A payroll mistake either costs the organization or the employee but it will definitely cost. The morale of the employee might also take a nosedive. This is neither good for the organization nor for the employee. Ultimately the business will suffer. There are more than one aspects coming together to make it one of the most complicated human resource department activity. There are labour laws and other laws in place and noncompliance is a clear invitation to legal and financial consequences. Then there are PF, ESI and several other statuary compliance making it more critical. Therefore, understand it. Do not proceed in case there are some doubts.

Payroll is the list of employees receiving compensation from an organization. Some companies also use the term payroll for money being paid to the employees. Pay policy of an organization includes:

  • Basic pay, variable pay, HRA, medical allowances, conveyance/transport allowance, DA, leave travel allowance, special allowances and other flexible benefits.
  • Leave encashment policy
  • Collecting various payroll inputs such as information from the food vendor
  • Calculation of gross salary, statutory deductions (legally compulsory deductions such as Employee’s Provident Fund, Professional Tax and TDS) and non-statutory (noncompulsory deductions such as health insurance), and net pay.
  • Paying salary
  • Depositing dues such as PF, TDS and more

Some Important definitions

Regular income

Income an employee is receiving at uniform intervals.

Gross income

It is total pay before any deduction. Gross income includes regular income, allowances, one-time payment and other benefits.

Gross deduction

it is statutory and non-statutory deductions made in the gross income. Gross deduction includes regular deductions, statutory deductions and one-time deductions.

Net Pay

It is the amount an employee receives after deductions.

Net Pay=Gross Income – Gross Deduction

So, it is OK to say that payroll processing is all about arriving at the net pay.

Payroll Activities

  • Pre-Payroll Activities:

    • Defining payroll policies

      The human resource department defines some policies and the management approves these policies which play a part in standard payroll processing. Some of these policies are:

      • Pay policy
      • Attendance policy
      • Leave and benefits policy and more
    • Gathering inputs

      The human resource department needs to interact with different departments to gather information such as attendance data, salary revision data etc. Input gathering can be overwhelming for a large organization if it is doing it manually. However, large organizations use payroll software. MS Excel is enough for small organizations as there are small and fewer teams. The human resource department needs to gather less data.

    • Input Validation

      The human resource department validates the format of gathered inputs, its adherence to policies, approval and authorization.

  • Actual payroll process:

    • Payroll calculation

      Once the payroll data is processed, the human resource department calculates payroll and arrives at net pay after making taxes and other necessary deductions. The department once again verifies and validates the net pay.

  • Post payroll process:

    • Statutory compliance

      The department deducts EPF, TDS, ESI and other statutory compliance while processing payroll and remits to government agencies respectively.

    • Payroll accounting

      Obviously, an organization records all of the financial transactions it makes. Salary, such a significant transaction also goes into the account books.

    • Payout

      Usually, an organization opens bank accounts for all of its employees and the salary is transferred to their bank accounts. Before that, the organization verifies that it has sufficient funds in its bank account to make all payments. The department then prepares salary slips which contain employee’s id, account number, salary paid and other details. After transferring salaries to bank accounts the department sends salary slips to employees.

    • Reporting

      The human resource department then sends payroll reports to the higher management. This report contains information including salary slip summary, payments and deductions summary, employer’s costs and more.

Statutory Compliance

Central and state legislation has set up norms such as minimum wage, overtime wages, TDS, PF, ESI and other deductions. All businesses have to comply with these rules and regulations. The human resource department must consider these deductions while calculating salary. Tax deduction is an important deduction.

Following table illustrates four tax slabs in India:

Annual Income Tax Rate Tax Amount
>=INR 2,50,000 Nil Nil
Between INR 2,50,000 and INR 5,00,000 5% 5% of taxable income
Between INR 5,00,000 and INR 10,00,000 20% INR 12,500 + 20% of taxable income
Above INR 10,00,000 30% INR 1,12,500 + 30% of taxable income

TDS is calculated and deducted based on these tax slabs. TDS is deposited every month. The next job is to file a quarterly report of all deductions. On the completion of TDS returns for the last quarter, employees receive form 16. This form shows that the tax deducted by the employer is deposited with the authorities. This form provides the employee with information he needs to file income tax return. An organization not complying with these statutory laws is subjected to penalties and fines.

It is extremely important for the human resource department of an organization to stay up-to-date with the latest changes in the tax structure and other statutory deductions.

Payroll management challenges

Staying statutory complaint and dependence on multiple sources of payroll input are the two things making payroll management a very challenging job.

The human resource department before processing payroll collects different types of data from different sources such as salary revision, attendance register etc. There are consequences of not complying with laws governing tax, PF, ESI and other deductions.

While large organizations have the option of using smart software solutions. Small organizations still use MS Excel to keep attendance, leaves, payroll and other records. There is always a possibility of human error while manually adding and extracting data from an excel sheet. There are very limited excel formulas available for calculating salaries, deducting TDS, PF, ESI and other statutory and non-statutory deductions. Complexity increases with data. And, the amount of data an organization maintains always increases. Still, if you look at the investment a small business have make to take advantage of these smart software solutions, MS Excel is best for Human Resource Department in Small and Mid-sized Business.

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