Payroll Management Guide
HROne’s payroll management guide can turn the roller coaster payroll management ride into a smooth sail. It emphasizes all the basic to complex corners of payroll including the payroll process, its components, set-up, and importance along with several fun facts regarding the same.
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Payroll Management Guide
45 Min Read
What is Payroll ?
The term ‘Payroll’ is associated with several meanings and is interchangeably used as an umbrella term for:
- A group of people employed by an organization depicting their earnings
- The total number of employees working with a company or an economy
- The amount of money paid to the people employed by a particular company
- The complete chain of tasks for managing the money paid to the employees
With that being said about the subject, the most widely accepted payroll meaning is the 4th one, i.e., Payroll is an operation that includes a gamut of tasks starting from onboarding a new join on payroll, establishing payroll policies, defining pay components, gathering inputs, calculating and verifying payout, processing salary, distributing payslips, tax-filing, accounting, and reporting.
What is the Payroll Management Process?
Pre-Payroll
Process
- Delineating Payroll
Policies - Collecting Inputs
- Validating Inputs
Actual
Payroll Process
- Payroll Calculations
Post-Payroll
Process
- Payroll Reconciliation
- Payout
- Statutory Compliance
- Payroll Accounting
- Reporting
3 Stages Of Payroll
The payroll management process is nothing but a set of regulated steps that are performed in the same order every month to form a payroll cycle. In other words, the payroll process is all about arriving at what is due to the employees, i.e., the Net Pay after making the necessary tax adjustments and other deductions.
The stages of payroll process include:
Pre-Payroll Process
- Delineating Payroll Policies: The final amount paid to every employee depends upon various factors. The company’s different policies come into play at the time of payout. To begin with, these policies need to be properly defined and approved by the management to ensure standard payroll processing and administration. The primary company policies that are considered while processing payroll include:
- Time & Attendance Policy
- Employee Pay Policy
- Leave and Benefits Policy
- Reimbursement Policy
- Collecting Inputs: The payroll process includes interacting with multiple departments and professionals to gather relevant information. In MNCs and large organizations, the task of gathering data can be a little overwhelming. However, in SMEs, inputs are received from a consolidated source or fewer teams. A little tip is to use a smart payroll software having integrated attendance management software and employee self-service portal so that the input collection process does not remain a problem. Information that needs prior attention if payroll is to be processed includes:
- New Joiner Salary Structure
- Mid-year Salary Revisions
- Variable Payouts
- Attendance Inputs like paid days for the month, overtime, shift allowances, and leave encashments
- Ad hoc Deductions like EMIs or Recoveries like replacement of ID card, or clearance recoveries
- Employee Joining Date
- Month on Month Pre-processing
- Investment Declarations – collected from employees
- Bills for Reimbursements
- Old & New Tax Regimes
- Previous Employer Income/ Tax Declaration
- Previous Company Relieving Details
- Validating Inputs: Once the information is gathered, it’s time to ensure adherence of the inputs to company policies, verifying investment declaration bills and reimbursement proofs, variable payout inputs. The most imperative thing is to ensure that all the new joins have been included in the payroll cycle, previous employment salary declaration has been considered, and CTC break-up has been done as per the company policies. Before processing the payroll, it should also be ensured that any employees expected to be relieved in the payroll cycle are also updated.
Fact:
“Walmart Is The Largest Employer In The Word With 2.3 Million Employees All Across The Globe. The U.S. Army Is A Distant Second With An Employee Base Of 763,522.”
Actual Payroll Process
- Payroll Calculations This is the real game! When someone says payroll, the first thing to strike most minds is money math. So, at this stage, the gathered and validated input data is fed into the payroll system for actual payroll processing. After evaluating all the components including EPF, ESI, LWF, PT, Statutory Bonuses, Statutory Bindings and applicable taxes, the salary is computed. The final result is the Net Pay or Net Take Home Salary with adjusted taxes and other deductions. Once the payroll process is over, it is always advised to reconcile the values and verify data for accuracy to prevent errors.
Post-Payroll Process
- Payroll Reconciliation This is the key process of maintaining and verifying the actual monthly payout including accurate records of employee wages, withholdings, and segments of tax details with the accounting records in the ledger. Payroll reconciliation ensures that you steer clear of piled up paperwork at the time of submitting periodic tax deposits and tax forms and ultimately prevent any fines or legal troubles.
- Payout “Salary has been credited to your account.” Yes, it’s that time of the month! The time to bring a smile to the employees’ faces through this small notification on their phone screens. Usually, organizations provide employees with a salary bank account and prefer bank transfers. However, you can also pay salary in cash or by paychecks. Once the payroll is complete, you just need to ensure that the company’s bank account has sufficient funds to make the salary payment. Details such as employee name & ID, bank account number, PF details, and the amount of wages are then sent to the concerned branch through a salary bank advice statement. In case you are technically woke, and opt for a payroll software that has an ESS portal, you can simply publish the payslips for the employees to log-in to their accounts and access the same, at any time and anywhere.
