What is Payroll Processing & It’s 3 Stages

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Rishabh Ranjan
APR 20, 2022 12:49 PM

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Payroll processing is an essential business function that involves arriving at the ‘net pay’ of the
employees after the adjustment of necessary taxes and deductions. For an efficient payroll
management process, the payroll administrator needs to plan the payroll process step-by-step.

What is Payroll Processing?   

Payroll processing in HR is an elaborate process that involves a lot more than salary calculations.
The process can be intimidating if you do not know how to go about it which is exactly why this
handy guide will navigate you through the intricacies of payroll processing. 

What is the meaning of Payroll Processing?

Payroll processing is an essential business function that involves arriving at the ‘net pay’ of the
employees after the adjustment of necessary taxes and deductions. For efficient payroll
management process, the payroll administrator needs to plan the payroll process step-by-step. 

*Note

Net pay = Gross income – Gross deduction

Here,

Gross income/Salary = Regular Income + Allowances + One-time payment/ Benefit

Gross deduction = Regular deductions + Statutory deductions + One-time deductions

Challenges in the Payroll system and its One Step Solution:

What precisely are the payroll management obstacles? In this part, we’ll look at the problems that
beset payroll management systems:

 There are several rules and procedures to follow, such as labour laws, federal rules, and legal
compliance. Implementing these guidelines is not optional; it is required. However, non-compliance
alone is not often a decision; many individuals simply do not grasp intricate rules. As a result, there
are concerns with compliance and large fines.
 If we merely analyze the example of conformity, we can see that mistakes might occur owing to
human factors. Errors often occur when the sole person is responsible for the payment of 30 people.
These are common errors that occur during hand computations. Charges and fines are occasionally
imposed as a result of these mistakes.
 Because cost accounting is so complicated, it is usual for Hrm to postpone compensation. Time is
required for manual methods, regulation, taxation, and anything else. Determining each employee’s
paycheck manually can be exhausting, resulting in delays. Whenever these delays occur,
employees become irritated, and your attrition rate rises.

Cost accounting for your SMEs isn’t a straightforward activity that can be performed in-house by a
single individual. Payroll processing presents a number of problems that have an influence on your
efficiency and adherence framework. As a consequence, noncompliance sanctions have grown
commonplace. In the preceding post, we looked at solutions for payroll processing problems. These
difficulties are simply overcome by using one payroll processing provider.

What does Payroll Processing encompass? 

Here’s a list of tasks the payroll administrator needs to accomplish during payroll processing.

 Develop the organisation’s pay policy that includes flexible benefits, leave encashment policy, and
more 
 Define payslip components – basic and variable pay, HRA, LTA, etc.
 Collect other payroll inputs from the transport service provider or the food/canteen vendor
 Arrive at the net pay by calculating gross salary and deducting the statutory and non-statutory sums
 Finally, release employee salary. 
 File returns and deposit dues such as TDS, PF, and more, with respective authorities.

A step-by-step explanation of Payroll Processing in India

The entire payroll procedure is divided into 3 stages.

STAGE 1: Pre-Payroll Activities

1. Defining payroll policy

This is the first stage wherein you establish policies to bank on during the payroll process. To turn
these policies into standards, they need to be approved by the management. Examples of such
policies are – pay policy, attendance policy, leave and benefits policy, and more. 

2. Gathering inputs
The next step is to gather inputs from various departments to ensure accurate calculation of payroll. 

DATA SOURCE DATA EXAMPLE

Employees Income tax declaration, facilities availed,

and more. 

HR team Salary structure, eligibility for benefits,

etc.
 Finance team Deduction for recoveries. etc.

Leave and attendance Data from attendance systems, current

systems  work shift, etc.

General service Transport service provider, canteen

providers vendor, and more.

All this data collection can seem overwhelming at first. You must, therefore, incorporate payroll
software which comprises features such as leave and attendance management, ESS (Employee
Self Service portal) and more to make it hassle-free.

3. Input validation
Once you’ve finished gathering all the required data, you need to verify its validity. Because a single
mistake here can cause ruin the entire payroll process.

 Ensure that the list contains all the active employees and no records of inactive employees. 
 Check that data adheres to the company policy.
 Ensure the data present in the right format. 
Stage 2: Actual payroll process

4. Payroll calculation
Now that you have the verified data, its time to feed it into the payroll system. The result you get will
be the net pay after the adjustment of necessary taxes and deductions. In this step, you recheck the
process again to nullify chances of errors. 

