If you work for any private or government organisation, the payroll process plays an important role in your journey. Why? This process decides what salary an employee is going to take home. Also, it helps employees decide if they add value to the company or not. This makes payroll processing one of the essential components of the company. It comprises many crucial components, which determine the deductions and taxes of an employee. After all, these are parameters that can break or make a person’s take-home pay!
So, what is the payroll system, and how to prepare payroll in your business organisation? If you are looking for efficient and effective payroll preparation, we have pulled together a comprehensive insight into what the payroll process in HR represents. If you are administering the payroll processes of your company, keep reading.
Payroll System definition
Let us begin with the factu al payroll processing meaning. In the world of human resources (aka HR), payroll processing is also known as salary processing. However, the technicals behind any employee payroll system go over and beyond the salary. That is mainly because of what payroll processing represents in the real world. Most of the time, the entire process is intimidating. If you are unable to master the basics, you will find it difficult to complete the entire process effectively.
Also, you must be aware of the 5 basic steps in processing to understand the overall process. Small mistakes can translate to bigger figures and failures in payroll processing. Hence, a lot of people take ample time to understand the actual payroll process meaning.
By definition, payroll processes are crucial, and integral business functions. This is where the “net pay” of an employee working for the company is calculated. All necessary adjustments are made to compute the net pay. As mentioned previously, two of the most important adjustments in any payroll process would be deductions and taxes.
For the final payroll management process to be accurate, the administrator needs to plan the entire process with utmost care. They need to pull together a step-by-step guide, which defines and evaluates all the stages of the process neatly. In fact, payroll processing can be one of the longest and tedious departments to build in any company. Also, the firm is expected to hire experts for the job.
When it comes to making deductions and final computations- several formulas are used. Here is a simple outline of the most commonly used formulas for defining an employee’s net pay.
The Net Pay equates to the difference between the Gross Income and the Gross Deductions. The Gross Income (also known as the gross salary) represents the sum of an employee’s regular income, one-time benefit (or payment), and allowances. On the other hand, the gross deduction represents the regular deductions, the one-time deductions, and the statutory deductions.
Of course, these are basic formulas that can be fine-tuned based on the policies of an organisation. Regardless of the fine-tuning, all parameters included in calculating the net pay would fall within these categories. That means employees can also define their net pay, by identifying the above components in their salary. These are interesting parts of the salary processing syst em.
What is payroll processing?
With the above formulas, you will only be able to compute the net pay. Nevertheless, it would not be an exaggeration if someone tells you that payroll processing has many more elements. During the process of establishing the payroll, the administrator needs to engage in a couple of tasks. Often, these tasks are designed to suit the organisation and its principles.
A few of the commonly accomplished tasks would be as follows:
1. The administrator is responsible for building the Pay Policy of the company. They have to spend ample time defining the leave encashment policy, the flexible benefits, and even the bonuses. Most of the time, these benefits are defined by the employee’s level in the company. For example, the policy defined for an employee who works at level “E3” will be different from the benefits secured by someone in Level E7. Likewise, the policies defined for contractors will be different from full-time employees. These are factors the payroll administrator needs to take into consideration while building the payroll process. Indeed, these are reasons why the HR payroll process is not a cakewalk!
2. Now that you are aware of the actual payroll system meaning, you need to be aware of the other components in the computation. This includes the basic pay, the variable pay, the LTA, and HRA. These are four integral components of the payslip. It would be best if you remembered that these variables would differ from one company to another. Always, the variable pay will be a percentage of your actual take-home. And, the variables will be offered as one-time payments. The payroll administrator defines when and how the variable pay will be introduced into the employee’s take home.
3. Apart from computing an employee’s net pay, the payroll administrator is also responsible for collecting inputs from canteen vendors and transport service providers. These are additional factors, which can have an impact on your monthly take-home.
4. As a part of the payroll process, the net pay needs to be calculated from the gross salary. The non-statutory sums and statutory figures will be removed from the gross salary. The process of deducting “values” from the salary will be automated. However, these values need to be fed into the system by the administrator.
5. After the final value is identified, the payroll administrator needs to release the “Actual figures.” This could be the most challenging part of the entire job!
6. During certain times, the payroll processing department needs to take care of deposit dues and file returns as well. This covers various processes around the PF, TDS, and even more. The administrators need to be aware of the authorities they have to approach for completing the procedures.
Also Read: Statutory Compliance in Payroll- A Complete Guide
Basic Stages in processing payroll
Now, let us learn more about payroll process steps in India. Often, the entire procedure is broken into three crucial stages. In our post, we would like to tag them as “pre payroll,” “actual payroll,” and the “post payroll” activities.