- Statutory Compliance After making all the statutory deductions like EPF, TDS, ESI, LWF, and PT at the time of processing payroll, the company remits the amount to the respective government agencies. After that, the payment of dues is made via challans. Once all dues are paid, then quarterly/half-yearly/annual returns/reports are filed and submitted to the respective government bodies. For instance, ECR is generated and filed for filing EPF returns.
- Payroll Accounting Keeping a record of all the financial transactions is an indispensable part of the payroll process. Employee salary is one of the most integral operating costs which has to be recorded in the books of accounts. So, it is essential to keep an eye on the financial data and ensure that all salary and reimbursement information is fed accurately into the accounting/ERP system as part of the payroll management process.
- Reporting In order to perform analytics, take decisions, and forecast the business future, in-depth reports are prepared and maintained. Thus, after you lock and run payroll for a month, reports such as department-wise and location-wise employee costs are analyzed to plan for the next month and submitted to the finance and senior management team. It is more of a responsibility of the payroll professionals to dig into the data, extract required information and share similar reports on a monthly, quarterly, half-yearly, and yearly basis for eg., they need to keep a track of liabilities such as leave encashments, gratuity liabilities, and bonus liabilities and provision the same in the organization’s sustainability plan.
Pre-Payroll Process
- Delineating Payroll Policies: The final amount paid to every employee depends upon various factors. The company’s different policies come into play at the time of payout. To begin with, these policies need to be properly defined and approved by the management to ensure standard payroll processing and administration. The primary company policies that are considered while processing payroll include:
- Time & Attendance Policy
- Employee Pay Policy
- Leave and Benefits Policy
- Reimbursement Policy
- Collecting Inputs: The payroll process includes interacting with multiple departments and professionals to gather relevant information. In MNCs and large organizations, the task of gathering data can be a little overwhelming. However, in SMEs, inputs are received from a consolidated source or fewer teams. A little tip is to use a smart payroll software having integrated features like leave & attendance management and employee self-service portal so that the input collection process does not remain a problem. Information that needs prior attention if payroll is to be processed includes:
- New Joiner Salary Structure
- Mid-year Salary Revisions
- Variable Payouts
- Attendance Inputs like paid days for the month, overtime, shift allowances, and leave encashments
- Ad hoc Deductions like EMIs or Recoveries like replacement of ID card, or clearance recoveries
- Employee Joining Date
- Month on Month Pre-processing
- Investment Declarations – collected from employees
- Bills for Reimbursements
- Old & New Tax Regimes
- Previous Employer Income/ Tax Declaration
- Previous Company Relieving Details
- Validating Inputs: Once the information is gathered, it’s time to ensure adherence of the inputs to company policies, verifying investment declaration bills and reimbursement proofs, variable payout inputs. The most imperative thing is to ensure that all the new joins have been included in the payroll cycle, previous employment salary declaration has been considered, and CTC break-up has been done as per the company policies. Before processing the payroll, it should also be ensured that any employees expected to be relieved in the payroll cycle are also updated.
Fact:
“Walmart Is The Largest Employer In The Word With 2.3 Million Employees All Across The Globe. The U.S. Army Is A Distant Second With An Employee Base Of 763,522.”
Actual Payroll Process
- Payroll Calculations This is the real game! When someone says payroll, the first thing to strike most minds is money math. So, at this stage, the gathered and validated input data is fed into the payroll system for actual payroll processing. After evaluating all the components including EPF, ESI, LWF, PT, Statutory Bonuses, Statutory Bindings and applicable taxes, the salary is computed. The final result is the Net Pay or Net Take Home Salary with adjusted taxes and other deductions. Once the payroll process is over, it is always advised to reconcile the values and verify data for accuracy to prevent errors.
Post-Payroll Process
- Payroll Reconciliation This is the key process of maintaining and verifying the actual monthly payout including accurate records of employee wages, withholdings, and segments of tax details with the accounting records in the ledger. Payroll reconciliation ensures that you steer clear of piled up paperwork at the time of submitting periodic tax deposits and tax forms and ultimately prevent any fines or legal troubles.
- Payout “Salary has been credited to your account.” Yes, it’s that time of the month! The time to bring a smile to the employees’ faces through this small notification on their phone screens. Usually, organizations provide employees with a salary bank account and prefer bank transfers. However, you can also pay salary in cash or by paychecks. Once the payroll is complete, you just need to ensure that the company’s bank account has sufficient funds to make the salary payment. Details such as employee name & ID, bank account number, PF details, and the amount of wages are then sent to the concerned branch through a salary bank advice statement. In case you are technically woke, and opt for a payroll software that has an ESS portal, you can simply publish the payslips for the employees to log-in to their accounts and access the same, at any time and anywhere.