What is a Payroll System?

A payroll system is a software to automate the payroll process. These systems can be integrated
with leave and attendance tracking systems and employee self-service portal and are used to keep
track of employee’s working hours, calculate salaries, calculate taxes and deductions, print payslip,
etc.

Payroll software, thus, minimises employers’ efforts so that they can focus on more pressing
problems of the business.

Stage 3: Post-payroll process

5. Statutory compliance
During the payroll processing, the payroll administrator needs to religiously adhere to the statutory
compliances. Various statutory deductions – EPF, TDS, ESI – are deducted during payroll
processing. These deductions are then paid to the respective authorities/government bodies. 

6. Payroll accounting
Every organisation needs to maintain an accurate book of accounts. And the salary paid is one of its
significant entries. Therefore, as a step of the payroll process, all salary data must be fed into the
accounting or ERP system.

7. Payout
After all these steps, you can finally pay salaries via cash, cheque, or bank transfers. It is preferable
to have salary accounts of employees for hassle-free transfers. For payment to salary accounts, you
need to send salary bank account statements with particulars such as employee ID, account
number, salary amount, etc., to the branch. 

8. Reporting
The last step is to prepare accurate reports containing information such as department or location-
wise employee cost. These reports are then sent to the finance department or the management
team for further analysis.

These are what goes into the making of an efficient payroll process in India. Now that you know the
procedure in detail, make sure to leverage the information and amplify your organisation’s efficiency.

FAQ’S

1. What is the best frequency for payments to employees?

The frequency with which employers pay their employees can have a direct impact on the morale of
the employees and, as a result, the success of the business. In general, employees are happiest
when they are paid frequently, such as weekly. Retail companies, construction companies, and
skilled labour businesses typically pay their employees weekly because this practice fosters loyalty
and productivity among employees.

The only downside of paying weekly is that it costs more than paying monthly or bi-weekly.
Government agencies and schools typically pay their employees once a month to save money and
keep with their financial budgets. The only downside to monthly payroll processing is that it takes so
long for employees to be paid.

2. Is paying employees by direct deposit a convenient and cost-effective way to pay

employees?

Payment via direct deposit is an oft-used payment method. It is used by a majority of workers and is
considered to be the most popular payment method. Business owners find this payment method
convenient because it allows them to pay employees without having to hand them a physical check.

This payment method also makes business owners feel safer because they don’t need to worry
about employees losing paychecks with sensitive information on them. Some states allow employers
to implement mandatory direct deposit.

3. Is it legal for me to pay my employees in cash?

Employers who pay their employees in cash must take out taxes and deductions from the
employee’s pre-tax wages before giving them their final take-home pay.
In addition, employers must keep accurate records of these transactions in case the government
authorities or regulators wish to review them.

4. How long does it typically take companies to transfer payroll providers?

If your employees earn salaries with little fluctuation, and you conduct periodic payrolls, transferring
the payroll to another system will be a relatively simple process.

Payroll administration is complex and time-consuming, especially when there are many pension
schemes or employee benefits. This can make the transition from one payroll provider to another
problematic, particularly if there have been many adjustments each month.

It may be necessary for a payroll provider to process one or two parallel pay-run files to ensure that
any problems with the live transfer are identified and corrected. Payroll partners such as BetterPlace
will assess your payroll at the start of our communications to decide whether parallel pay runs are
necessary. Typically, most payroll providers in India do not charge for parallel pay runs in the
majority of cases.

5. What are the dissimilarities between payroll and salary? Moreover, what are the essential
aspects of payroll?

Salary refers to a regular payment of amounts of money, usually paid on a daily, weekly, monthly, or
annual basis. Payroll is a system that allows businesses to process employees’ salaries. Salary and
payroll are both crucial workplace activities.

As for the essential aspects of payroll, the following two are the most significant.

Accuracy is crucial when dealing with vital information. Maintaining the integrity of numbers and facts
is critical in any industry, especially finance.

Any payroll system should comply with government rules and regulations relating to income tax,
social security, payroll withholding and other matters. Failure to comply can result in large fines for
the company as well as a host of other problems.

Related Articles:
How Can Companies Be Statutory Compliant and Avoid Payroll Hassles
Why should you invest in payroll outsourcing services?
7 Common Misconceptions About Payroll
How payroll services can grow your business effortlessly ??