Payroll processing is an integral part of employee management as salary is one of the key motivating factors for employees to work for their organization. Hence, companies should ensure that their payroll process is as smooth and accurate as possible.
The salary payments should be undertaken in accordance with the various payroll and salary acts applicable to Indian employees. Additionally, companies are also required to maintain records of salary payments.
Hence, we will be sharing a step-by-step guide for processing your employee payroll while ensuring that you stay compliant with the regulations. This guide will help you answer the query, ‘what is payroll processing in HR?’
We will also be sharing the regulations to provide you with a complete picture of payroll processing. You will also get to know the various ways of processing employee payroll in addition to understanding the numerous challenges with manual payroll processing.
What is Payroll Processing?
Payroll processing is the process of collecting the attendance data of the employees, calculating their salaries accurately based on it, disbursing it on time, and maintaining its records according to regulatory norms.
It involves all the steps from setting up employee salary accounts to generating reports of the payments done. Being a comprehensive aspect of employee management, it involves the HR department and the accounts team, as they are required to disburse the amount once it is calculated by the HR team or payroll system.
The various functions undertaken as a part of payroll processing are:
- Creation of organizational payroll policies.
- Gathering payroll inputs.
- Calculation of employee salaries.
- Salary disbursals.
- Generation of statutory reports.
- Filing tax returns.
- Maintenance of salary records.
Steps for Payroll Processing
Since the process of payroll is extensive, it can be divided into three stages based on when it is undertaken within the payroll process. By splitting the payroll process into these stages, it can be carried out with better efficiency as the chances of errors are minimized.
So, the three stages of payroll processing are:
1. Pre-Processing Stage
➔ Define Payroll Policy
The first step in developing a robust payroll process is to create a comprehensive payroll policy that covers all aspects of employee payroll. It should provide a clear picture of the payments, the leave and added benefits, the attendance-related policies, and more. The payroll policy should also be shared with the employees upon their onboarding to ensure that they are aware of it and agree to it.
➔ Gather Inputs
Another major aspect of payroll processing is to gather the multitude of inputs required to calculate employee payroll accurately. Payroll processing requires inputs from multiple sources such as employee attendance records, previous payroll details, leave details, miscellaneous expenses, travel and expense details, arrear details, etc. which are gathered each salary cycle to ensure accurate payroll calculations.
2. Actual Payroll Process
➔ Calculate Salaries
Once all the inputs are collated for the salary, the actual salary amount is calculated considering the attendance and related data captured from the attendance management system. Every component of the salary is calculated in this step, including the added benefits, deductible taxes, arrears, etc. Once these values are calculated, they should also be verified to ensure that all compliances are maintained.
➔ Disburse Salaries
Once the salaries are calculated, the next step is to distribute the salaries based on pre-defined payment methods such as cheques, direct deposits, wallet payments, etc. Once the salaries are disbursed, the payslips or pay stubs are generated, which enables the employees to understand how much they were paid for each component of their salary.
3. Post-Processing Stage
➔ Maintain Payroll Accounting
Once the salaries are disbursed, payroll accounting is undertaken as companies need to maintain records of the financial transactions. Since salaries paid are a major part of company expenses, it is essential to maintain records of the different kinds of payments such as salaries and reimbursements to the staff members. It also helps in staying compliant as the records are required to be maintained in a specific format as defined by regulations.
➔ Generate Reports
The final step is to generate reports which can be either for statutory reasons or for analyzing payroll expenses. These reports can be utilized by the management to understand whether they are spending money within budget or whether they are going overboard. Similarly, these reports can also be demanded by the government authorities whenever required for audits.
Indian Payroll Regulations
Since India is a populous country, various regulations related to employee payroll have been established by the government. While most of these regulations are established by the Central Government and are applicable throughout the country, some of them are applicable only to certain states as these are established by the State Governments.
The common Indian payroll regulations are:
➔ Minimum Wages Act
The Minimum Wages Act provides workers with a minimum wage that is decided by the government and varies from one state to another. According to this act, the workers within a specific state should be paid a minimum wage that is defined by the government and revised from time to time.
➔ Payment of Wages Act
The Payment of Wages Act ensures that employees get paid on time and protects them from any unnecessary deductions. This Act assures the employees regarding their payments as it dictates that they get paid before the 7th or 10th day of the month, depending on the number of employees in the company. It is the 7th day if the employee count is within 1000, and the 10th day if it exceeds 1000.
➔ Employee Provident Fund
The Employee Provident Fund (EPF) is a provision of Indian employment, which helps the employee save for their retirement. According to the regulations, employers are required to deduct 12% of an employee’s salary and deposit the same with the EPF Office, every salary cycle. Along with it, they are also required to deposit the same amount from their expenses with the EPF Office.
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➔ Employee State Insurance
The Employee State Insurance (ESI) Scheme provides employees (up to a specific wage limit) with benefits related to medical, sickness, disabilities, etc. The regulations state that employers should deduct 0.75% of their employee’s salary and contribute 3.25% by themselves towards the ESI scheme to ensure that the needy are provided with all the financial help required.