- Statutory Compliance After making all the statutory deductions like EPF, TDS, ESI, LWF, and PT at the time of processing payroll, the company remits the amount to the respective government agencies. After that, the payment of dues is made via challans. Once all dues are paid, then quarterly/half-yearly/annual returns/reports are filed and submitted to the respective government bodies. For instance, ECR is generated and filed for filing EPF returns.
- Payroll Accounting Keeping a record of all the financial transactions is an indispensable part of the payroll process. Employee salary is one of the most integral operating costs which has to be recorded in the books of accounts. So, it is essential to keep an eye on the financial data and ensure that all salary and reimbursement information is fed accurately into the accounting/ERP system as part of the payroll management process.
- Reporting In order to perform analytics, take decisions, and forecast the business future, in-depth reports are prepared and maintained. Thus, after you lock and run payroll for a month, reports such as department-wise and location-wise employee costs are analyzed to plan for the next month and submitted to the finance and senior management team. It is more of a responsibility of the payroll professionals to dig into the data, extract required information and share similar reports on a monthly, quarterly, half-yearly, and yearly basis for eg., they need to keep a track of liabilities such as leave encashments, gratuity liabilities, and bonus liabilities and provision the same in the organization’s sustainability plan.
What are the components of Payroll?
The disbursement of monthly salary and employee wages have several prime components structured together in the form of payroll. Amidst the gross and net salary, there are multiple ‘components’ that collectively form a salary package. These are imperative for the employers & employees to calculate taxes, EPF, medical expenses, benefits, travel allowances and other elements.
One of the strongest reasons that most companies opt for Payroll Outsourcing Services is that framing the salary components is a huge challenge as one manages the payroll system.
Having understood the payroll definition, comprehending its components is equally important. The payroll components consist of ‘taxable’ and ‘tax-exempt’, variable, constant pay, earnings, some allowances, and deductions. Mentioned below are the most significant ones:
Here’s a blog on how you can perform CTC breakup and decode all the components of your salary:
CTC
When new recruits join the company, a total salary package is offered to them. CTC, short for Cost To Company, is the term for the same, used in countries such as India and South Africa. It delineates the overall amount of expenses that an employer spends on an employee in a span of one year.
Earnings
- Basic Salary This is the base pay defined by the central and respective state governments that every working professional is expected to earn prior to including any added benefits, bonus, profits, and compensation or deducting tax and penalty payments. It is recommended that 50% of the total pay that an employee earns should comprise basic pay. Employers often want to keep this as low as possible so as to curb additional liabilities such as Gratuity, Leave Encashments, or Employer’s PF Contribution.
- Gross Salary Gross salary is the sum total of all the monthly wages, salaries, allowances, rents, and other forms of earnings of an employee, before any deductions or taxes are paid. The components of Gross Salary include Basic Pay, HRA, Special Allowance, Conveyance Allowance, Educational Allowance, Medical Allowance, and Leave Travel Allowance.
- Net Take Home Salary Having learnt about the two aforementioned components of salary, the Net Pay is quite easy to understand. Net Salary or Take Home Salary is the actual pay that an employee takes home. This is calculated by subtracting the total deductions for the employee such as Income Tax, Employee PF Contribution, Notice Pay Recovery from the Gross Earnings for the month.
Allowances
- Dearness Allowance (DA): Generally, Dearness Allowance is an intrinsic component of a government employee’s pay structure. It is a calculation on inflation and allowance paid to government employees, public sector employees and pensioners in India, Bangladesh and Pakistan. Dearness Allowance is calculated as a percentage of an Indian citizen’s basic salary to mitigate the impact of inflation on people.
- Other Allowances: There are some other types of allowances that may be fixed or variable. These allowances are generally included in the pay structure to leverage the benefits of various tax saving schemes. There are different categories of special allowances such as:
- Examples of Other Allowances/ Reimbursement Exempt Under Section 10 (5)
House Rent Allowance (HRA)
A necessary part of the salary provided by an employer, House Rent Allowance or HRA is given to employees for their rented accommodation. If only the employee is residing in a rented house can the HRA exemption be claimed. It can be exempted upto 50% of the Basic Pay for the employees staying in Metro cities. For all the other cities, the limit is 40%.
Child Education Allowance
The Children Education Allowance (CEA) is paid to the professionals in India for the schooling and hostel facilities offered to their children. It is eligible for exemption up to INR 100 per month and INR 2,400 per annum for maximum 2 children. The amount provided under CEA for a differently abled child is double that offered to a normal child.
