Statutory Compliance In Payroll : 7 Tips To Get It Right [+Cheatsheet]

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Compliance In Payroll

Compliance is the process of ensuring that a set of government rules and regulations are followed. It comes into play because there are many laws and regulations that govern the business world leaders and other people who run them.

When it comes to payroll, compliance plays a huge role because most of the time, payroll mistakes can lead to misappropriated payments, overtime pay, reduced wages, and even tax fraud coming from these mistakes. Compliance in payroll helps maintain law and order, ethics, as well as safety for employers, employees, and customers. It ensures that payroll is kept on track and that statutory requirements are met. 

What does Compliance in Payroll mean?

Payroll compliances mean adhering to the rules and regulations laid down by the central, state, or local authorities with regard to the payroll of employees. Non-adherence to these compliances can lead to severe penalties for an organization or even loss of business.

Compliance in payroll is not a concept, but an idea. It’s being a responsible employer that is based on rules and regulations laid down by regulatory bodies. It ensures transparency, efficiency, and fraud management.

Thus, it is an essential part of your business strategy, especially given the risk of penalties imposed by regulatory bodies.  It’s important to focus on what you should be doing in order to avoid being penalized or potentially losing money or clients. Implementing and updating your systems with the latest changes in laws and regulations can have a positive impact on your business.

Statutory Laws Mandatory for Payroll Compliances in India

Besides the above, organizations must adhere to some mandatory tax compliances.

The Payment of Wages Act, 1936

This law helps to regulate the direct and indirect wages paid to the employee. It also includes deductions from the employee’s salary. Within the ambit of this compliance, the employer cannot deduct anything other than what is legally permitted. This act makes It mandatory for employers to pay salaries before the 7th of each month if they have fewer than 1000 employees and by the 10th if the headcount is above 1000.

The Minimum Wages Act of 1948

This act falls under the ambit of the central and state governments. Under this regulation, the minimum wage is defined as the cost of living for that region. There would be minimum wages prescribed for various working classes so, within this schedule, it is essential to fix wages on an hourly, monthly or weekly basis.

Amendments to the Maternity Benefits Act

This act applies to all workers who are pregnant. The act includes the following:

  1. Regulating the woman’s employment in an establishment just before and after childbirth.
  2. Offering certain types of maternity benefits to women.

This act covers all establishments, including factories and mines. Shops and stores that have more than ten employees are also included under this act.

Employees’ Provident Fund and Miscellaneous Provisions Act 1952

Another important payroll compliance in India is the Employees’ Provident Fund Act. This fund contributes to the overall welfare of the employee. Any organization with more than 20 employees is expected to deduct their PF based on basic pay and dearness allowance. All employees earning more than Rs 15,000 per month are eligible to participate in the provident fund scheme.

Why are Statutory Compliances in Payroll Important?

Complying with the prevailing laws is highly beneficial for the organization. For instance, it helps the company expand its business operations within that country because the organization has created trust with the government.

It also shows that, as an organization, you are invested in your employees’ well-being by adhering to the prevailing labor laws. Organizations that do not comply risk having their reputations tarnished.

Business complexity has increased tremendously, more so after the pandemic. In this environment, being in sync with operations becomes very difficult. Thus, many organizations approach statutory compliance experts to help them develop an effective compliance strategy.

Some of the advantages of having statute compliances in place are they:

  • Protect the organization from unreasonable wage or benefit demands from trade unions
  • Prevent penalties and fines as payments are made promptly
  • Minimize adverse incidents and legal hassles, as the company is fully compliant
  • Increase overall awareness about compliance rules and regulations

Benefits of Payroll Compliance

There are some critical benefits of following payroll compliance. They are as follows:

  1. With compliances in place, employees get just and fair wages, irrespective of their role or position.
  2. Reasonable wages are paid to all workers as per the prevailing wage rules. This helps to protect employees’ rights.
  3. Employees are not forced to work extra hours without pay, and the chances of an employer behaving unreasonably towards them are minimal.
  4. Employees are always paid on time.
  5. Employer-employee relationships are markedly improved as there is less ambiguity on pay and allowances.
  6. Employees are given protection with existing rules and regulations in place.

Challenges in Statutory Compliances in Payroll

Some challenges are associated with payroll compliance. Let us see what they are:

Compliance and Legislation Issues

Running a company or a business is not necessarily a cakewalk. There are umpteen laws and regulations that must be adhered to. Often companies end up making mistakes during compliance.

This, however, is inadvertent, as many do not understand the intricacies of complicated and nuanced regulations. Many businesses also rely on conducting their payroll manually. Manual management of payroll can get complex, especially if the regulations change.

Technology Constraints

With the advent of technology, payroll management has become much more streamlined, but this has not been without challenges. Newer software often tends to introduce errors and accuracy issues. Therefore, It is essential to verify all the credentials of the payroll service provider to mitigate any risks arising during payroll compliance.

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Changing Payroll Legislation

Regulations are being created in all geographies and countries and are changing at a very rapid pace. Further, several organizations are either expanding or restructuring. Therefore, sticking to compliance becomes a source of angst for employers. In an environment that is in a constant state of flux, being able to adapt to changing regulations is mandatory.

In such times, it becomes compulsory to leverage technology to help automate payroll processes. A process like this helps to prevent errors that might take place during payroll processing.

Acute Shortage of Payroll Professionals

The HR industry is experiencing a shortage of payroll professionals. The lack of competent and experienced payroll professionals has led to many gaps during the payroll compliance process, as many of these professionals are not familiar with the protocols.

Cyber Security Challenges

Within the realm of technology, there are growing incidences of cybercrime and cyber fraud. It has become challenging to keep payroll data safe and encrypted. Security risks tend to make compliance with the regulations extremely difficult.

How to Address Payroll Tax Compliances

There are several ways to address payroll tax compliances:

  1. Correctly calculating the wages, including overtime wages.
  2. Withhold the correct amount of payroll tax from the salaries depending on the applicable payroll tax.
  3. Ensure that the deposit of the tax liabilities is made promptly with the appropriate tax authorities within that region.
  4. Timely file various tax returns associated with the payroll.
  5. Use payroll software. Using payroll software ensures meticulous record-keeping and reduces manual errors. There are also a host of associated benefits that come from using payroll software such as security, accuracy, automation, integration, accessibility and global capabilities.
  6. Make a payroll compliance checklist. A checklist includes essentials such as classifying new hires appropriately, inspecting onboarding paperwork carefully to detect errors and entering the data in the payroll compliance software.
  7. Have at least one global payroll partner. A global partner ensures the simplification of global payroll tax management. It removes the additional burden on the performing organization and the HR stakeholders.

Final Words

Statutory compliances are extremely important and can make or break the company’s overall reputation. Many rules and regulations are involved and need to be complied with to avoid severe penalties.

Companies and organizations have to remain accountable to the rules and regulations about payroll compliance that exist within the jurisdiction of their state or country. With rapid HR technology strides, companies can automate payroll processing and ensure compliance by eliminating human error. 

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Bhim Singh Bhandari

Bhim Singh Bhandari is a Manager of Accounts & Taxation at HROne, where he manages a full range of tax services and ensures strategic tax planning. He reviews complex income tax returns, coordinates audits and disseminates his knowledge of accountancy and taxation, like payroll and compliance, to various company leaders and managers.

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