needs to be in place in every organisation. Payroll process involves combining a lot of data and crunching numbers step by step.
- All the information necessary to calculate salary of every individual employee needs to be compiled and validated. For example: attendance records, time sheets and components of salary.
- The collected information is processed with the help of an excel sheet or a Payroll software to calculate the net salary an employee should receive along with all the other costs the company will incur in the respective pay period.
- All the statutory compliances have to be completed to ensure no legal problems arise for the organisation with the government.
- Generate payslips and pay the employees, usually via bank accounts.
Data collection before Payroll
What are the essential employee details for payroll?
Name is a very important data as there can be multiple employees with the same name. Last/Sur name of the employees are absolutely necessary. Apart from that, many details of the employee are necessary for Payroll such as PAN number, PF & ESI numbers, Bank account information etc.
What are the components of a salary structure?
A salary structure contains many components such as
- CTC: Cost to company or gross salary is the total expense incurred on the company towards an employee. This is also called the gross salary.
- Basic salary: The amount to be paid to an employee before any additions or deductions.
- Dearness Allowance/DA: An allowance to an employee calculated on the basis of cost of living and inflation in the country.
- House Rent Allowance/HRA: The HRA is paid by an employer to an employee for his accommodation.
- Medical Allowances: If any provided by the organisation according to its policy.
- Provident Fund: Deductions made on government rules that is like a pension fund for retirement.
- ESI: Health insurance deductions for employees made toward government organisation called the Employee State Insurance Corporation.
- Gratuity: A deduction toward a tax-free lump sum amount for when you retire.
- TDS: Tax deducted from source.
- Net Salary: Net salary is what a person would receive after all these additions and deductions to his Cost to Company.
What is attendance and leave policy?
Different organisations follow different policies for leaves and attendance. In an organisation where employees work in rotational shifts there is no single in and out time for employees. But this data is crucial in payroll as it can affect their Overtime pays or Loss of pays. So the calculation of late comings and permissions become very difficult unless managed by an electronic mechanism.
Leaves on the other hand can be authorised and unauthorised by management. Usually many companies contain the following leaves: Casual leave, sick leave, maternity leave, paternity leave, government holidays, bereavement leave and earned leave. If any employee extinguishes his available leaves of the above category and continues to take unauthorised leaves that would result in loss of pay. So an integrated attendance and leave policy is very important for Payroll.
Running Payroll
How to validate information before processing payroll?
After collecting all the data for payroll it is validated by checking a number of things like
- If any new employees have joined or if anyone has exited the firm.
- If any bonus or incentive has been distributed or if any employee has taken a loan.
- If any loss of pay has occurred for employees. This is calculated from attendance as well as if any damage has occurred on employee’s part.
- If Salary or wages have been revised for any employees.
After validating all the data a payroll is run as per the company’s policy. Payroll should be without any errors as there should be no mistakes in the payslips of the employees.
Which tool is the best to process payroll?
Many organisations use spread sheets or excel to process payroll and it does prove to be effective to an extent. But what every HR or Payroll officer needs to remember is that enormous amount of data is being updated and there is a lot of chance for human error. Especially when calculating tax deductions or other statutory compliances any mistake could cause embarrassment or even legal issues to the company. So it is better and efficient to opt for smart payroll software.
What are the challenges faced in payroll management?
- Ever changing laws and taxes create a huge hassle for the Payroll officers or HR’s as they have to update procedures and methods every time.
- Compliance errors and non-compliances create a lot of risk for the management as tax departments and other government organisations can levy huge fines.
- Processing with the help of spread sheets or paper based methods may work for small organisations but it starts to become tedious and risky as the man power of an organisation increases.
- Human errors cannot be ruled out all in payroll as it involves enormous amount of data.
- A lot of confidential information of employees is being recorded such as bank details and address. Any leak or misuse of information could land an organisation in serious trouble.
- Any wrong calculation of costs could result in paying either too much or lesser than the employees monthly net salary.
After Payroll
What is statutory compliance in payroll?
Government norms and rules with respect to salary, wages, gratuity and pension, manpower, work hours of labour and taxes are some of the various statutory compliances an organisation has to follow in order to run a perfect payroll. These are mandatory and any non-compliance is could land the organisation in legal trouble. For example, tax deducted at source and contributions towards ESI and PF. Here at Aanoor we make sure your monthly ESI and PF filings are done effectively at an affordable rate.
What is a Payslip?
After salary is disbursed every employee will get a note called the payslip from the employer. The payslip contains the details about his salary and its components with respect to the period he receives it. Every allowance and deductions for the month along with all the contributions made toward ESI, Provident fund, Pension and Gratuity is clearly specified in the payslip. It also contains other important information such as his UAN number and PF number for the employee’s reference.
What is Payroll Outsourcing?
When payroll is managed and computed by a source outside of the company it is called Payroll outsourcing. Usually when a company does all of its payroll work it takes an extensive amount of time and skilled staff. Also the need may arise to buy competent payroll software and train their payroll employees in it. All this cost, time and manpower can be saved easily by outsourcing the Payroll process. It would cost comparatively less than what a management usually spends on payroll.