Hostel Expenditure Allowance
Hostel Allowance is provided by the employers to the employees for their children’s hostel fee. It is eligible for exemption up to INR 300 per month and INR 3,600 per annum for maximum 2 children.
Car Allowance
The amount of money that an employer offers to its employees who need to use their car for traveling purposes, as a part of the job.
Leave Travel Allowance (LTA)
As per Income Tax Act, 1961, LTA is an important component of an employee’s salary which is eligible for income tax exemption. It is provided to an employee by his/her employer to compensate for the leave and expenses incurred on business-related travel.
Uniform Allowance
Any allowance offered to the employees to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the execution of the job role of an office or employment of profit.
Transportation Allowance
Also known as Conveyance Allowance, this is a monetary allowance given to the employees by their employers to compensate for the amount that they spend on traveling from their residence to the workplace.
Books and Periodicals
Employees can claim reimbursement of expenses incurred on books, newspaper subscription, periodicals, journals and so on. These reimbursements are tax-free for employees. Allowances are a part of employees’ CTC (Cost-to-Company) and are paid in addition to basic salary.
Furnishing Allowance
Under this allowance, an employee can buy some household items or pay for soft furnishing of the house and submit original bills for reimbursements. Usually, there is a max cap depending on the hierarchy of the organization.
Deductions
- EPF (Employees’ Provident Fund) Employees’ Provident Fund (EPF) is a scheme in which the retirement benefits of working professionals are accumulated. Under the scheme, an employer has to contribute 12% of the Gross Earnings towards the scheme and an equal contribution is paid by the employee. The total collection is then deposited into the employee’s EPF account. Any contribution made by the employer is not accounted for in taxable income upto a limit of INR 2.5 lakhs per year w.e.f. 1st April 2021. Employee PF contribution is also subject to deduction under section 80(c).
- LWF (Labor Welfare Funds) ESI stands for Employee State Insurance, managed by the Employee State Insurance Corporation which is an autonomous body created by the law under the Ministry of Labour and Employment, Government of India. This scheme is a self-financed health insurance started for Indian workers. Every month, employers and employees have to make a nominal contribution for the employee to enjoy the ESI benefits.
- Professional Taxes Professional tax is the tax levied and collected by the state governments in India. It is an indirect tax, only applicable in select states. Just like TDS, PT is deducted from an employee’s salary. PT deducted from an employee’s salary is also exempted from taxable income for the assessment year.
- TDS (Tax Deducted At Source) The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The concept of TDS also extends to the salary paid by the employer to an employee. Employers are expected to consider all investments made by the employee and adjust income or loss from sources such as House Rent before computing the final TDS. Employers are expected to deposit the deducted TDS to the government on a monthly basis and file the TDS return on a quarterly basis.
Employees can use their PF money is the best possible ways as mentioned in this blog:
Other Statutory Compliances
- Statutory Bonus As a reward for accomplishing or overachieving the work targets, employees receive additional amounts called bonus with their base monthly salaries, as part of their wages. An employer is expected to comply with the Bonus Act, 1965 to be able to pay a bonus. To an eligible employee who earns between INR 7,000 to INR 21,000 (Basic +DA) on a monthly basis, the employer pays a minimum of 8.33% and maximum 20% of the employee’s salary earned during the relevant accounting year.
- Gratuity In case an employee parts away from the organization, under The Payment of Gratuity Act, 1972, an employer is expected to pay an employee 15 days of salary for every completed year. This computation needs to be done as per the employee’s last drawn salary. An employee is only eligible for Gratuity if he/she has completed 5 years of service with a single organization. Any payment done under Gratuity is exempted for upto INR 20 lakhs for a lifetime.
- Leave Encashments A category of leaves such as the earned leaves which are not availed by an employee within a particular period can be encashed. The accumulated leaves are usually encashed at the time of Full & Final Settlement or after every financial year. The amount paid under Leave Encashments is exempted from taxable income under special constraints defined by the government.
- NPS (National Pension Scheme) The National Pension System is a voluntary defined contribution pension system in India. National Pension System is an EEE (Exempt-Exempt-Exempt) instrument in India where the entire corpus escapes tax at maturity and the entire pension withdrawal amount is tax-free. In addition to this, there are multiple tax benefits under 80CCD that an employee can enjoy.
Reimbursements
Reimbursement is the act of compensating an employee for business-related expenses incurred by an employee. It is generally a good practice to pay reimbursements in a separate reimbursement bank account for the employee. Various types of reimbursements can be:
- Business Expense Reimbursements Expense Reimbursement is the way businesses pay back their employees who have spent their own money on business-related expenses. While reimbursements for business travel is quite common, employees can also be reimbursed for education, healthcare, and other expenses incurred on behalf of the organization.
- Auto Mileage & Travel Reimbursements This is a type of business expense reimbursement, however there are some specific characteristics of travel reimbursement that set it apart from the other types such as standard mileage rate and per diem travel.
