Payroll is the total of all compensation a business must pay to its employees for a set period of time or on a given date. It is usually managed by the accounting or human resources department of a business; small-business payrolls may be handled directly by the owner or an associate. Increasingly, payroll is outsourced to specialized firms that handle paycheck processing, employee benefits and insurance, and accounting tasks such as tax withholding.
Payroll can also refer to the list of employees of a business and the amount of compensation due to each of them. It is a major expense for most businesses and is almost always deductible, meaning the expense can be deducted from gross income lowering the taxable income of the company. Payroll can differ from one pay period to another because of overtime, sick pay, and other variables.
While different people may have different opinions on this, the top two important aspects of payroll would be accuracy and compliance. One mistake and the range of repercussions could vary from an unhappy employee to heavy losses to the company, often to the tune of crores of rupees. So accuracy in payroll calculations and processing is paramount. Secondly, any payroll system should be compliant with the local laws and regulations like Income Tax, EPF etc. Non-compliance can also cause fines to the organisation and a load of other troubles.
Payroll is a complex process that involves tight collaboration between multiple departments like HR, finance, team incharge of leaves and attendance etc. Inputs from these departments are gathered for every employee then the net amount to be paid is calculated based on employees’ CTCs and other deductions like taxes, LoPs etc. The calculations can be done either manually using Excel sheets or with the help of software that do it automatically and error free.
Once all the input has been gathered from various departments, and if a payroll software is being used, then it can take anywhere between a few hours to a couple of days to process payroll.
The Net Pay is calculated using the formula:
Gross Pay – (Deductions + Total TDS). Total TDS is the sum of TDS, Surcharge, Health & Education Cess.
Moreover, there are certain rules to calculate the payroll taxes:
(Basic + Allowances – Deductions (ESI)) * 12 – (IT Declarations)
Only ESI is considered as a deduction. ESI or Employee State Insurance is calculated on 0.75% of – Gross Pay (Basic and LOP dependent allowances) or 21,000, whichever is lower.
It is an HR function because it pertains to processing salaries of the workforce. However, it needs input from other departments like finance, admin, canteen/mess vendor, transport etc.
Whether it is a large enterprise, a small business, or a conglomerate, salaries have to be processed and paid to the employees. That is the one function that is crucial irrespective of the industry, size, geography or the number of employees. One mistake and the range of repercussions could vary from an unhappy employee to heavy losses, often to the tune of crores of rupees. Thus, the purpose of payroll is to accurately process and pay salaries, keep their morale and trust high and help reduce costs to the company.
As a business function, payroll involves:
There are 3 stages of payroll processing - Pre Payroll, Actual Payroll and Post Payroll.
The sub-stages here include defining the payroll policies, gathering all the payroll inputs from the different departments and validating those inputs. Let’s take a closer look:
Defining payroll policies essentially means standardising the policies around leave encashment, overtime payments, attendance policies, benefits and other perquisites.
Then the next task is to gather all the inputs for payroll processing for each employee like number of days present and absent, total hours of overtime done, IT declarations, data from canteen vendors, transport providers and other such relevant departments.
The gathered data is then validated against company policy, checked if it is arranged in the right format and then sent for actual processing.
Which brings us to the next stage of the process. In this step, all the data is calculated, usually through a software, that gives you the net amount to be paid to each employee after all the necessary deductions.
This last stage includes adhering to the statutory compliances by paying the concerned authorities like EPFO, IT Department and ESI; payroll accounting; payout via cash, cheque or bank transfers; and reporting that involves creating accurate reports for analysis and further action.
When the organisation completes all the stages of a payroll cycle vis-a-vis pre payroll, actual payroll and post payroll, it is considered a full cycle payroll.
The 5 most common challenges of payroll are: