Payroll management is the process of managing employees’ payroll, which includes managing salaries and the breakups associated with them. It encompasses the details of various salary components such as deductions, contributions, allowances, perks, bonuses, etc.
Payroll processing is a crucial process for the organization as it not only helps them track the record of the employees but also keeps them informed about their monthly salary details, hence maintaining clarity in the salary disbursement process.
Payroll management is conducted by implementing payroll software that streamlines payroll processing and helps organizations and HR professionals improve the efficiency of the payroll process by eliminating human errors and enhancing accuracy by automating calculations of the salaries of the employees.
In this blog, we will give you an insight into the payroll management software, payroll management system, and how to conduct the process of payroll along with the suitable methods and challenges that affect the operational efficiency of payroll processing in an organization.
What is Payroll Management?
Payroll management is a process of calculating and disbursing salaries to the employees for their service. It includes addition of compensations and deductions of taxes and other relevant measures to ensure accurate and timely payments.
Payroll management is a specialty tool designed to streamline payroll processing and facilitate employee payroll management. It calculates taxes, employee and employer contributions, bonuses, other deductions, etc.
The primary objective of payroll processing is to keep the employees clear on their basic salary deductions, contributions, and allowance, hence enabling them to understand their salary break-ups and maintaining transparency in salary transactions.
This will not only help the employers maintain a cordial relationship with the employees but will also enhance the employee connection to the organization and serve as financial proof for employees seeking loans or other financial help from banks.
What is Payroll Management in HR?
Payroll management in HR is a process of overseeing payroll management and administrating employee compensations by automating the evaluation process and making the evaluations accurate and authentic.
In payroll management, HR is focused on evaluating and distributing payslips to employees after salary disbursements. However, the technological advancements in HRMS software have made it easy for human resource professionals to make payslips available to employees on their ESS portal or employee self-service portal where they can download their payslips and keep themselves informed about their salary breakups.
The new-age workforce demands clarity and transparency in employment policies and communication. So, it becomes a critical factor for HR professionals to administer payroll management and make it available to the employees as soon as the salary is disbursed. Some of the key components of salary payroll management in HR are:
- Employee data management
- Calculations of salary allowances and bonuses
- Evaluations of deductions from the net pay.
- Compliance with laws and regulations
- Maintaining documents of employees
- Payroll record maintenance
- Employee benefits and allowances administration
- Data uploading on the ESS portal
- Distribution of accurate payslips.
Payroll Management Process
The steps in the payroll management process include the following:
1. Pre-payroll Activities
The pre-payroll activities involve the prerequisites necessary to get sorted before the payroll is processed. It is a mandate that requires compliance to get the processing of payroll started. Let us understand in detail:
a. Defining Policies for Payroll
The first and foremost step in the payroll management process in the pre-payroll activities is defining the payroll policies included in the company policies and establishing policies related to salary structure, overtime, leaves, benefits, bonuses, deductions, and disbursement periods of salaries.
Also, ensuring the payroll policies comply with the policies in India, its laws, regulations, and the company’s norms is an essential step that is required to be done before the start of the payroll processing management.
b. Gathering Employee Data
The next step is to gather the employee data such as employee detail information, their job role, designation, department, salary structure details, allowances provided, deductions to be made, contributions, bonuses, advances made, etc.
Gathering employee data also includes the collection of taxation details, employees’ PAN, TIN, and other financial identity proofs to ensure the necessary benefits they are entitled to in the company.
c. Time-tracking and Attendance
Collect the attendance of employees along with the details of overtime, day offs, etc. to calculate and evaluate the payroll. This is a crucial step to get the data correct as it will affect the amount to be credited to the employee’s account. Faux in this step can create chaos and dissatisfaction in employees. So, the employer must be cautious in this step to avoid conflicts.
Also, with a robust attendance management system you can gather employee attendance accurately without any human errors and make the payroll processing credible as well as reliable for the employees.
d. Validations and Approvals
The last step of pre-payroll processing management is to validate the information gathered and obtain necessary approvals from the superiors or the concerned managers regarding the expenses of the employees that are required to be reimbursed.
Also, the percentage of allowances, deductions, and other benefits are required to be conferred as per the laws of the Nation and the company. So, the HR managers are required to check on the compliance of the total amount and the salary structure before stepping to the next steps of the payroll processing.