- Medical Expense Reimbursements Medical Reimbursement is an arrangement under which employers reimburse the portion of the health expenses incurred by the employee. The Income Tax Act allows tax exemption of up to INR 15,000 on medical reimbursements paid by the employer.
- Arrears Arrears is a legal term for the part of a debt that is overdue after missing one or more required payments. In context to an employee, different types of arrears can be Salary Increment Arrear, Loss of Pay Adjustment Arrears, or any other ad hoc payment that an employee was entitled to and was missed in the previous pay cycles. Any arrear payments are expected to be taxed and considered for all other statutory computations.
Some Fun Facts:
- The Employees In Egypt Used To Be Paid In BEER, According To Ancient Pay Stubs.
- The Idiom “BRING HOME THE BACON” Originated In The Early 20Th Century, When Bacon Was A Staple Meat For The Working Class.
- 2 BILLION People Worldwide Do Not Have A Bank Account Or Access To A Financial Institution Via A Mobile Phone Or Any Other Device.
- 4 MILLION Paychecks Are Lost Or Stolen Each Year In The U.S.
- In Afghanistan, It Is Not Uncommon For Individuals To Receive Their Net Pay Into A Mobile Phone Account Rather Than A Bank Account.
- In The U.S., 21% Of Businesses Pay Their Employees By Paper Check.
- The Most Common Pay Frequency Is Bi-Weekly, I.E., Every Two Weeks.
CTC
When new recruits join the company, a total salary package is offered to them. CTC, short for Cost To Company, is the term for the same, used in countries such as India and South Africa. It delineates the overall amount of expenses that an employer spends on an employee in a span of one year.
Earnings
- Basic Salary This is the base pay defined by the central and respective state governments that every working professional is expected to earn prior to including any added benefits, bonus, profits, and compensation or deducting tax and penalty payments. It is recommended that 50% of the total pay that an employee earns should comprise basic pay. Employers often want to keep this as low as possible so as to curb additional liabilities such as Gratuity, Leave Encashments, or Employer’s PF Contribution.
- Gross Salary Gross salary is the sum total of all the monthly wages, salaries, allowances, rents, and other forms of earnings of an employee, before any deductions or taxes are paid. The components of Gross Salary include Basic Pay, HRA, Special Allowance, Conveyance Allowance, Educational Allowance, Medical Allowance, and Leave Travel Allowance.
- Net Take Home Salary Having learnt about the two aforementioned components of salary, the Net Pay is quite easy to understand. Net Salary or Take Home Salary is the actual pay that an employee takes home. This is calculated by subtracting the total deductions for the employee such as Income Tax, Employee PF Contribution, Notice Pay Recovery from the Gross Earnings for the month.
Allowances
- Dearness Allowance (DA): Generally, Dearness Allowance is an intrinsic component of a government employee’s pay structure. It is a calculation on inflation and allowance paid to government employees, public sector employees and pensioners in India, Bangladesh and Pakistan. Dearness Allowance is calculated as a percentage of an Indian citizen’s basic salary to mitigate the impact of inflation on people.
- Other Allowances: There are some other types of allowances that may be fixed or variable. These allowances are generally included in the pay structure to leverage the benefits of various tax saving schemes. There are different categories of special allowances such as:
- Examples of Other Allowances/ Reimbursement Exempt Under Section 10 (5)
House Rent Allowance (HRA)
A necessary part of the salary provided by an employer, House Rent Allowance or HRA is given to employees for their rented accommodation. If only the employee is residing in a rented house can the HRA exemption be claimed. It can be exempted upto 50% of the Basic Pay for the employees staying in Metro cities. For all the other cities, the limit is 40%.
Child Education Allowance
The Children Education Allowance (CEA) is paid to the professionals in India for the schooling and hostel facilities offered to their children. It is eligible for exemption up to INR 100 per month and INR 2,400 per annum for maximum 2 children. The amount provided under CEA for a differently abled child is double that offered to a normal child.
Hostel Expenditure Allowance
Hostel Allowance is provided by the employers to the employees for their children’s hostel fee. It is eligible for exemption up to INR 300 per month and INR 3,600 per annum for maximum 2 children.
Car Allowance
The amount of money that an employer offers to its employees who need to use their car for traveling purposes, as a part of the job.
Leave Travel Allowance (LTA)
As per Income Tax Act, 1961, LTA is an important component of an employee’s salary which is eligible for income tax exemption. It is provided to an employee by his/her employer to compensate for the leave and expenses incurred on business-related travel.
Uniform Allowance
Any allowance offered to the employees to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the execution of the job role of an office or employment of profit.
