Payroll Management
The term ‘Payroll’ is associated with several meanings and is interchangeably used as an umbrella term for:
With that being said about the subject, the most widely accepted payroll meaning is the 4th one, i.e., Payroll is an operation that includes a gamut of tasks starting from onboarding a new join on payroll, establishing payroll policies, defining pay components, gathering inputs, calculating and verifying payout, processing salary, distributing payslips, tax-filing, accounting, and reporting.
What is the Payroll Management Process?
Stages Of Payroll
The payroll management process is nothing but a set of regulated steps that are performed in the same order every month to form a payroll cycle. In other words, the payroll process is all about arriving at what is due to the employees, i.e., the Net Pay after making the necessary tax adjustments and other deductions.
Pre-Payroll Process
- Delineating Payroll Policies: The final amount paid to every employee depends upon various factors. The company’s different policies come into play at the time of payout. To begin with, these policies need to be properly defined and approved by the management to ensure standard payroll processing and administration. The primary company policies that are considered while processing payroll include:
- Time & Attendance Policy
- Employee Pay Policy
- Leave and Benefits Policy
- Reimbursement Policy
- Collecting Inputs: The payroll process includes interacting with multiple departments and professionals to gather relevant information. In MNCs and large organizations, the task of gathering data can be a little overwhelming. However, in SMEs, inputs are received from a consolidated source or fewer teams. A little tip is to use a smart payroll software having integrated attendance management software and employee self-service portal so that the input collection process does not remain a problem. Information that needs prior attention if payroll is to be processed includes:
- New Joiner Salary Structure
- Mid-year Salary Revisions
- Variable Payouts
- Attendance Inputs like paid days for the month, overtime, shift allowances, and leave encashments
- Ad hoc Deductions like EMIs or Recoveries like replacement of ID card, or clearance recoveries
- Employee Joining Date
- Month on Month Pre-processing
- Investment Declarations – collected from employees
- Bills for Reimbursements
- Old & New Tax Regimes
- Previous Employer Income/ Tax Declaration
- Previous Company Relieving Details
Actual Payroll Process
Payroll Calculations This is the real game! When someone says payroll, the first thing to strike most minds is money math. So, at this stage, the gathered and validated input data is fed into the payroll system for actual payroll processing. After evaluating all the components including EPF, ESI, LWF, PT, Statutory Bonuses, Statutory Bindings and applicable taxes, the salary is computed. The final result is the Net Pay or Net Take Home Salary with adjusted taxes and other deductions. Once the payroll process is over, it is always advised to reconcile the values and verify data for accuracy to prevent errors.
Post-Payroll Process
- Payroll Reconciliation This is the key process of maintaining and verifying the actual monthly payout including accurate records of employee wages, withholdings, and segments of tax details with the accounting records in the ledger. Payroll reconciliation ensures that you steer clear of piled up paperwork at the time of submitting periodic tax deposits and tax forms and ultimately prevent any fines or legal troubles.
- Payout“Salary has been credited to your account.” Yes, it’s that time of the month! The time to bring a smile to the employees’ faces through this small notification on their phone screens. Usually, organizations provide employees with a salary bank account and prefer bank transfers. However, you can also pay salary in cash or by paychecks. Once the payroll is complete, you just need to ensure that the company’s bank account has sufficient funds to make the salary payment. Details such as employee name & ID, bank account number, PF details, and the amount of wages are then sent to the concerned branch through a salary bank advice statement. In case you are technically woke, and opt for a payroll software that has an ESS portal, you can simply publish the payslips for the employees to log-in to their accounts and access the same, at any time and anywhere.
- Statutory Compliance After making all the statutory deductions like EPF, TDS, ESI, LWF, and PT at the time of processing payroll, the company remits the amount to the respective government agencies. After that, the payment of dues is made via challans. Once all dues are paid, then quarterly/half-yearly/annual returns/reports are filed and submitted to the respective government bodies. For instance, ECR is generated and filed for filing EPF returns.
- Payroll Accounting Keeping a record of all the financial transactions is an indispensable part of the payroll process. Employee salary is one of the most integral operating costs which has to be recorded in the books of accounts. So, it is essential to keep an eye on the financial data and ensure that all salary and reimbursement information is fed accurately into the accounting/ERP system as part of the payroll management process.
