An organization needs an established payroll policy and procedures to run the payroll department smoothly and ensure employees of accurate and timely payment of salaries and wages. Thus it plays a huge role in maintaining employee morale and business financial stability. Procedures mentioned in the policies ensure a clear and defined approval process, efficient payroll activities, availability of forms and appropriate controls.

What is a payroll POLICY?

A payroll policy describes the payroll process as it covers the administration of the salaries, timekeeping, payroll schedules and payment methods of the employees of an organization. This policy is defined to set control and make employees aware of what they should expect on payday.

A payroll policy covers the payroll processing services provided by payroll, the legislative requirements it must comply with and to determine the employment status of workers.

Different Payroll policies are shown below:

Different payroll policies are developed for the payroll department outlining how payroll duties should be handled. Some policies are related to your employee as a whole whereas some are designed for your payroll department.

Payment schedule (Pay Periods and Paydays)

 This policy explains the pay period (weekly, bi-weekly or monthly) and the actual payday to your employees.

For Ex. If your pay period is bi-weekly then state the start and end dates for that period.  And mention the payday-like all paychecks will be distributed after the last working of the pay period.

Payment Methods

 This policy states how your employees will be paid.
    • Direct deposit: Payroll checks will be directly deposited to the employee’s designated bank accounts.
    • Live Checks: Live checks generated by the payroll system will be payable to the employee.
    • Manual checks: Live checks prepared manually by the payroll department staff outside the normal payroll processing cycle.


This policy explains the types of wages your employees may receive. Wages may be minimum wage, fair wage, and a living wage. Explain to your employees about all the components of the wage structure in line with prevailing wage policies.

The Workweek

This policy states the time and day your work week starts and ends, such as 12:01 am Sunday through midnight Saturday.


Proper recording of time worked is essential for accurate payroll calculation of your employees. This policy should clarify procedures that your employees need to do to ensure proper timesheet submission.

For Ex. If you need weekly timesheets from your employees, then explain rounding procedures, submission dates and who is allowed to approve timesheets. Also, list the consequences for falsifying time records.

Breaks and Lunches

This policy clarifies whether short breaks and lunch periods are provided or not. If so, then for how long? In what circumstances these breaks and lunches are paid or unpaid? Whether employees are required to clock in and out for those periods? Address all of these questions in your payroll policy and ensure that your responses should adhere to government regulation.

Overtime Rules

This policy states whether overtime is permitted at your workplace or not. How many hours can be considered as overtime as per government regulation? and how overtime is calculated. Mention the approval process of overtime and the consequences of unauthorized overtime.

Payroll Deductions

 This policy states the types of deductions you are required by law to withhold from your employee’s paychecks. The mandatory deductions include

    • Professional Tax (PT)
    • Employee provident fund (EPF)
    • Employee State Insurance (ESI)
    • Transport Allowance (common recurring deductions)

Update your employee about these compulsory deductions that offers an employee tax exemption but is not refundable.

Underpayment and Overpayment

This policy outlines the processes for the correction of payment errors that results in overpayment or underpayment of members of staff. It also explains what happens during an overpayment.

For Ex. Excess wages have been deducted from the employee’s next paycheck or place a stop payment on the overpaid check and reissue a check for the corrected amount.

Employee Benefits

This policy describes the different benefits you offer and how your employees can avail them. It may include paid vacation, holidays or sick leave, health insurance plans, retirement plans, flexible spending accounts, business expense reimbursements, and paycheck advances.

Explain to your employees the accrual methods for paid benefit days such as vacation and sick time and the fines or action if they are absent more than the allowed days.

Final Checks

This policy states when the resigned or discharged employees will receive their final paychecks. Whether their paychecks will include all wages due and PTO at the time of separation? Do they need to intimate in advance about their resignation to receive a payout of unused paid time off (PTO)? What deductions will be taken out of the final check?

Your answers to the above questions should be as per guidelines framed out in the appointment contract. In the case of an employee’s demise, the final payment will be paid to the expired employee’s estate. If an employee’s estate is not appointed. In that case, an individual may claim the employee’s final paycheck by providing an affidavit to your company.

Your payroll policy should also cover salary adjustments, paid time off, pay increases, and expense reimbursement.

Importance of a Payroll Policy

Payroll is a critical piece of employment in any organization. It brings a lot of challenges for processing the payroll of an employee. It looks straight forward but in actual it is the most daunting task. An organization spends the maximum in their payroll department to reduce errors, the possibility of fraud and hence running it smoothly. Payroll policy is essential for establishing internal checks and measures to control and protect the organization's cost.