Transportation Allowance
Also known as Conveyance Allowance, this is a monetary allowance given to the employees by their employers to compensate for the amount that they spend on traveling from their residence to the workplace.
Books and Periodicals
Employees can claim reimbursement of expenses incurred on books, newspaper subscription, periodicals, journals and so on. These reimbursements are tax-free for employees. Allowances are a part of employees’ CTC (Cost-to-Company) and are paid in addition to basic salary.
Furnishing Allowance
Under this allowance, an employee can buy some household items or pay for soft furnishing of the house and submit original bills for reimbursements. Usually, there is a max cap depending on the hierarchy of the organization.
Deductions
- EPF (Employees’ Provident Fund) Employees’ Provident Fund (EPF) is a scheme in which the retirement benefits of working professionals are accumulated. Under the scheme, an employer has to contribute 12% of the Gross Earnings towards the scheme and an equal contribution is paid by the employee. The total collection is then deposited into the employee’s EPF account. Any contribution made by the employer is not accounted for in taxable income upto a limit of INR 2.5 lakhs per year w.e.f. 1st April 2021. Employee PF contribution is also subject to deduction under section 80(c).
- LWF (Labor Welfare Funds) ESI stands for Employee State Insurance, managed by the Employee State Insurance Corporation which is an autonomous body created by the law under the Ministry of Labour and Employment, Government of India. This scheme is a self-financed health insurance started for Indian workers. Every month, employers and employees have to make a nominal contribution for the employee to enjoy the ESI benefits.
- Professional Taxes Professional tax is the tax levied and collected by the state governments in India. It is an indirect tax, only applicable in select states. Just like TDS, PT is deducted from an employee’s salary. PT deducted from an employee’s salary is also exempted from taxable income for the assessment year.
- TDS (Tax Deducted At Source) The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The concept of TDS also extends to the salary paid by the employer to an employee. Employers are expected to consider all investments made by the employee and adjust income or loss from sources such as House Rent before computing the final TDS. Employers are expected to deposit the deducted TDS to the government on a monthly basis and file the TDS return on a quarterly basis.
Employees can use their PF money is the best possible ways as mentioned in this blog:https://hrone.cloud/these-7-things-to-do-with-their-pf-money/
Other Statutory Compliances
- Statutory Bonus As a reward for accomplishing or overachieving the work targets, employees receive additional amounts called bonus with their base monthly salaries, as part of their wages. An employer is expected to comply with the Bonus Act, 1965 to be able to pay a bonus. To an eligible employee who earns between INR 7,000 to INR 21,000 (Basic +DA) on a monthly basis, the employer pays a minimum of 8.33% and maximum 20% of the employee’s salary earned during the relevant accounting year.
- Gratuity In case an employee parts away from the organization, under The Payment of Gratuity Act, 1972, an employer is expected to pay an employee 15 days of salary for every completed year. This computation needs to be done as per the employee’s last drawn salary. An employee is only eligible for Gratuity if he/she has completed 5 years of service with a single organization. Any payment done under Gratuity is exempted for upto INR 20 lakhs for a lifetime.
- Leave Encashments A category of leaves such as the earned leaves which are not availed by an employee within a particular period can be encashed. The accumulated leaves are usually encashed at the time of Full & Final Settlement or after every financial year. The amount paid under Leave Encashments is exempted from taxable income under special constraints defined by the government.
- NPS (National Pension Scheme) The National Pension System is a voluntary defined contribution pension system in India. National Pension System is an EEE (Exempt-Exempt-Exempt) instrument in India where the entire corpus escapes tax at maturity and the entire pension withdrawal amount is tax-free. In addition to this, there are multiple tax benefits under 80CCD that an employee can enjoy.
Reimbursements
Reimbursement is the act of compensating an employee for business-related expenses incurred by an employee. It is generally a good practice to pay reimbursements in a separate reimbursement bank account for the employee. Various types of reimbursements can be:
- Business Expense Reimbursements Expense Reimbursement is the way businesses pay back their employees who have spent their own money on business-related expenses. While reimbursements for business travel is quite common, employees can also be reimbursed for education, healthcare, and other expenses incurred on behalf of the organization.
- Auto Mileage & Travel Reimbursements This is a type of business expense reimbursement, however there are some specific characteristics of travel reimbursement that set it apart from the other types such as standard mileage rate and per diem travel.
- Medical Expense Reimbursements Medical Reimbursement is an arrangement under which employers reimburse the portion of the health expenses incurred by the employee. The Income Tax Act allows tax exemption of up to INR 15,000 on medical reimbursements paid by the employer.
- Arrears Arrears is a legal term for the part of a debt that is overdue after missing one or more required payments. In context to an employee, different types of arrears can be Salary Increment Arrear, Loss of Pay Adjustment Arrears, or any other ad hoc payment that an employee was entitled to and was missed in the previous pay cycles. Any arrear payments are expected to be taxed and considered for all other statutory computations.