2. Calculating payroll
This is a crucial step of evaluation where the salaries of the employees are evaluated after adding the compensations, allowances, and bonuses and subtracting the deductions like income tax, loss of paydays, advances, etc. It includes the following steps:
a. Gross Salary Evaluations
Compute the total earnings of the employees that is inclusive of basic salary, allowances, bonuses, overtime, etc. The total amount to be extracted out of adding all the compensations, benefits, and allowances of employees with their basic salary is the gross salary of an employee.
b. Deductions
Deductions are the amount that are required to be deducted from the gross pay of the employees. It includes income tax, advances taken by employees, insurance, provident fund contributions, and other deductions such as ESIC contributions, pension funds, labour welfare contributions, etc.
c. Net Salary Calculations
After summing up the allowances and benefits in the basic pay and deducting the necessary deductions from it, you get the net salary of the employees for which the payroll is to be processed, and the final amount is to be disbursed to the bank accounts of the employees on the salary due dates.
d. Approvals
In the last of the evaluation process, the final approvals are taken from the management regarding the percentage of deductions and contributions to be made for each employee as per their grade of employment and terms of service in the organization. Also, if any additions of compliance or other policies to be made as per the company policies or government mandate is reviewed by the seniors and alterations are made if required.
3. Salary Disbursement
After the fulfillment of the prerequisites of payroll processing and evaluations of the total amounts and derivation of the net pay of the employees, the next step is salary disbursement to the salary accounts or bank accounts of the employees. Companies can disburse the salaries by the method of NEFTs, bank transfers, cash-in-hand, or through any other mode depending upon the policies and provisions of the company. It is done in two different steps namely:
a. Payment Processing
The salary is processed to the bank accounts of employees which are linked to the company The processing of salaries is done on the dates fixed by the employer as per their company policies. The payment of salaries is done via bank transfers, NEFTs, cheques, etc.
b. Payslips Distributions
After the salary is processed, the payslips of employees are distributed in which the details of their salary structure and breakups of their salary are mentioned. It includes every single detail of employees’ benefits, compensations, and deductions and keeps them informed about their net pay details.
4. Post-payroll Activities
After the processing of the payroll, the last step includes the post-payroll activities that are focused on the rectifications, documentation, and query-solving of employees. It includes:
a. Compliance
File and remit taxes, insurance contributions, and other statutory dues to government authorities within the specified deadlines post-processing of payroll and salary disbursements. Ensuring compliance of laws as per the Nation is essential to keep away from legal lawsuits and avail governmental benefits.
b. Report Keeping
Record keeping of the employees’ disbursed salary for the concerned month and the deductions made per employee along with the total deductions, benefits, and allowances. Also, generating and storing payslips for future audits, financial analysis, and compliance.
c. Reconciliation
Reconciliation of payroll data with the financial statement is the last step post payroll processing to ensure accuracy and consistency in data as well as to submit a reconciliation of taxes or income tax returns in case of the extra amount paid by the employer to the government.
5. Payroll Review & Updates
The last step in payroll processing is the review and update process which focuses on the review of data as well as the update of laws and policies (if any). It includes the following:
a. Updating Records of Employees
Reflect changes such as promotions, salary increments, income tax declarations, or benefits adjustments in the payroll system and update the system to avoid faux report generation.
b. Auditing
Conduct periodic audits to identify discrepancies and file a return if tax exceeds the amount. Also, auditing on the actual amount disbursed as salaries is checked to avoid faux transactions and identify missing transactions if any.
c. Feedback
Last but not least, feedback is collected from the employees regarding their experience with payroll processing management and how it can be improved to best suit their requirements and needs. Constructive employee feedback is considered and can be implemented if it aligns with the organizational policies and goals.
Methods of Payroll Management?
The payroll management process can be conducted through various methods such as:
➔ Manual Payroll Management
This is the traditional approach or method of processing payroll in which the employer uses manual technique, that is using spreadsheets or Excel sheets or books of accounts to keep the records of payroll.
Papers, excel sheets, and simple calculators are the tools that are used in the manual processing of payroll. It is usually used for small businesses with limited employees ranging from 5-15 and is cheaper than other methods of payroll.
However, it is a time-consuming process that is prone to manual errors and faux caused due to discrimination, biases, or fraud.
➔ Payroll Management Software
The new-age businesses are inclined towards the usage of payroll software that automates the tasks of payroll service hence streamlining the hectic process of payroll structure and making it error-free. It is less time-consuming and is more relevant to rely on for the data and reporting.
