Knowledge Base

Payroll Processing

Payroll is an integral part of any company or business. A payroll is nothing but an account of all those employees of a company that are eligible to get paid or compensated for their efforts or services rendered to the company. Since everyone works for money, it is very important to keep proper track of payments due to the employee. It does not make a difference what kind of company it is, what its size is, whether it is manufacturing goods or providing services, or whether it is making a profit or loss. The employees need to be paid on time, and they need to be paid continuously. Indeed, payroll processing is one of the most important aspects of a business, and occupies a major chunk of the expenses. As the government of India, USA and other countries around the world keep changing norms to suit the prevailing conditions, payroll processing, it is necessary to keep abreast of the latest laws and regulations. Since payment is a very sensitive subject, payroll processing has to be absolutely error free. In India and many other countries, there are different rules that govern overtime, leaves, travel allowance, housing allowance, provident fund (wherever applicable), etc. Different companies have their own rules for payroll processing as well. Once an employee quits for any reason, it becomes difficult to recover dues from him / her in case of excess payment. This is one of the basic reasons why most companies, especially small and medium scale companies outsource payroll processing to experts. Since such consultants are experienced in payroll processing, it is a win-win situation for both the company and the payroll processing consultant. Pune, Mumbai and other big cities of India have competent payroll processing agencies as these cities are industrialised to a large extent.

Basic Components of Payroll
No matter the size of the company, the profitability, the product or service being sold, or the type of organization, employees need to be compensated. And with laws and regulations getting stricter in India and elsewhere, the task of payroll processing is getting difficult with every passing year. Before we look into why more and more small and medium companies are beginning to outsource payroll processing, let us briefly review the steps that payroll proceeding involves.

  • Setting up new employee accounts: this involves adding the details of a new employees that has just joined the company
  • Processing timecard information: before making any payment, employers need collate the exact hours an employee has docked in. Since different employees may have different work hours (topical of a manufacturing company working in shifts), this is tedious task. Processing of wages is dependent on this information, and the task is made complicated because of overtime wages, bonuses, shift differentials, compensatory offs, etc.
  • Update employee information: employees need to change their information once in a while. While change of personal details occurs sometime, oftentimes it is tax information that matters most. This includes tax exemptions allowed, PPF (in India), pension deductions, or medical deductions. Payroll processing involves calculating taxes on all of these.
  • Wage deduction: The govt of India and many other countries mandate wage deductions for various purposes. This includes deduction for absence of duty, deduction for amenities and many other such deductions. Since both the state and the central government of India keep on changing these deductions from time to time, the payroll processing team should be aware of the latest allowable wage deductions
  • Create a payroll register: summarize the wage and deduction information for each employee on a payroll register
  • Payroll verification: before processing payment, the payroll processing team needs to review each record carefully. This involves verification of wage and tax amounts
  • Update the general ledger: this involves compiling a journal entry that transfers the payroll expense, all deductions, and the reduction in cash to the general ledger
  • Process GST: in certain cases, GST may be applicable, specifically if the employee is a contract employee
  • Issue pay cheques: this is the final step of the payroll processing cycle. Nowadays, most modern businesses prefer depositing money directly using online transfer facility like NEFT / RTGS, etc.

As you can see, payroll processing is not a simple task. It has been aggravated by numerous regulations the government has passed recently. The job responsibilities of payroll processing have multiplied and now require persons with advanced knowledge in the area of payroll to handle the position. Payroll professionals must keep abreast of the changes in their field so that they can remain technically proficient.

Payroll Accounting System
A payroll accounting system incorporates all those procedures and methods related to the disbursement of pay to employees. A typical payroll accounting system includes the steps mentioned above. The nature of the payroll records depends to a great extent on the size of the workforce and the degree to which the record keeping is automated.

Payroll is so important that there is much professional software available today, typically deployed over the internet, that automate the task of processing it. The task of automation has been a boon to payroll processing. Earlier, most of the calculations were done by hand using hand held calculators. That process was cumbersome and prone to errors. Software makes it easy to process payroll. Once you select an appropriate select that suits your needs, and set the parameters properly, all the tedious computations are undertaken by the software.

Why do companies prefer to outsource payroll processing?
The first important point is that payroll processing is a very critical task. Each country including India and others, require companies to follow stringent compliance laws. What is more, there might be more than one compliances to adhere to – like state and the central. To add to the woes of payroll professionals, the government keeps on changing these norms once in a while. Payroll is most probably the largest expense a company incurs, and they cannot afford to make any mistakes processing it. In addition, payroll generates huge amount of data. Analysing this data helps companies understand where they can save cost. In light of the current Covid – 19 pandemic, this task gains even more importance.

Unfortunately, most small and medium sized companies do not have the expertise to process payroll in-house. Simple bookkeeping or accounting knowledge is of no use; it really takes expertise to process payroll accurately. With better communication, sophisticated payroll processing software, it is now relatively simple to outsource payroll processing to professionals. Luckily, finding a professional payroll processing consultant is now easier. Industrial cities like Pune, Mumbai, Ahmedabad, etc. provide many such capable consultants.