➔ Labour Welfare Fund
The Labour Welfare Fund (LWF) is a regulatory contribution fund managed by different state governments in India. Hence, the employers are required to deduct specific amounts from their employees’ salaries and contribute that amount towards the LWF. The amount, as well as the contribution frequency, differs from state to state.
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➔ Professional Tax
The Professional Tax is a tax levied on all employees, freelancers, traders, and other professionals, who undertake any kind of profession within specific states in India. It is levied over specified monetary thresholds based on the regulatory bodies. The amount to be paid also depends on the individual’s income as well as the location from where they are working.
Documents for Payroll Processing
Since payroll processing also involves paying taxes to the government, there are various documents required for regulatory purposes. Additionally, since the organization requires multiple details from their employees, they require multiple documents to verify the details shared by them.
Below, we are sharing some of the most relevant documents required for payroll processing:
1. Form 11
Form 11 is essential for organizations and employees as it is related to the EPF Scheme. It is used for verifying the EPF account details provided by the employee and transferring their working EPF account into a new Member ID. Hence employees are required to fill this form on the first day of their employment with an organization.
2. Form 16
Form 16 is required by the employees and the employers to ensure the correct remittance of income tax. It is a certificate that provides TDS information on the salary earned by the employee. It should be shared by the employer with their employee before June 15th of the succeeding financial year for which the Form was developed.
3. Form 26Q
Form 26Q is a form used to verify the payments undertaken by an organization to independent contractors and freelancers. It requires their name, address and PAN details, which helps the government verify the tax claims of organizations. It is submitted by the employers quarterly.
4. Employee Bank Details
If an organization is planning to deposit their employee salaries directly into their bank accounts, then they are required to capture the bank details from their employees. Generally, employers require the employee’s complete name as per their bank records, their account number, as well as their branch’s IFSC Code, which ensures timely payments as soon as the salary is disbursed.
5. Medical Insurance Details
Organizations also require their staff members to provide written consent to deduct a specific amount from their salaries for corporate medical insurance. Without their written permission, companies cannot deduct this amount and the employee also has the option to opt out if they wish so.
Challenges in Manual Payroll Processing
There are various challenges associated with manual payroll processing since it is a time-consuming process. Companies cannot afford to have any manual errors with payroll processing since salary is one of the primary motivations for employees to work for an organization.
Following are some of the major challenges associated with manual payroll processing:
➔ Manual Calculations
When calculations are undertaken manually, there are chances of human error creeping into the data. Moreover, when the number of employees in an organization is huge, the task of manual payroll calculations becomes highly stressful and time-consuming for the accounts and HR teams. Manual calculations can also give rise to statutory errors, which could prove costly to the organization in the form of fines and penalties.
➔ Dependency on Manual Inputs
Another major issue for manual payroll processing, especially in organizations with larger employee counts is the dependency on manual inputs. Processing employee salaries requires multiple kinds of inputs such as attendance and leave records, bonuses and commissions, reimbursements, arrears, etc. Since these records are procured from different sources, any delay from even a single source could potentially delay the disbursal of employee salaries.
➔ Multiple Pay Structures
Additionally, there are multiple kinds of employees in an organization with varying pay structures, and their payroll calculations differ based on their designation, tenure, and other factors. When trying to process payroll manually, any human error or omission in the calculations could prove costly for the company.
➔ Payroll Data Security
Since manual payrolls are often undertaken on spreadsheets in organizations, data security and integrity become major concerns for the team handling employee payroll. While spreadsheets do provide limited data security measures, maintaining data integrity remains a major issue with manual payroll processing. Given the rise in cyber thefts and fraud, maintaining payroll records on spreadsheets is no longer a viable option for companies.
Payroll Processing Checklist
Nobody likes delayed and inaccurate payroll. Hence, we are sharing a checklist of tasks that you need to perform each salary cycle, which will ensure timely accurate disbursals:
1. Pre-Payroll Activities
- Keep employee records updated
- Verify employee bank details
- Collect and verify attendance, leave, and overtime data
- Address discrepancies in timesheets or biometric data
- Confirm any policy changes affecting payroll
- Ensure employees have updated their tax-saving declarations
- Verify TDS calculations.
2. Payroll Processing
- Compute gross salary
- Deduct statutory and voluntary contributions
- Double-check salary registers
- Confirm amounts with department heads if required
- Share payroll reports with senior management for final approval
- Transfer salaries via bank or payroll processing software.
3. Post-Payroll Activities
- Notify employees of successful disbursement
- Generate and share payslips with employees
- Deposit TDS, PF, ESI, and other contributions before due dates
- File compliance reports with authorities
- Maintain payroll records for audits and future reference.
Conclusion
Payroll processing is not only essential for an organization, but its very existence depends on accurate salary disbursals. When your employees are compensated accurately on time, and according to the industry standards, they trust your company and tend to stay longer.
Hence, we have provided you with a complete overview of the payroll process in this guide, including the various stages, Indian regulations related to employee payroll processing, and the required documents. We have also shared a payroll processing checklist to enable you to provide accurate on-time salaries every salary cycle. Finally, we have shared the multiple challenges associated with manual payroll processing, as switching to an automated system is the future.
