Friday, September 28, 2018

Getting Familiar with Payroll & Salary - Process and Calculations

Payroll Processing Basics

What is Payroll?

In general terms, payroll is a list of employees working in a company eligible for salary. (ref) In this list against each employee name, a record of its salary, wage, bonus and tax information are maintained. The department in a company working on calculations and payment of salary and wage is commonly called payroll department. Payroll term is also widely used to refer to: the total amount of money that a company pays to its employees. You might have often heard the words ‘salary’ and ‘payroll’ alternatively from many people while asking salary to someone. Like, “May I know what is your payroll?’ or “Hey, what is your salary?” Though these words represent same intent and people respond with amount they get monthly but here is

Difference between Salary and Payroll

Salary is fixed amount of money paid to employee whereas, payroll a list of employees who receive the salary (ref).

What is Payroll in Human Resources?

Payroll in HR is a process by which workers get a monthly payment. It involves preparing salary and producing salary slip with mention of all payables, deductions, and reimbursements. Payroll department looks after this process. It takes care of record keeping, pay data verification, tax depositing and reporting along with releasing salary of employees per month. (ref)

What is Payroll Management System?

As per Dolphin Technologies - 'The Payroll Management System deals with the financial aspects of employee's salary, allowances, deductions, gross pay, net pay etc. and generation of pay-slips for a specific period. The outstanding benefit of Payroll Management System is its easy implementation.'

What is Process of Payroll?

Payroll Processing is processing the salary of the employees and process involved is:- >Joining Formalities >Updating Employee Database >Processing salary slip with regard to designing the break-up of salary and considering the deduction like leave, salary advance, travel and other statutory. >To take care of deductions through the data of leave availed as per attendance and pending salary and travel advance. >While processing salary slips care should be taken to delete the resigned employees, name, add new employees name and calculate pro-rate or proportionate gross salary depending upon a number of days worked in that particular month.

Payroll Example

  • (For e.g., June salary is being processed and an employee has joined on 11th June. His gross salary Rs. 6000/-pm the number of days worked in June is only 20 days i.e. from 11th June to 30th June [Any month in the year 30 days should be considered for salary processing], and on 10/07 i.e., salary date his gross is only 4000/- i.e., from next month i.e., from July that employee will get Rs. 6000/-
>Again while processing June salary increments or any reimbursement should be considered.
  • (Increments usually depends upon management i.e., yearly once and the amount of increment is decided based on the performance of the employees and most important is treat given from that employee).
  • (Reimbursement means conveyance reimbursement, travel reimbursement, telephone or any other amount spent by the employee for official purpose but against approval from Accounts or HR manager).
>Further in this June salary arrears if any of the previous months should be added to the gross [Arrears means increment will be summed to June month which he was eligible from April. So assume increment amount decided was Rs. 1000/pm, then arrears is Rs. 3000/- from April to June. o For e.g., July salary after increment is Rs. 7000/- o July Salary 7000 o Arrears from April to June 3000 o Deduction XXX o Net Salary XXX Again while processing next month salary in this pays lip arrears should be removed and only gross of Rs. 7000/- will be processed. Net salary means Gross minus (-) deductions. Gross salary is the amount an employee receives as a salary, before any deductions. After processing salary slips, a summary of all the pay slips would be prepared.

Things to double check while Payroll Processing

>Taking care of employee database regard to their date of appointment, address, telephone numbers, references, employee department/code number, PF number, ESI number, performance parameters and incremental due date. >Monitoring employees leave eligibility; leave availed, leave availability and deductions wherever necessary. >Taking care of employee’s corporate salary accounts with regard to filling account opening forms, along with PF, ESI, and employment registration forms. >Preparation of pay slips of with regard to designing break-up of gross salary and taking care of statutory deductions such as PF, ESI, PT, TDS, and other viz leave deductions etc. along with the conveyance and travel claims and salary disbursements. >Preparation of summary for all the pay slips. >Monitoring PF, ESI, PT remittances, filling, etc. >Routine tax planning for salaried personnel.

How to Calculate Salary/Payroll

As we know salary is an individual amount that an employee gets through payment. While Payroll is total amount that an organization pays to employees. Before understanding calculation, we have to understand salary structure Breakup. There are some components in salary which are taxable, hence are deducted while calculating payroll.

Salary Structure Breakup

Before landing any company's salary breakup we should know that Each company may have its own salary structure consisting of various payroll components that may be unique to that company only. Also, many location-specific laws such as Labor Welfare Act, Payment of salary and wages act, and the Minimum Wages Act affect the payroll calculations. Under minimum wages act, the employees need to be given some mandatory salary components such as Basic, DA, and HRA.

Here is a sample of salary breakup or more specifically we call payroll components PARTICULARS ----------------------------------------------------------------
(A) Monthly Allowances a. Basic : b.HRA c. Conveyance Allowance d. Child Education All. e. Other
(B) Annual Benefits a. LTA b. Medical Reimbursement c. Family
(C) Variable Salary a. Performance Linked Incentive: b. Bonus
(D) Retiral Benefit a. PF: b. Superannuation: c. Gratuity :
(E) Other Prerequisite (Equivalent Amount in Rs) Mediclaim Insurance:
a. Coverage Amount (……………………………....)
b. Premium Amount:----------------- Personal Accident Insurance
c. Coverage Amount (……………………………....)
d. Premium Amount:----------------- ----------------------------------------------------------------

How benefits and deductions affect payroll calculation

Tax Deducted at Source (TDS) is a mandatory part of Deduction from Salary under Section 192 of the Income-tax Act, 1961, if the salary is more than maximum amount exempt from tax. Few of the salary components that impact TDS deduction are [caption id="attachment_526" align="alignnone" width="1324"] Click image to enlarge[caption] If you liked this post, please share with your friends. Share your thoughts in the comment box below.  


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