In the world of business, payroll is one of the most crucial yet complicated processes. It is a process that transforms an employee’s time and effort into tangible financial rewards, keeping them motivated and morale high.
Payroll encompasses a range of tasks – calculating gross wages, deductions and complying with tax and labour regulations. Payroll involves intricate calculations, legal considerations and meticulous attention to detail.
In this blog post, we’ll cover what payroll is, its different terms & stages, and everything else you need to know about this core business function.
Table of Contents
What is Payroll?
Payroll is the process of paying compensation to a company’s employees for work done in a certain period of time. It is a critical business function that involves multiple departments like finance and HR.
The process of payroll involves managing employee information, tracking working hours and making timely salary payments. The payroll process can be managed internally with automation and software or can be outsourced to specialized firms.
Functions of Payroll
Payroll as a function encompasses the following:
- Establishing payroll policy and process within the organisation
- Defining payslip components like basic & variable pay, HRA, LTA and more
- Calculation of gross salary, statutory and non-statutory deductions like PF, taxes, etc
- Releasing salary and payslips to employees
- Depositing dues like TDS, and PF with appropriate authorities
- Accounting for payroll-related expenses
Previously, businesses relied on spreadsheets or manual methods to calculate and disburse salaries. Today, automated payroll software helps businesses manage these complexities effortlessly.
A payroll cycle is the time gap between two salary disbursements. Businesses can opt to pay salaries on a weekly, bi-weekly, or monthly basis. Generally, in India, it is processed every month.
Stages of Processing Payroll
Here are the series of steps involved in executing payroll successfully from ground zero.
Processing payroll is a sensitive task that involves the efforts of multiple departments like HR, finance and legal. This process includes the following functions:
- Payroll policy structure
- Consolidating payroll inputs
- Validating inputs
- Calculating payroll
- Deduct taxes and other statutory compliances
- Payroll accounting
- Making the actual payment
- Make statutory payments
- Payslips and tax computation sheets
Current Payroll Landscape in India
To understand the current payroll landscape in India, RazorpayX Payroll commissioned a survey by the International Research Bureau, which spoke with HR executives from 163 organizations across 12 key industries.
- Payroll automation is the norm. All the businesses IBR spoke to automated their payroll functions with payroll software. Only 37% of Indian businesses perform their payroll functions manually.
- Current payroll tools being used lack functional prowess. This was clearly indicated in the fact that 31% of organizations say that their payroll accuracy is below 90%. This is an unacceptable number since payroll is a very important function in every organization.
- There is limited insight into ideal payroll solutions. Most organizations today use sub-optimal payroll software that does not provide fundamental features like automated compliance, speedy and accurate processing, data security and more.
Best Payroll Software for Your Business
Out of all the ways to carry out your business’s payroll process, automated payroll is the most popular and economical. What does a good payroll software look like?
Intuitive & Easy: A good payroll software is intuitive and easy to operate. It should be easy to implement with minimal training for both HR teams and the employees.
Scalable: As a business grows, so does the size and complexity of its payroll function. A good payroll software should be able to handle payroll for businesses at all stages: small, mid-market and enterprise level.
Read more: Payroll for Enterprise
Robust ESS Mechanism: Payroll software is equally used by the employee to access payslips, submit declarations and other important payroll information. A good employee self-service portal thus becomes very important since it enables employees to be self-reliant.
HRMS Integrations: Payroll is only one of the several functions that come under the purview of the HR department and is closely tied with other HRMS functions like time, attendance, and leave management.
A good payroll software should be able to integrate seamlessly with other HRMS software. For example, the RazorpayX Payroll integrates with 45+ HRMS like ZohoPeople, Springverify and more to provide an all-in-one, seamless experience for both HR and employees.
Accounting Integrations: Payroll is an important function of the finance team as well – employee salaries take up a sizeable chunk of most teams’ budgets, and ensuring that this expense is properly and accurately recorded is very important.
For this reason, most payroll software should provide you with integrations with accounting software which will automatically record payments to employees in your books of accounts.
Compliant: The tax regulations and requirements in India are ever-changing, and good payroll software should be able to keep up and stay updated in real time. Compliance includes elements like tax deductions, PF deductions and minimum salary payment requirements.
Not adhering to regulatory requirements can be very costly for a business – it can lead to hefty fines, lawsuits or even criminal punishment.
100% Accurate and Timely: Imagine if you paid the wrong salary to your employees – the consequences of this is immense; right from correcting the error to identifying the source of the error becomes a tedious, time-consuming task.
This is why it is important for payroll software to be 100% accurate right from the start, with no room for error.
Learn more: Timely & Accurate Payroll Software
Customizable: Every business’s needs are different; good payroll software should accommodate these unique needs with customizations. For example, businesses that pay employees on a shift-wise basis are different from those that pay on an hourly or a monthly basis.
Advantages of Payroll
While there are benefits to a manual payroll process, automated payroll is the way to go today. Here’s why:
- Improved accuracy: Automated payroll systems reduce the risk of errors in payroll calculations, leading to fewer discrepancies in employee paychecks.
- Reduced costs: Automated systems reduce the risk of payroll errors, which can lead to fewer penalties and fines. They also save time and resources, leading to lower labour costs.
- Enhanced compliance: Automated systems can automatically calculate and withhold taxes and generate reports that can be used to verify compliance.
- Improved employee satisfaction: Employees appreciate being paid accurately and on time. Automated payroll systems ensure that employees are paid correctly and on time, which can lead to improved employee satisfaction.
Challenges in Handling Payroll Process
Keeping Up with Compliance
Businesses in India have to follow a legal framework while disbursing salaries to their employees. This framework is made up of four components.
Compliance is complicated because each tax is computed differently. Businesses must also periodically file returns on four different portals or risk expensive penalties.