- Reporting In order to perform analytics, take decisions, and forecast the business future, in-depth reports are prepared and maintained. Thus, after you lock and run payroll for a month, reports such as department-wise and location-wise employee costs are analyzed to plan for the next month and submitted to the finance and senior management team. It is more of a responsibility of the payroll professionals to dig into the data, extract required information and share similar reports on a monthly, quarterly, half-yearly, and yearly basis for eg., they need to keep a track of liabilities such as leave encashments, gratuity liabilities, and bonus liabilities and provision the same in the organization’s sustainability plan.
What are the components of Payroll?
The disbursement of monthly salary and employee wages have several prime components structured together in the form of payroll. Amidst the gross and net salary, there are multiple ‘components’ that collectively form a salary package. These are imperative for the employers & employees to calculate taxes, EPF, medical expenses, benefits, travel allowances and other elements.
One of the strongest reasons that most companies opt for Payroll Outsourcing Services is that framing the salary components is a huge challenge as one manages the payroll system.
Having understood the payroll definition, comprehending its components is equally important. The payroll components consist of ‘taxable’ and ‘tax-exempt’, variable, constant pay, earnings, some allowances, and deductions. Mentioned below are the most significant ones:
Here’s a blog on how you can perform CTC breakup and decode all the components of your salary:
CTC
When new recruits join the company, a total salary package is offered to them. CTC, short for Cost To Company, is the term for the same, used in countries such as India and South Africa. It delineates the overall amount of expenses that an employer spends on an employee in a span of one year.
Earnings
- Basic Salary This is the base pay defined by the central and respective state governments that every working professional is expected to earn prior to including any added benefits, bonus, profits, and compensation or deducting tax and penalty payments. It is recommended that 50% of the total pay that an employee earns should comprise basic pay. Employers often want to keep this as low as possible so as to curb additional liabilities such as Gratuity, Leave Encashments, or Employer’s PF Contribution.
- Gross Salary Gross salary is the sum total of all the monthly wages, salaries, allowances, rents, and other forms of earnings of an employee, before any deductions or taxes are paid. The components of Gross Salary include Basic Pay, HRA, Special Allowance, Conveyance Allowance, Educational Allowance, Medical Allowance, and Leave Travel Allowance.
- Net Take Home Salary Having learnt about the two aforementioned components of salary, the Net Pay is quite easy to understand. Net Salary or Take Home Salary is the actual pay that an employee takes home. This is calculated by subtracting the total deductions for the employee such as Income Tax, Employee PF Contribution, Notice Pay Recovery from the Gross Earnings for the month.
Allowances
- Dearness Allowance (DA): Generally, Dearness Allowance is an intrinsic component of a government employee’s pay structure. It is a calculation on inflation and allowance paid to government employees, public sector employees and pensioners in India, Bangladesh and Pakistan. Dearness Allowance is calculated as a percentage of an Indian citizen’s basic salary to mitigate the impact of inflation on people.
- Other Allowances: There are some other types of allowances that may be fixed or variable. These allowances are generally included in the pay structure to leverage the benefits of various tax saving schemes. There are different categories of special allowances such as:
House Rent Allowance (HRA)
A necessary part of the salary provided by an employer, House Rent Allowance or HRA is given to employees for their rented accommodation. If only the employee is residing in a rented house can the HRA exemption be claimed. It can be exempted upto 50% of the Basic Pay for the employees staying in Metro cities. For all the other cities, the limit is 40%.
Child Education Allowance
The Children Education Allowance (CEA) is paid to the professionals in India for the schooling and hostel facilities offered to their children. It is eligible for exemption up to INR 100 per month and INR 2,400 per annum for maximum 2 children. The amount provided under CEA for a differently abled child is double that offered to a normal child.
Hostel Expenditure Allowance
Hostel Allowance is provided by the employers to the employees for their children’s hostel fee. It is eligible for exemption up to INR 300 per month and INR 3,600 per annum for maximum 2 children.
Examples of Other Allowances/ Reimbursement Exempt Under Section 10 (5)
Car Allowance
The amount of money that an employer offers to its employees who need to use their car for traveling purposes, as a part of the job.
Leave Travel Allowance (LTA)
As per Income Tax Act, 1961, LTA is an important component of an employee’s salary which is eligible for income tax exemption. It is provided to an employee by his/her employer to compensate for the leave and expenses incurred on business-related travel.
Uniform Allowance
Any allowance offered to the employees to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the execution of the job role of an office or employment of profit.
Transportation Allowance
Also known as Conveyance Allowance, this is a monetary allowance given to the employees by their employers to compensate for the amount that they spend on traveling from their residence to the workplace.