Some top payroll software even provides the payslips of employees on their ESS portal for the employees to view and keep themselves informed about their salary breakups.
With the growing payroll software market in India, payroll management system have been the best method of processing payroll in recent days even for the MSME sectors as different payroll processing software providers of all price ranges and subscriptions are available in the market with the ease for the employers to choose as per their convenience and customize the same as per their budget and needs.
➔ Outsourced Payroll services
In this method, a third-party or payroll service provider manages your payroll processing and payroll-related queries. Tasks like payroll processing, payslips generation, and distributions, filing and remitting taxes on behalf of businesses are the priority for the third-party company. Such a process is scalable for growing businesses however, a major drawback of this process is privacy issues and data leakage as well as higher pricing.
➔ Internal Payroll Management
HR and payroll are the key in an in-house payroll management as HR professionals are involved in the processing of payroll and generation of payslips etc. The finance team of an organization is also the one involved in processing payroll in internal management. The company solely depends on internal employees for their payroll management.
Tools such as an automated payroll system, ERP software, etc are used by HR and payroll managing employees to process payroll.
➔ Cloud-based Payroll software
It is a contemporary approach where payroll is managed via cloud-based payroll software. The integration with cloud HRMS or cloud-based payroll solutions is one of the best ways to handle payroll operations as it streamlines the processing of payroll, and payslips distributions as well as automates compliance record keeping of data in the cloud for future references and audits.
➔ Hybrid Payroll Management
As the name suggests, hybrid management is a process in which a company partially depends on third-party service providers for tax compliance and processes the payroll in-house. It is a combination of internal management and outsourcing payroll management. It balances cost and efficiency and offers flexibility based on employers’ preferences and budgets. However, data integration can be a challenge for your business in this method as it requires adequate coordination between the provider’s policies and your business policies.
Challenges in Payroll Management
The payroll management or processing also faces a few challenges that are required to be considered with caution to avoid faux in report generation and analytics.
1. Compliance with Laws
Complying with tax laws, company policies, and outsourcing providers’ policies becomes difficult, and aligning them as per the company’s needs becomes expensive as well as sometimes putting the employees’ data at threat.
2. Accuracy in Evaluations
The accuracy in evaluations becomes challenging for employers adopting manual methods of payroll calculations as it is prone to human errors and hectic to manage in case of larger databases.
3. Data Maintenance & Security Issues
If not handled cautiously, employees’ data maintenance and storage would be at risk. Specifically in outsourced methods of processing payroll, data security becomes questionable as the data shared with them can be sensitive and have a high scope of getting leaked.
4. Integration with Other Systems
Integrating the payroll systems with other systems such as employee management systems, and biometric attendance system becomes difficult. So, it is always advisable to get robust payroll processing software that can integrate with ease with other systems.
5. Handling Employees Queries
Handling employees queries regarding payslips and payroll becomes challenging in the manual method of valuation surging dissatisfaction in the employees. An employee might raise a concern about missing overtime pay while some might have queries regarding tax deductions, percentages of benefits, etc.
6. Managing Contractual Employees
Contractual employees are the temporary employees who are usually not included in the payroll. They get paid as per their work hours and availability in work days. Payroll for seasonal workers, contractors, or freelancers often involves irregular hours or one-time payments which increases the proneness of errors in evaluations.
7. Technological Challenges
Not all employers are tech-savvy and have access to digitalization in their regions. This creates challenges for the micro sector businesses operating far away from remote locations with little or no internet availability. The new-age technology puts the old-age business employers in complexities to managing payroll with ease.
Also, integration with outdated or incompatible payroll systems can hinder efficiency and accuracy. With the update in tax regulations and changes in tax slots, outdated or inefficient software can cause errors in tax calculations for processing payroll.
8. Cost Constraints
Managing an efficient employee payroll software is expensive and becomes unaffordable for micro businesses. Infact, the subscriptions to premium features come with a premium pricing that becomes costly for most employers.
End Note
Payroll is the critical factor of an organization that ensures transparency and compliance with laws. After getting an insight into what is a payroll management system and how it functions, it is essential to keep up with the recent payroll service or payroll software that will best suit your business needs as well as fit your finance budget. A payroll management system is an essential tool that is required for handle the new-age workforce with efficiency. So, it is essential you invest in the best payroll software that not align with your business policies but will also integrate with other systems seamlessly in your budget.