Most businesses use spreadsheets and other manual methods to work on compliance, which is not the most efficient way to be compliant. The computations are lengthy, time-consuming and inaccurate.
In India, employee laws also change frequently, making it even tougher to stay updated.
Read more: Income Tax Slabs 2023
According to a survey, over 57% of businesses in India still rely on paper or spreadsheet-based payroll management and processing.
Manual payroll is easy and cheap, but also time-consuming and prone to mistakes. Information can also be mishandled and tampered with.
Spreadsheets also cannot be compliant with tax laws as they change.
For processing payroll, employees are required to provide a substantial amount of sensitive data in the form of official documents to the concerned team. These include employee’s bank account details, rental agreements, PAN and Aadhaar details.
This data can be compromised; failure to protect it can seriously damage the reputation of the business and the personal security of employees.
Paper-based documents can be misplaced easily. Even if the documents are saved on spreadsheets, they are just a password away from being misused.
Methods of Processing Payroll
There are three ways to process payroll: the manual spreadsheet route, the automated route, or outsourcing the entire process.
Depending on the budget, size of the organisation and each business’s special set of circumstances, payroll can be processed in any way.
Many businesses at their initial stage of operations find spreadsheet-based payroll management convenient because they only have a handful of employees to manage.
This method involves calculations using standard templates that have set mathematical formulas for the salary and compliance payment computations.
While this is a cost-effective method, it’s not suitable for businesses when their employee count increases. Also, the opportunity cost of using a traditional system over automated methods is very high.
Automated software will do away with all the challenges of using spreadsheets or outsourcing them. There are many automation tools and software available in the market that can reduce manual efforts and increase efficiency.
Apart from carrying out payroll computations, the software needs to be updated with the latest compliance laws.
Read more: How to switch to automated software
This means entrusting your payroll execution to an agency. A lot of businesses that don’t have dedicated personnel opt for outsourcing.
Based on their payroll cycle, they provide the agency with salary information and other data such as attendance, leaves, reimbursement details, etc. every month. The agency then calculates dues and is also responsible for complying with statutory compliances.
How to Manually Calculate Payroll Taxes
To calculate payroll taxes in India, follow these steps:
- Calculate your gross salary. This includes your basic salary, allowances, and any other taxable components.
- Subtract any exempt components from your gross salary. This includes the following:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Standard Deduction
- Calculate your taxable income. This is the amount of your salary that is subject to income tax.
- Calculate your income tax. This is done by applying the income tax slabs to your taxable income. The income tax slabs for the financial year 2023-24 are as follows:
|Up to ₹2.5 lakh
|₹2.5 lakh to ₹5 lakh
|₹5 lakh to ₹7.5 lakh
|Above ₹7.5 lakh
- Add any other payroll taxes, such as professional tax and provident fund contribution, to your income tax.
- The total amount of payroll taxes payable is the sum of your income tax and other payroll taxes.
Calculating these taxes manually for each and every employee is a tedious task. Learn more about automating your payroll with RazorpayX Payroll.
Payroll Glossary – Important Terms
1. Gross Pay: Gross salary is the total of all the components of the salary package offered to an employee. It is the salary before any mandatory and voluntary deductions such as income tax, provident fund, medical insurance, etc.
2. Net Pay: After calculating gross pay, you must make govt. mandated deductions such as income tax, provident fund, etc. from gross pay. The amount that an employee takes home after all such deductions is termed net pay or net salary.
3. Overtime: Overtime refers to the extra hours worked by an employee in a company than the usual defined as per govt. Law. The extra salary or remuneration that the employee will get depends on the company policies.
4. Pay Period: It is a time frame defined to calculate earned wages and determine when employees receive their payslips. Pay periods are fixed and recurring on a bi-weekly, or monthly basis.
5. Compensation: It involves managing, analysing, and determining the salary, benefits, and incentives paid to the employees for their work.
6. Contractual employees: These are not permanent employees and are usually employed on a temporary basis. Their terms of employment are mentioned in the contract.
What is payroll in HR?
Payroll in HR means managing and administering employee compensation. It involves ensuring accurate and timely payment to employees while adhering to legal requirements and company policies.
What is payroll formula?
The payroll formula is used to calculate the net pay of an employee, which is the total amount of money they receive after deductions. The basic payroll formula is: Net pay = Gross pay - Deductions.
Gross pay is the total amount of money an employee earns before deductions, including base salary, bonuses, overtime pay, and commissions. Deductions can include taxes, social security, Medicare, health insurance, and retirement contributions.
What is the process of payroll?
The process of payroll begins with collecting employee information, which is then followed by deducting taxes, ensuring compliances and finally disbursing salaries to employees. The process of payroll also includes accounting for payroll related expenses and keeping up with the changing regulations.
What is the difference between payroll & salary?
Salary is the fixed amount of money paid to an employee for their work, and payroll is the process of calculating and distributing employee wages.
What is a payroll cycle?
A payroll cycle is the time between two salary payments. Most businesses follow monthly payroll cycles, where salaries are paid on the first or last day of every month. Some businesses may follow daily, weekly or fortnightly payroll cycles.
What is a payroll software?
Payroll software is any automation or tool that helps businesses manage payments made to employees. Good payroll software also helps businesses follow compliance and tax laws in the country it operates in. For example, in India payroll software like RazorpayX Payroll automates TDS payments and more.
What is payroll management?
Payroll management is the process of compensating employees for work done over a period of time. It involves tasks like tracking employee hours, wages, keeping track of employee information, calculating deductions for taxes, benefits and paying employees on time.
What is payroll processing?
Payroll processing is the series of steps taken to ensure employees are paid accurately and on time for their work. Payroll processing starts with gathering employee data and ends with timely and accurate payment of salaries.