Payroll can be defined as the list of employees who are functional within the operations of the company. The amount owed to the employees at the conclusion of each monthly cycle is, by definition, also included in the payroll.
It is crucial for your HR staff to make sure the payroll process runs well if you are a startup. Failure to sustain this could result in staff discontent and an unwelcome attrition rate.
What is Payroll processing?
There are several elements that make up the payment that a company owes to an employee. When payroll is being processed, HR needs to calculate the employee’s net salary, including all deductions and tax deductions. Salary involves more than just the monthly compensation an employee is entitled to base on hours worked.
Thus, payroll processing can become quite complicated for start-ups as well as companies which are relatively small in size and scale. In other words, the Human Resources department of small and medium enterprises might be hard pressed in maintaining regular and efficient payroll processing.
What are the components of a payroll?
Some of the main components of an employee’s payroll in India are defined as follows:
- Employee Information
- Pay Policy
- Basic Salary
- Allowances
- Gross Salary
- Deductions
- Net Salary
- Tax Deducted at Source
- Perquisites
What are the steps involved in payroll processing?
The following steps help to establish a systematic payroll accounting process:
- Define the payroll policies, as approved by the senior management, to the concerned bank.
- Input needs to be taken from various departments which would lead to tabulation of individual data regarding the employees. This should include income declaration, leaves taken, eligibility for raise, bonuses received. The information needs to be gathered from the employees as well as the Human resources team.
- The payroll data needs to be accordingly calculated. The net pay will be arrived at by deducting taxes and deductions from the net pay.
- Statutory compliance needs to be observed in the deductions that are due to the government or other bodies in the form of EPF, ESI etc, and these need to be deducted.
- The final step is the payout of the salaries via cash, cheque, or bank transfer.
What are some of the compliances that need to be observed during payroll processing in India?
Companies are required to keep up-to-date with all the payroll legislation that the central government has adopted, and any new legislation that may be introduced in the future. Below is a list of some administrative and statutory provisions governing payroll processing in India.
Payment of Wages Act, 1936
This Act mandates that payments be made by the seventh of the month if an organisation employs fewer than 10,000 people. Payroll updates for employees with more than 10,000 must be made by the latest on the tenth of the month. However, it should be highlighted that anyone making more than Rs. 10,000 is exempt from the Payment of Wages Act.
Minimum Wages Act, 1948
This rule ensures that payroll adheres to the minimum wage rate and attempts to prevent labourers from being exploited for unfair earnings. In India, committees selected by both the federal and state governments determine the exact minimum wage, with the cost of living serving as the baseline.
Payment of Bonus Act, 1965
Employees who have completed 30 working days in an establishment and have earned up to a maximum of Rs. 21,000 will be considered as eligible for receiving a bonus.
Employee State Insurance Act, 1948
This Act aims to provide some protection for workers in unexpected situations.
It should be noted that this applies only to employees who are earning under Rs. 21,000. In case the salary of the former is raised from the same amount, contributions to the ESIC may be stopped from the following payroll cycle. The Act seeks to provide protection to employees against maternity, disability, accident and so on.
What are some common payroll processing mistakes?
- In the case of some multi-national companies, there might be some confusion as to the manner of maintenance of payroll provisions. This is because of some of the payroll standards not being consistent across the various countries in which the company is operating.
- Certain expenses borne by the senior management may be classified as under ‘business expenses’. These may have tax liabilities, and it should be strictly ensured that the former are not evaded. Any reimbursements should be duly paid, and the taxes eligible should be accounted for.
- Certain trivial expenses, say in the event of a company event or function, may require the use of petty cash. This may be done on an ad-hoc basis and may be debited from the wages of an employee. These need to be carefully audited for, in order to ensure compliances.
- Electronic Fund Transfers, if they are not properly accounted for, can go under the radar. This might present an opportunity for fraud for those who are aware of the loopholes. Consequently, payment authorizations need to be strictly monitored in order to prevent corruption within payroll processing.
FAQs
- Has the payroll processing mechanism changed over the years in India?
The system of maintaining payrolls used to be a cumbersome as well as bureaucratic process. The records would be maintained in traditional official files, and thus there was the risk of misplacement as well as other discrepancies. With the onset of software, the process has become much smooth and streamlined. - What softwares can be used effectively in the payroll process?
Some of the best applications as well as software for payroll processing include the likes of Razorpay, Zimyo, Zoho, Wallet HR, Pocket HRMS, and Saral PayPack.
- Will the software be effective in observing legal compliances?
A lot of these softwares are used by reputed companies for maintaining their payroll systems. The Government of India's administrative and legislative needs are typically taken into consideration while designing software.
- What are some of the penalties that businesses risk facing if they violate payroll laws?
The government authorities have the authority to impose heavy fines if an audit reveals payroll law noncompliance. Extreme cases may also lead to shutdown of the company site or other facilities. Other measures could include the suspension of licenses, as well as top management facing civil lawsuits in court.
All of this, would of course, contribute to the loss of the reputation of the company. Existing employees or staff might also wish to terminate their association with the company considering it to be unworthy of trust.
Conclusion
It is important for employees to comply with payroll procedures. Otherwise, they run the risk of having disgruntled employees. There are several legal compliances that need to be respected, ranging from labour laws to Union Government laws. Since there are so many components involved, and the process is intricate, the human resources team might tend to take time, in handling the regulations, taxation and so on.
It makes sense to contract with a reputable payroll service provider to handle your payroll processing if you are a startup and would want to concentrate primarily on your operations.
These payroll service providers have constructed effective payroll management systems and practices based on their experience. They also offer a leave management system to ensure payroll compliance. It is important to ensure regular payroll payments and tax deductions in order to ensure that you stay out of legal hassles.
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