Some Fun Facts:
- The Employees In Egypt Used To Be Paid In BEER, According To Ancient Pay Stubs.
- The Idiom “BRING HOME THE BACON” Originated In The Early 20Th Century, When Bacon Was A Staple Meat For The Working Class.
- 2 BILLION People Worldwide Do Not Have A Bank Account Or Access To A Financial Institution Via A Mobile Phone Or Any Other Device.
- 4 MILLION Paychecks Are Lost Or Stolen Each Year In The U.S.
- In Afghanistan, It Is Not Uncommon For Individuals To Receive Their Net Pay Into A Mobile Phone Account Rather Than A Bank Account.
- In The U.S., 21% Of Businesses Pay Their Employees By Paper Check.
- The Most Common Pay Frequency Is Bi-Weekly, I.E., Every Two Weeks.
How to create a payslip?
A payslip or salary slip, even called pay stub or paycheck is a stamped document that entails the details of an employee’s monthly payout. It is shared with the concerned employee on or a few days after the salary is deposited into his/her account. It is issued to keep a record of the employee’s salary information including Basic pay, Dearness Allowance, HRA, TA, Bonus, Gross Pay, Net Pay, etc.
It is even produced as a proof of employment to the new employer when joining another company.
Having understood the payroll definition, comprehending its components is equally important. The payroll components consist of ‘taxable’ and ‘tax-exempt’, variable, constant pay, earnings, some allowances, and deductions. Mentioned below are the most significant ones:
If you wish to understand the salary slip, format terminology, and more
The structure of a salary slip includes the following elements:
- Personal Information: Name, Employee ID, PAN, and Aadhaar No.
- Bank Details
- Universal Account Number (UAN) and Payroll Number
- Earnings: HRA, TA, and DA, etc.
- Deductions: EPF, ESI, Professional Taxes, and LWF, etc.
- Reimbursements: Arrers, Travel Reimbursement, etc.
- Year To Date (YTD)
- You may also want to include a detailed tax computation slip
Here’s a format for your reference –
The payslip is either created as a Word document or in Excel sheets. The formats may be different in each case, but the components are more or less the same. Payslip is considered as one of the most complex official documents to be issued by the employers. The number of components and breakdown of each element of the payslip is not an easy job. Which is why, companies use advanced hr payroll software to automatically create downloadable salary slips for their employees. Besides, the deep insights and detailed reports are cherry on the top for understanding and analyzing the same.
Download HROne’s free payslip template and customize it as per your needs and preferences.
How to select a Payroll Service?
Before you adopt a new payroll solution or service, it is extremely crucial to consider some primitive factors while choosing the same.
First of all, there are 3 types of payroll services:
- Online: This is the easiest and the most common way to manage payroll nowadays. You simply have to choose an online payroll software that suits your company needs and user preferences. Get a stable internet connection and avail online payroll services as per your budget. In a few clicks and the salary is auto-processed into your employees’ accounts.
- In-house: This is when you decide to purchase a payroll software of your own and integrate it with your existing HR management system. In this case, there is no need to raise requests for rectifying errors or making changes to the process. You can simply hire experts to operate the software and get things done in the workplace.
- Outsourced: Now comes the most liked option of processing and managing payroll – Outsourcing! It is cost-effective as you don’t need to hire experts or use your resources to perform the functions. You just have to finalize the budget and hand over all your payroll responsibilities to a third-party payroll service provider.
Facts:
“Companies That Outsource Payroll Save 18% More As Compared To The Ones That Don’t.”
Now that you know about the 3 mediums through which you can optimize your payroll operations, it’s time to set the expectations right. Meaning, you need to prepare a detailed payroll checklist before choosing the service. So, before you start:
- Get recommendations from acquaintances and colleagues
- Read & Research from online & offline resources
- Take payroll experts’ advice specific to company size and nature
- Shortlist, and make a list of the best-suited providers
Once the homework is done, you can pitch vendors or service providers by asking the following questions so that they have a clear understanding of your demands.
(Considerations while choosing a payroll service)
- What core payroll features do you offer?
- How user-friendly will the process become?
- Is the price to performance ratio low?
- How is the vendor’s brand reputation?
- How steep/shallow is the learning curve?
- Can other business tools be integrated with payroll?
- How timely and efficient is the customer support?
- What additional services do you offer with payroll? (eg. HR, accounting, benefits & compensation)
After the service search and purchase is complete, it’s time for implementation. Payroll is an elaborate process and thus, requires strong attention during the set-up. From feeding each employee’s name and personal details into the system and converting data to taking care of the statutory compliance and taxes and going live, every step should be taken carefully.
