Payroll – Definition, Processes & Solutions
What is a Payroll System?
Payroll is a primary aspect of an organisation. It is all related to the employee’s wages and thus needs to be handled carefully. There should be a proper payroll management system to carry out the payroll process effectively and efficiently. Payroll processing is a complicated process, and in this article, you will learn everything about the payroll system.
What is Payroll?
Payroll is a process of paying salary to the employees of a company. It begins with creating the employees’ list to be paid and closes with tracking the expenses. It is a complicated process, which requires different teams like HR, payroll, and finance to work together. In simple language, we can say that it is a process that involves finding out the due amount of employees in a payroll cycle once the deductions, such as PF, TDS, and meal coupons are removed.
A payroll cycle is the time period between the disbursements of two consecutive salaries. This payroll cycle can be weekly, bi-weekly or monthly.
Stages of Processing Payroll
A payroll officer must be careful while planning. This process can be divided into three steps that include pre-payroll, actual payroll, and post payroll activities.
1. Pre-Payroll Activities
Defining the policy for payroll
Many factors affect the net payable amount. The different policies related to attendance, benefits, leave, etc., become functional at this time. The management must define these policies on priority to make sure the standard payroll processing.
Gathering inputs
The payroll process includes linking with various departments. So, you do not miss any kinds of information such as attendance data, data related to any revision that occurred mid-year, and more. In the smaller organisations, the information gets collected from the dedicated teams of respective departments. Big organisations make use of the payroll software that has smart features such as an employee self-service portal, a separate leave management system, etc.
Input validation
Once all the data is received, it needs to get checked for validity and then changed to the correct format. While validating the data, it is also ensured that the data is for all the active employees and no data of inactive employees is present.
2. Actual Payroll Process
Payroll calculation
Once the data gets validated, it gets fed into the payroll system of the company, where the actual processing occurs. As a result of this processing, the net payable amount gets calculated after removing the tax and the deductions.
3. Post-Payroll Process
Statutory compliance
All the deductions, such as TDS, EPF, etc., get deducted during the processing of payroll. All the amount of this deduction then gets dispatched to the government agencies, which then gets returned or reported as part of PF return filing.
Payroll accounting
Each company keeps a record of each financial transaction. Similarly, the salary transaction also gets added as a transaction in the account’s books. It is a part of the payroll management system to verify that all the salary data is added accurately in the accounting system.
Payout
The companies pay a salary in the form of bank transfer, cheque, or cash. Once the payroll processing completes, make sure that the bank account of the company has enough funds so that the salary payments can be made. The salary statement gets sent to the bank branch, containing the details, such as employee id, amount to pay, bank account number, etc. The organisations using the payroll system having a self-service portal for an employee can get the payslips published easily for the employees, where employees can log in and get access to their payslips.
Reporting
After every payroll cycle, a report is maintained that contains all the data about that payroll cycle. It is the duty of a payroll officer to maintain this reporting system department-wise and provide it when someone asks for it.
Methods of Payroll Processing
There are three methods of processing the payroll. These are as follows:
1. Spreadsheets
This is the best method of payment processing for small organisations or startups where the total number of employees is very less. Hence, all the employee data and salary are easily manageable through the spreadsheets system with the help of a few mathematical formulas to perform computations. As the number of employees rises, this method becomes costly as compared to the automated ones.
2. Outsourcing
This is another method of payroll processing that many businesses, who do not have dedicated personnel for this purpose, use. The businesses provide information such as leaves, attendance, and other reimbursement details each month. The outsourced agency then computes the salary amount and reverts with the computed data.
3. Automation
There are certain challenges in spreadsheet and outsourcing methods, which are outweighed by the automation method. There are many payroll softwares available in the market that process the payroll and eradicate the dependency of manual and outsourcing methods. But make sure that the software being used gets regularly updated with the compliance laws.
Payroll Software to Use
There are many payroll software in the market, but which one to choose is the big question. Payroll software eases the work of payroll processing with increased accuracy. It keeps the payroll management system regulated for the organisation. Before deciding which software is best for your organisation, consider some of the key features which are present below:
1. Ease of operation
The payroll software should be one, which is easy to use and straightforward. It will reduce the requirement of training to use the software. Also, the software should be accompanied by proper documents so that you can get access to all the information.
2. Scalability
The software should be scalable enough to handle the ever-increasing count of employees. It should have features such as a reimbursement model, the management system of attendance and leaves, and can get easily upgraded with advanced features without difficulty.
3. Employee self-service portal
It is the primary feature of any payroll software. It offers information such as the declarations of tax saving options opted by the employee, flexible benefits used by the employee, etc. It makes it easy for the employee to interact with the payroll officer.
Conclusion
Payroll system is very crucial for any company, and it is crucial to understand payroll processing. I have tried to cover every aspect of payroll in this article. I hope I have answered all your queries related to payroll.
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FAQs
Q. What payroll terms do I need to know?
Ans. There are several terms related to running payroll. Check out a few payroll terms mentioned below:
- Compensation: The things an employee is given in exchange for their work, such as bonuses, wages, and any benefits.
- Deduction: The amount that is held from the employee’s salary.
- Gross wages: The wages of an employee before deductions.
- Net Wages: The net salary after all the deductions.
Q. What is the best way of running a payroll?
Ans. Payroll can be run in a few ways depending upon what you feel good with. Business owners can use payroll software, run payroll by hand, or outsource payroll to an expert. The payroll software is the most convenient way as it saves your money and time. While doing payroll by hand is the most time consuming and less expensive. Outsourcing the payroll is less time consuming and the most expensive way.
Q. How is an exempt employee different from a non-exempt employee?
Ans. You need to pay overtime wages to an exempt employee, and these employees need to fulfil a few requirements:
- The exempted employees must get paid on a salary basis.
- The employees should have job duties such as professional, administrative, or executive, which are considered exempt.
The employee that does not fulfil the requirements given above is non-exempted. They get paid overtime wages and minimum wages.
Q. For how long do I have to keep the payroll records?
Ans. Keeping the payroll records is a must for every employer. These records need to be kept for at least three years, and the records of employment taxes need to be maintained for at least four years after filing the last quarter of the year. But you are advised to keep the payroll records for as long as you can.