The payroll policy assures that employees will receive accurate pay at the right time. It ensures that the company sticks to the federal, state and local laws, especially those that refer to taxes, Medicare, Social security and fair labor standards. Adhering to the laws helps the company in avoiding penalties.

The payroll policy should give a solid understanding of payroll procedures to employees. Thus it enables employees to promptly find answers related to payroll issues, regarding pay, leave management, employment entitlements and conditions of the workplace.

Payroll policy also helps employees to be better informed and equip staff with resources. It provides a direction of the business rules and regulations for employees and guidance in staff management and operations.

What is payroll PROCEDURES?

Payroll procedures are controls, guidelines, methodologies, and policies that are established for the proper control and handling of payments to employees. These procedures create efficiencies in terms of time collection, report handling, data entry, payment, and record-keeping. Payroll procedures empower organizations to monitor direct and indirect labor expenses, including costs incurred in manufacturing activities. By implementing mechanization and advances in system technology, procedures can be cost-effective and save the organization’s cost.

Payroll procedures are helpful to companies in averting negative regulatory decisions, such as fines and nonmonetary penalties. Payroll procedures also support the payroll department in implementing the established compensation structures and systems, department budgets and collective bargaining agreements.

Policy Features

Any payroll policy should define the responsibilities and accountabilities of payroll staff and chiefs. Since payroll includes sensible and confidential information, the policy should also specify access and security levels. The policy should clearly distinguish the preparation required by different employee groups.

All the procedures should be documented in detail in the payroll policy handbook, which starts from employee hiring to separation. These procedures include payroll processing activities and forms required for handling new contracts, work changes, data updates, unique payments, deductions, time reporting, and separation.

What are the stages of processing payroll?

Payroll processing refers to the administration of employees that includes the tasks of paying wages, salaries, and bonuses to directors and employees. Companies generally use payroll software for processing payroll or use the service of the organizations which provide payroll processing services. Payroll processing includes 3 basic stages:

Stage one: Pre-payroll preparations Stage two: Payroll calculation Stage three: Post payroll reporting and recording

Pre-payroll preparations

Setting a clear payroll policy

The payroll department has to consider many company policies such as attendance, leave policy, pay policy and benefits before processing the payroll of an employee. Therefore the first step is to set and define payroll policy and clearly communicate to all your employees.

Gathering Inputs

Gathering data of an employee for payroll processing requires interaction with multiple departments. Therefore it is one of the most important and complex tasks of payroll. This task is mostly done by the HR and finance teams.

Data for calculating employee salary includes employee position, leave days, time worked, attendance management data, wage revision data, and others for the specific pay period. If an organization has more than a handful of employees then it takes several hours for collecting data.

Data Validation

Validation of the data is essential for keeping your payroll process on track and ensures that data is adhered to the right formats, company policies, authorization, and approval. This step is very important as it avoids costly payroll errors that might lead to financial mistakes, employee’s grievances or legal penalties.

Payroll calculation

After validation, the collected employee data is fed into the payroll system to calculate the net pay after adjusting taxes and deductions through a manual or an automated payroll processing system. Do not rush at this stage else it may cause payroll mistakes

Net pay = Gross salary – Gross deductions

Post payroll reporting and recording

Statutory compliance

Payroll processing considers the statutory deductions like EPF, ESI, and TDS. The deducted amount is remitted to the relevant government agencies. The payment frequency varies depending upon the dues. Mostly dues are made through challans. Once it is done you can file a return.


All the financial transactions including employee salaries are recorded in the accounting system. This helps to extract any needed payroll data at any time in an easy and organized manner.


The salary of an employee is transferred based on the agreed method of transaction. Like direct deposit, cheque or cash. Employee details are submitted in the salary bank advice statement to the respective bank branch.

Payroll reporting

After running the payroll for a particular month. The management asks to submit the payroll reports of all the employees' location wise.  As a payroll chief, you should be able to extract data from the payroll system and share the reports.


So you have seen, payroll policy and procedures are required to handle the payroll department smoothly. It plays an important role as it protects your company’s reputation by ensuring compliance with various legislations as well as labor laws in your country.

Labor laws affect the payroll process and it varies by state, at times and by city. If you want to manage those complexities then we would recommend going with paysquare that is the top payroll services provider in India. Paysquare simplifies payroll processing services as they have expert advisors and perform routine checks to ensure the right systems in place.

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