Definition of Company Standards
Company standards often define the organisation. These standards are derived from policies. And nothing can be more important than the payroll process. This is an integral component of the norms and values a company believes in. And, defining these policies need time, expertise, and professional knowledge. The company standards have to be approved by the management. This is often a lengthy process. Why? Big companies have multiple board members. Each of these members would have unique policies and perspectives. Which makes it a lot tougher for the payroll administrators. Common policies that build the company’s payroll process would be attendance, pay, leave, and benefits.
Collection of Information
Once the policies are defined, they need to be assigned to the right department. Companies often have multiple departments, each with many pieces of information.
The 5 basic steps in processing payroll information would be:
- Employees have to provide details of their tax declarations. They also need to disclose information about any specific tax policy or benefit they leverage.
- Moving on, the Human Resource team needs to provide details about employee salary, benefits, and eligibility for other added funds.
- The finance team is responsible for providing details like the deductions and recoveries from employees.
- Likewise, the transport and vendor department needs to provide details to the Payroll administrators.
- The leave and attendance are automated systems in most companies. From these systems, the payroll administrators would gather details of the current shift and employees’ attendance.
Information from these departments can appear overwhelming. Yet, these pieces of information are extremely important. That is why companies use software solutions to gather these details. Automation makes the whole process simpler and faster. Also, it increases the accuracy of the entire payroll system.
Validation of information
A lot of tedious tasks kick-start once the system has the information described above. It is the job of the payroll team to ensure that the data collected is accurate.
Here are few common checks performed by the administrators:
- The administrators have to make sure that the employees are active in the company. They should not process payments for employees who have left the company. The list should be up to date.
- The data collected needs to fall in line with the company’s policies.
- The data collected has to be in the right format, as well. There is no universal standard for the format. Yet, it has to meet the company’s requirements.
Computation of Payroll
Once the required figures are collected from the different departments, the computation begins. Fortunately, the process is automated and uses a payroll processing system. The payroll systems can be integrated easily with portals, leave, and attendance systems too! This means payroll administrators don’t have to worry about the computation. They need to feed the formulas and “rules of computation”. With these details, the system would take care of the deductions and calculation of the final pay.
According to experts, payroll processing has changed drastically in the past few years. Today, there are many robust tools to help HR and payroll teams.
With the help of the right tools, employees will have the freedom to invest their effort and time on much more pressing matters.
Compliance
One of the key governing factors of the payroll processing system would be compliance. The administrator needs to be extremely careful about the statutory compliances of the company. Why? Many statutory deductions will be made to identify the net pay of the employees. Three of the standard statutory deductions would be ESI, TDS, and EPF. These are always deducted during the payroll processing activities. Once the amount is deducted, the funds need to be diverted to the respective government bodies or authorities. This needs to happen in a systematic manner. There is no room for failure or mistakes in this process.
Accounting the Payroll System
Moving on, the company is expected to maintain accurate books, which would speak volumes about accounts. For example, when salary is paid to an employee, the details have to be entered in the book. When we say “book”, we focus on the system which keeps track of the figures. In these modern times, there are many payroll processing systems to help with this task. Often, the data is manually entered into the system. These are also known as ERP or accounting systems.
The Payout
The talk about any payroll processing system will be incomplete without the actual payout. After the steps mentioned above are executed flawlessly, the administrator will be in a position to transfer funds. The fund (or salary) will be sent in the form of:
- Bank transfers
- Cheque
- Cash
Most of the time, employees prefer the amount being transferred to their bank accounts. This would be their salary account. To achieve this, the company will need the employee to share specific details. This includes the salary amount, account number, and even the employee ID in some cases.
Reporting
The final stage of payroll processing would be reporting. This step is where the payroll team starts to prepare department-wise reports. The reports are always regional. This means employees in a specific region of the world will be handled by a payroll team who knows the rules and regulations of that place. Finally, the reports will be shared with a finance team. The finance team is responsible for taking the figures and facts to the upper management. Once the consolidated reports are received, the management starts to make decisions. Of course, the decisions are made after a thorough analysis of the figures shared by the finance department.
Also Read: What is Tax Deducted at Source, Deduction Rules & Payment Method
Conclusion
Payroll processing is a lengthy job. And it involves many departments. In order to make the entire process seamless and interesting- companies find intuitive ways of bringing the departments together. Since you are aware of the basics of payroll processing, you can use this information to redefine and improve the methods used by your organisation. Also, if you are an employee, this post will help you understand the tasks executed by your payroll department before releasing the net pay.
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