Are you hiring employees at your business? But before that, you need to set up a payroll solution for your business Setting up a payroll for the first time can be overwhelming but it will be worthful once you have extra hands helping to run your business. Do not delay further? No matter which business you run, new or old, establishing a payroll system is vital for your business. Read on to learn, how to set up a payroll, problems faced in manual payroll, and other aspects of setting up your payroll solution.

Let’s start now and go through the steps required to set up a payroll solution for your small business.

Steps for setting up a payroll system for new business

Establishing a payroll system is very essential for any business. Till today the payroll system has gone through many changes and completely revolutionized. Boom! The new payroll systems have all the features required for the employees. It saves enormous time in processing the leaves and salaries of employees. The best part is it processes the employees’ salaries accurately and on time and employees can view their account at any point in time.

Here are the 10 important tips for setting up your payroll solution for small business

      1. Apply for TAN (Form 49 B) Obtain an Employment Identification Number (EIN)
      2. Gather Employee InformationCheck whether you need State or Local Ids
      3. Classify Your Employees Set up a policy for leave, attendance, shifts, etc and finalize leave year Decide on a Pay period
      4. CarefullyDocument Your Employee Compensation Terms
      5. Select a Payroll System
      6. Run a Payroll Cycle
      7. Maintain Records on a Regular Basis
      8. Report Payroll Taxes

1.Appy for TAN (Form 49B)

As an Employer when you hire employees you need to pay a salary to them. While doing so you need to deduct or collect tax at source under the Indian Income Tax Act 1961. This is the reason TAN registration is very important for an employer. TAN Stands for Tax Deduction and Collection Account Number (TAN) that you can apply online or offline. This is a 10 digit alphanumeric number allotted by the Income Tax Department of India.

Though at the early stage of your business you may not need TAN number it is always a good idea to get the TAN in advance as you definitely need it later.

Along with TAN number, the GST number is also mandatory so apply for GST number.

2.Gather Employee Information

An employer you are responsible for filing taxes on your employee's behalf so gather employee details (personal and professional) working with you. Here is the information you need to collect:

      • Full Name
      • Aadhar Card Number
      • Permanent Account Number (PAN)
      • Universal Account Number (UAN) for PF
      • Date of Birth
      • Current Address
      • Permanent Address
      • Declaration form 12B

All this information is required when you enter the employee data to run Payroll. If an employee has joined in the mid of the financial year then form 12B is required for calculating overall tax liability and balance TDS is then deducted and deposited.

3.Classify your Employees

Businesses in India have a variety of employee payroll system. So classify your employees on the basis of a permanent, freelancer, part-time and hourly based employee. This will help you to understand their impact on taxation. Note the employee's grade and the tax slab in which they fall.

4.Set up a policy for leave, attendance, shifts, etc and finalize leave year

In India organizations mostly go for the calendar year (April Ist to March 31st).This is considered a leave year and financial year for payout. The gap of three months (January to March) gives time to finalize year-end leaves. If this policy is approved by the management then payrolldept.consider this as a base for monthly payroll and tax calculation. At the same time, you can also select the infrastructure required for your business to record the attendance of your employees.

5. Decide on a Pay period

Deciding the pay period for your employees is very important. Many countries run payroll monthly, weekly, bi-weekly, daily, etc. But in India mostly monthly payroll is used i.e. 1st - 30th / 31st of a month. 

6. Carefully Document Your Employee Compensation Terms

Outlining your employee compensation is essential. So keep a tab on employee hours, paid time off, overtime and various other requirements so it would be easy for you to comply with the Industrial labor laws.

Do not forget to calculate the deductibles such as health plans, retirement contributions, food coupons, transport allowance, Provident fund (PF) contributions, etc.

Communicate to your employees about these deductible components especially to the new joinee so they should not get shocked when they receive less take-home salary than what they expected.

7.Select a Payroll System

Payroll administration focuses more on accuracy so spend time on research and then select the one which is beneficial for your business. The best way is to take the opinion of other business owners about the methods they use and implement the tips shared by them in setting up and administering payroll.

You can manage payroll either in-house or outsource it. Any choices have their own advantages and disadvantages. Handling payroll in-house gives you more flexibility in regard to the processing time of the payroll whereas with the payroll service provider you get the lead time of three to five days for submitting all the information. The payroll service provider charges hefty fees if you miss their requested deadline.

