Payroll is the process of paying a company’s employees, which can include the tracking of hours worked, the calculation of employee’s pay, and the distribution of payments via direct deposit directly to their account or by check. Payroll is a list of employees who get paid by the company. Payroll also refers to the total amount of money employer pays to the employees. As a business function, it involves:
- Developing organization pay policy including flexible benefits, leave encashment policy, etc.
- Defining pay slip components like basic, variable pay, HRA, and LTA
- Gathering other payroll inputs (e.g., organization’s food vendor may supply information about the amount to be recovered from the employees for meals consumed).
- The actual calculation of gross salary, statutory as well as non-statutory deductions, and arriving at the net pay.
- Releasing employee salary.
- Depositing dues like TDS, PF, etc. with appropriate authorities and filing returns.
Equation for calculating the net pay
Net pay = Gross income- gross deduction.
Gross income or salary = All types of regular income + allowances + any one-time payment or benefit.
Gross deduction = All types of regular deductions + statutory deductions + any one-time deductions.
Stages to processing payroll
Pre-payroll activities
- Defining payroll policy: The net amount to be paid is affected by multiple factors. The company’s various policies such as pay policy, leave and benefits policy, attendance policy, etc. come into play at that time. As a first step, such policies need to be well defined and get approved by the management to ensure standard payroll processing.
- Gathering inputs: Payroll process involves interacting with multiple departments and personnel. There can be information like mid-year salary revision data, attendance data, etc.
- Input validation: Once inputs are received, you need to check for validity of the data concerning adherence to company policy, authorization/approval matrix, right formats, etc. You also need to ensure that no active employee is missed out and that no inactive employee records are included for salary payment.
Actual payroll process
- Payroll calculation: At this stage, the validated input data is fed into the payroll system for actual payroll processing. The result is the net pay after adjusting necessary taxes and other deductions. Once payroll process is over, it is always a good practice to reconcile the values and verify for accuracy to avoid any errors.
Various methods available to do payroll for your business
- Excel based payroll management: Excel based payroll management involves doing payroll calculation on excel sheets using standard payroll calculation template. The mathematical formulas are set that help the payroll officer do the computation.
- Payroll outsourcing: Outsourcing payroll means you want an external agency to take care of your payroll function. Many organizations who do not have a dedicated person for payroll go for this option. Based on their pay cycle, every month they provide employee salary information and other data such as attendance, leaves, reimbursement details, etc. to the payroll service provider.
- Using payroll software: There are advanced payroll management software available in the market that not only automates payroll computation but also serve as a holistic leave and attendance management, HR management and employee self-service portal. Depending on the size of your business and use cases you can opt for an appropriate payroll software for your business.