Payroll Accounting is the process by which employees' compensation is recorded and disbursed by taking into account federal, state, and local tax laws and other with-holdings. Payroll accounting relies on a delicate network of activities such as leave management and attendance tracking, expense reimbursements, statutory compliance, other perks, and benefits provided to the class of employees and the existing agreements with those employees. It is quite simple and most significant expense that your organization will incur, and also the one activity your HR department will spend the most time on. Even when outsourced to specialized payroll providers, this job requires a lot of oversight and double-checking because incorrect calculations render your organization open to costly lawsuits -- from the employees' side and the federal tax agencies' side.

Why is Payroll so Important?

Payroll accounting

The job of payroll is partly finance and partly HR. It relies heavily on the contractual agreements with the employees, but also on the existing regulations applicable to your organization. Since it is the source of livelihood for the employees in your organization, it is vital that you record the entries correctly.

Not recording proper attendance, leaves, etc. can result in the excess computation of income, which will be a loss for you. Not deducting the applicable taxes, contributions to statutory funds, etc., will make you liable to criminal prosecutions. You, as an HR or from the finance department, need to ensure that there are no discrepancies in this process.

For this purpose, you need to have a robust payroll processing system that accurately calculates the remuneration due to the various classes of employees within your organization. Otherwise, there can be severe legal and financial implications.

Process of Payroll Inputs

Payroll accounting starts with obtaining inputs from various sources. Before receiving these inputs, you should define clearly the system of sources from which you'll gain such data. This is the case even if you are going to outsource your payroll processing. Payroll providers are going to demand information regarding the existing systems and checks in place to accurately identify and attribute various parts of payroll to the relevant sections of employee compensation. Some of the methods that you should define are-

    • Defining leave policy, including leave encashment, accumulation, and lapse of leaves, classification, and consequent permissions required to avail that class of leaves
    • Fringe benefits and other perks as part of the employee compensation agreement
    • Defining fixed and variable components in the employee compensation package
    • Illustrating the system of dividing into such fixed and variable segments
    • Identifying the monetary value of perks given in kind, such as HRA, RFA, vehicles, maids, cooks, education for kids, etc.
    • Determining the system of collections for lunches at the workplace, daily commute, etc., from the employees
    • Tools for regular updation of statutory compliance
    • Methods for generating automatic deposits within the framework of statutory compliance within the deadlines
    • Systems for releasing employee salary on time
    • Grievance redressal system concerning the employee compensation disbursal

Benefits of Using Tools for Payroll Computation

If the process of payroll computing is not automated to a certain degree, errors are an obvious consequence. It is ideal to use software and payroll tools that help in the accurate computation of employee compensation to eliminate that problem. This way, any changes that you make to the payroll master will get reflected in all the relevant fields, thereby reducing the problem of human error.

This will help in accurate forecasting concerning how changes to the employee master or the payroll master will affect the compensation payable to the employee. This will be particularly useful in the case of Human Resource budgetary decisions in case of promotions, hikes, inclusion or exclusion of perks, evaluating the worth of a particular job role, segregating tasks into different functions, etc.

It also helps in identifying what happens in various leaves scenarios. This tool will be useful because the inputs it collects will be collated from multiple points such as the attendance marked by the employee himself, the approval for such attendance given by the manager or the HR, or both, the data received from the bio metric scanners, thereby ensuring that there is consistency in deciding what is the compensation payable to the employee.

It also can corroborate this information with the base information provided in the employee master, which is, in turn, provided based on the contractual agreement with the employee. An effective payroll accounting system would be one in which the mundane tasks would be automated.

Robust Payroll System

Payroll providers should ensure that there is no conflict of interest when it comes to sensitive issues like computing the final compensation due. The persons in charge of this should be supervised by personnel from all the departments concerned. For example, the same person in charge of making the changes to the master can't be in charge of signing off on the final payable.

Since the issue of finance is a sensitive matter with no consensus regarding which department between Finance and HR it belongs to, supervision should include both the departments. If automation is opted for, each department should not have access to more than mere updation of the master files.

We should take care to ensure that access to master files don't create conflicts of interest. HR department taking care of attendance can't sign off on compensation payable based on the hourly rate. Even access to the master files should be restricted to specific activities. You should ensure that a person accessing any master file doesn't have access beyond his scope of duties.

Payroll System for Indian Organisations

Indian payroll calculations require extensive knowledge of many laws besides the tax laws. There is the need to understand welfare laws such as minimum wages act, payment of wages act, etc., statutory contributions laws such as employee provident fund act, contributions to the employee pension fund, etc. Even in determining the with-holdings, the payroll provider should know about the recent updates concerning the income tax laws.

indian payroll calculations

That means, effectively, payroll accounting should include the latest in terms of tax slabs and deductions at source. The same payroll providers, while performing Indian payroll calculations, should also acknowledge forms submitted declaring sources of income, or the lack thereof.

Importance of a Robust Payroll Accounting System

A robust payroll accounting system would provide for proper input validation service wherein the data collected would be verified against the existing company policies. This data would also be useful for reporting purposes within the organization. The top levels of management might require consolidated data for budgeting purposes. It also ensures that the authorities, when they ask for the relevant data, will be satisfied with the existing checks in place.

Since payroll is a sensitive matter, and one that defines the continuity of the business to the broadest measure, proper checks need to be put in place. An effective payroll system would be one where for every level of a transaction conducted, there would be a verification at the next level, without a conflict of interest.

When you talk about the effective way of doing Indian payroll calculations, you speak about payroll computations that are compliant with the relevant laws of the country while ensuring your employees still get the most they can.

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