However, the payroll service provider takes all responsibility for the timely filing of tax payments and returns. Whichever payroll method you choose as an employer you are responsible for the reporting and payment of all payroll taxes.

8.Run a Payroll Cycle

After gathering all the forms and information you can start running payroll. Based on your selection of payroll method, you can either enter it yourself or give the information to your accountant.

9.Maintain Records on a Regular Basis

The law requires you to keep certain records for specified periods of time. For example, Employee number, Basic payroll records, filed tax forms, receipts showing the taxes paid at any time.

You can’t lose these records. In fact, you can retain copies of each document and keep them in a separate, secure location. This helps you to rebuild the database and get back on track quickly if you lose some documents.

10. Report Payroll Taxes

Paying employees is the number one task but filing payroll taxes is an extremely important measure. Therefore you need to submit different payroll tax reports to the appropriate authorities either on a quarterly or annual basis. Else it will incur expensive penalties to you.

There are many ways to file taxes and make the process efficient. You may do online tax filing or use a payroll service. In the first case, you need to take the burden of remembering on your shoulder to file tax on time whereas in the second case your service provider will take the burden of filing tax on their shoulder.

Challenges Faced While Running Payroll Manually

Manual processing of payroll is not only a time-sucking task but also presents many problems for the organization. Manual payroll poses a room for human error because everything is done by hand.  The issue of data security is more critical as payroll involves sensitive information due to which outsourcing to service providers also becomes a challenge.

The manual payroll system can be effective if you have only a few employees. If you have more employees then you need to manually track their hours and rates. Keeping an eye on time payouts with correct deductions is a daunting task with manual payroll.

Here are some of the challenges faced in manual payroll processing

1.Human Error

In a manual payroll system, all the entries are done manually which increases the risk of human error. Though you have the best HR and finance teams the reality is that mistakes can still happen.

Small mistakes or wrong entry could result in a completely inaccurate record. Finding the source of error would be time-consuming and if an error couldn’t be identified than data have to be recalculated. This is completely wastage of time which could have been used on more strategic tasks otherwise.


Mostly payroll includes sensitive employee information like address, bank account, and social security number. Managing the important employee data in a hard copy or excel sheet is very critical. When it is processed manually the chances of information getting into the hands of the wrong person is high. Thus it could easily result in data loss and can end up hurting businesses.

3.Employee Productivity

In a manual payroll system, employee data such as leaves, reimbursements, overtime are typically entered and uploaded manually. Maintaining such exhaustive data in an excel spreadsheet requires a lot of management.

Making a small change in the formula could result in incorrect payments. Doing such exhaustive entry repetitively is time-consuming and takes several days to compute salary. Since employees spend their valuable time in carrying out the same tasks again and again so their productivity and morale is decreased.

4.Time and Attendance

Many employees went on vacation or fall sick. This time off data should also be tracked by payroll. Manually tracking each and every employee’s time and attendance can be time-consuming and overwhelming with the potential of mistakes.

Inaccurate tracking of data can have an overall impact on payroll calculation. As a result of miscalculation, employees can get paid more or less than what they deserve. This decreases employee satisfaction levels and lower retention rates.

5.Non Compliance 

A small payroll error may be very costly to you in business. Due to not abiding statutory laws, you may have to pay severe fines and penalties for noncompliance.

Much statutory compliance is required for Indian payroll. You need to spare time and pay special attention to stay up-to-date on all the rules and regulations.

6.Disorganized payroll processing

Manual processing of payroll requires multiple spreadsheets to maintain employee information like payroll, leave, claims and other data.

7.Limited capabilities

The manual processing of payroll has very limited capabilities. Tracking time off data of employees via hard copies of forms and annual tax reports have to be prepared well in advance to meet statutory deadlines. Various reports like the year to date reports, CPF files, bank GIRO files, and itemized payslips cannot be generated with a click of a button.

Spreadsheets in which information is captured are saved in a common office computer. During emergencies, data cannot be assessed from your home or any other location without a VPN or cloud payroll solution.


Setting up a payroll solution is one of the most important responsibilities of your small business. This allows taking busy work off of small business owner's hands so they can continue to strategize and grow their business.

Carefully consider which payroll system will be handled by you to ensure you avoid the most common problems. If you are looking to outsource your payroll to service providers then contact the pay square team in Pune. They will provide end-to-end payroll service to you.

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