Here are some important steps to follow while setting up payroll:
- Define goals and fix target dates
- Create an implementation plan and team
- Train your team of payroll professionals
- Convert, transfer and integrate data into the new system
- Perform payroll tax compliance management
- Go live and make it operational
Facts:
“If We Go Back In Time To 7000 BC, Archaeologists Have Found Evidence Of Payroll Records Carved Into Stone In Athens.”
Why is Payroll Important?
Facts:
As Per Nucleus Research, “Payroll Errors Can Account For 1.2% Of An Employer’s Total Payroll.” And For A Small Business, It Can Mean Thousands Of Dollars.
Clearly, for any business, payroll is one of the most important aspects. Payroll is an elaborate and thought-through process, developed to control and maintain the multifaceted tasks pertaining to the employees’ salary in an organization. Not only does it reflect a company’s financial stability and repute, it also promotes employee morale. If the final payout of the employee is erroneous, it creates lack of trust. Similarly, when accurate salaries are deposited on time, it leads to employee satisfaction and motivation. Besides, the streamlining of payroll-related activities saves time, energy, and resources of the workforce. A payroll system is therefore one of the best solutions for employees.
Let’s throw some light on the 5 main reasons why Payroll is considered as an important part of Human Resource Management:
- Budget Cutting: It is often advised that companies give a go to outsourcing their non-core processes in an effort to cut the budget fat, and payroll is often number one on that list. One of the major reasons why payroll processing is so vital is it’s influence on your budget. The amount of time, energy, and other resources it takes to process every cheque, expense, deduction, garnishment, and every remittance is incredible.
- Risk Mitigation: The legal hurdles and the stringent compliance expected of each company is the most complex aspect of payroll processing. So, if someone asks you why payroll processing is important, remember that even a little error or glitch can increase the risk of leading you to legal troubles. Something as trivial as a misclassification issue can land you gross class action lawsuits, penalties, fines, and even charges for jail time. That’s the main reason why every second organization relies on payroll services for risk management.
- Resource Reallocation: Taking care of the wide range of activities to finally release employees’ pay is a time-consuming task. And if you employ a reliable payroll management team to work beside you, these cumbersome tasks can be delegated, making way for a sustainable use of resources.
- Compensation Determination: It is nothing else but payroll that determines the net worth of an employee within an organization. Every working individual’s total compensation is ultimately built into payroll which includes elements such as payout, allowances, benefits, bonuses, and increments among others. Generally speaking, every employee has to undergo performance evaluations by their managers, following which, they either get an increase in their salary or a bonus or both.
- Positive Company Culture: This is a widely recognised benefit of payroll. An efficient payroll management team is important to cater to matters like benefits, perks and compensation as a core responsibility. The employees become happy and satisfied with the systematic management of payroll. A survey from The Workforce Institute at Kronos even found that
Outsourcing is one miraculous way to save these resources. If you acknowledge that a payroll service already has the trained professionals, the equipment & tools, and the knowledge/skills for the job, it’s a road worth traveling. After all, you’re not wasting your own assets; you simply pay an amount and the work is done.
The risk of mistakes and errors goes down exponentially when you incorporate a reliable payroll system and consult payroll experts. Apart from keeping the employees happy, it also keeps the government and legal system happy.
Once you choose to adopt a great combination of HR and payroll software, the available resources can be optimized and your company can benefit from the time savings and proper management.
49% of American workers will start a new job search after experiencing just two payroll errors.
This implies that employees value an attentive payroll team and it is more than the ones that hands them their salaries. The 3 ways to utilize payroll for supporting company culture include accessibility, reputation building, and employee engagement.
Facts:
As Per A Study By Robert Half, “46% Of Professionals Feel They Are Underpaid At Their Jobs.”
Pay means compensation and employees work get paid, no matter how much they value their job role. Employees want recognition for the hard work they do every day, and their salary slip compensates the same.
“A person who feels appreciated will always do more than what is expected.”
And employees who are compensated for their extra effort or new initiatives feel valued and honored in the organization. To add to it, flexible payroll suggests that your workforce is compensated correctly, aligning with their performance as a unit.
Therefore, it is quite obvious now that payroll teams are significant contributors to a positive company culture. If you don’t have an efficient payroll team by your side, chances are, you will face the threat of a bad reputation and lack of employee engagement, resulting in high employee attrition.
There are many reasons why payroll management is necessary for organizations irrespective of the number of employees and type of industry. Firstly, it ensures that employees are paid accurately, on time, and have outstanding experience in the organization. Secondly, an efficient payroll management system help organizations save money, time, and resources spent on recalculations and mismanagement. Thirdly, it enables organizations to stay compliant with labor laws and ensure that they are paying their employees correctly and in accordance with the law. Not just these, three but a proper payroll management system can automate many of the payroll processes related to organizations and redefine employees-employers relationships.