Books and Periodicals
Employees can claim reimbursement of expenses incurred on books, newspaper subscription, periodicals, journals and so on. These reimbursements are tax-free for employees. Allowances are a part of employees’ CTC (Cost-to-Company) and are paid in addition to basic salary.
Furnishing Allowance
Under this allowance, an employee can buy some household items or pay for soft furnishing of the house and submit original bills for reimbursements. Usually, there is a max cap depending on the hierarchy of the organization.
Deductions
- EPF (Employees’ Provident Fund) Employees’ Provident Fund (EPF) is a scheme in which the retirement benefits of working professionals are accumulated. Under the scheme, an employer has to contribute 12% of the Gross Earnings towards the scheme and an equal contribution is paid by the employee. The total collection is then deposited into the employee’s EPF account. Any contribution made by the employer is not accounted for in taxable income upto a limit of INR 2.5 lakhs per year w.e.f. 1st April 2021. Employee PF contribution is also subject to deduction under section 80(c).
- LWF (Labor Welfare Funds) ESI stands for Employee State Insurance, managed by the Employee State Insurance Corporation which is an autonomous body created by the law under the Ministry of Labour and Employment, Government of India. This scheme is a self-financed health insurance started for Indian workers. Every month, employers and employees have to make a nominal contribution for the employee to enjoy the ESI benefits.
- Professional Taxes Professional tax is the tax levied and collected by the state governments in India. It is an indirect tax, only applicable in select states. Just like TDS, PT is deducted from an employee’s salary. PT deducted from an employee’s salary is also exempted from taxable income for the assessment year.
- TDS (Tax Deducted At Source) The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The concept of TDS also extends to the salary paid by the employer to an employee. Employers are expected to consider all investments made by the employee and adjust income or loss from sources such as House Rent before computing the final TDS. Employers are expected to deposit the deducted TDS to the government on a monthly basis and file the TDS return on a quarterly basis.
Other Statutory Compliances
- Statutory Bonus As a reward for accomplishing or overachieving the work targets, employees receive additional amounts called bonus with their base monthly salaries, as part of their wages. An employer is expected to comply with the Bonus Act, 1965 to be able to pay a bonus. To an eligible employee who earns between INR 7,000 to INR 21,000 (Basic +DA) on a monthly basis, the employer pays a minimum of 8.33% and maximum 20% of the employee’s salary earned during the relevant accounting year.
- Gratuity In case an employee parts away from the organization, under The Payment of Gratuity Act, 1972, an employer is expected to pay an employee 15 days of salary for every completed year. This computation needs to be done as per the employee’s last drawn salary. An employee is only eligible for Gratuity if he/she has completed 5 years of service with a single organization. Any payment done under Gratuity is exempted for upto INR 20 lakhs for a lifetime.
- Leave Encashments A category of leaves such as the earned leaves which are not availed by an employee within a particular period can be encashed. The accumulated leaves are usually encashed at the time of Full & Final Settlement or after every financial year. The amount paid under Leave Encashments is exempted from taxable income under special constraints defined by the government.
- NPS (National Pension Scheme) The National Pension System is a voluntary defined contribution pension system in India. National Pension System is an EEE (Exempt-Exempt-Exempt) instrument in India where the entire corpus escapes tax at maturity and the entire pension withdrawal amount is tax-free. In addition to this, there are multiple tax benefits under 80CCD that an employee can enjoy.
Reimbursements
Reimbursement is the act of compensating an employee for business-related expenses incurred by an employee. It is generally a good practice to pay reimbursements in a separate reimbursement bank account for the employee. Various types of reimbursements can be:
- Business Expense Reimbursements Expense Reimbursement is the way businesses pay back their employees who have spent their own money on business-related expenses. While reimbursements for business travel is quite common, employees can also be reimbursed for education, healthcare, and other expenses incurred on behalf of the organization.
- Auto Mileage & Travel Reimbursements This is a type of business expense reimbursement, however there are some specific characteristics of travel reimbursement that set it apart from the other types such as standard mileage rate and per diem travel.
- Medical Expense Reimbursements Medical Reimbursement is an arrangement under which employers reimburse the portion of the health expenses incurred by the employee. The Income Tax Act allows tax exemption of up to INR 15,000 on medical reimbursements paid by the employer.
- Arrears Arrears is a legal term for the part of a debt that is overdue after missing one or more required payments. In context to an employee, different types of arrears can be Salary Increment Arrear, Loss of Pay Adjustment Arrears, or any other ad hoc payment that an employee was entitled to and was missed in the previous pay cycles. Any arrear payments are expected to be taxed and considered for all other statutory computations.
