Basic Payroll Processing Steps: A Beginners Guide

Written By Sakcham Tiwari

June 8, 2021
Efficient payroll management ensures that the employees are paid their monthly salaries on time while meeting the legal requirements. It requires various steps to achieve proper payroll processing which will be covered in detail in this article.
payroll processing steps

Payroll processing is one of the most important tasks in any business. If not taken seriously, mistakes are bound to happen in payroll processing steps. This can be a serious problem for the employees who are waiting for their salaries at the end of the month. 

It is essential that there are no irregularities in payroll processing. If the payout of the employees are delayed, they can lose their trust in the company’s management as it directly impacts their livelihood. When employees lose trust, they lose their motivation to work properly, which leads to disengagement. This, in turn, can be detrimental to the business objectives of the firm. 

In order to avoid such problems, we are going to provide you with all the necessary information regarding payroll along with all the payroll processing steps. This will help you in making minimal mistakes when it comes to payroll processing. 

What is payroll?

Payroll refers to the total amount of money paid to the employees by the employer and as a business function, it involves the following:

  • Developing organization pay policy including flexible benefits, leave encashment policy, etc.
  • Gathering other payroll inputs 
  • Defining payslip components like basic, variable pay, HRA, DA, CA, etc. 
  • The actual calculation of gross salary along with statutory and non-statutory deductions. 
  • Paying the employee
  • Depositing dues such as TDS, EPF, etc. and filing returns

Thus, payroll processing involves arriving at the ‘net pay’ of the employees after adjustment of taxes and other deductions. It is necessary to plan the payroll process step-by-step so that the payroll of employees can be managed efficiently. The formula for calculating net pay is given below:

Net pay = Gross income – Gross deduction  

where,

Gross income salary = All types of regular income + allowances + any one-time payment or benefit

Gross deduction = All types of regular deductions + statutory deductions + any one-time deductions

Stages of Processing Payroll

The person in charge of processing payroll must conduct careful planning before actually sitting down to process payroll. For processing payroll, constant monitoring of changes to withholdings, contribution to social security funds, etc. is required. This entire process can be divided into three stages:

  1. Pre-payroll process,
  2. Actual payroll processing and calculation, and
  3. Post-payroll process.

Now let’s go through each stage one-by-one:

Stage 1: Pre-Payroll Process

  1. Defining payroll policy

This is the first step among all the payroll processing steps where you are required to establish policies for the payroll process. These policies will need to be approved by the management to turn them into standards. Some examples of such policies are pay policy, leave and benefits policy, attendance, policy, etc. 

Apart from the payroll policy, payroll cycle and payout attendance cycle also needs to be defined as part of the pre-payroll process. They have a direct impact on the payroll policy.

  1. Gathering inputs

The next step in the process is gathering inputs from various departments of your organization so that the payroll calculated is accurate. Below are the data inputs that you may need to ask from various departments:

Collecting all this data may be overwhelming to you so, you must use payroll software which comes with features like leave and attendance management, ESS (Employee Self Service portal), and much more. Using such software will make the payroll process much easier for the HR department. 

DATA SOURCEDATA EXAMPLE
EmployeesIncome tax declaration, facilities availed, and more.
HR teamSalary structure, eligibility for benefits, etc.
Finance teamDeduction for recoveries etc.
Leave and attendance systemsData from attendance systems, current work shift, etc.
General service providers Transport service provider, canteen vendor, etc. 
  1. Input validation

After collecting all the required data for the payroll processing, you will need to verify the validity of the collected data. This step is highly important because a small error at this stage can sabotage your entire payroll process. Here is how you can validate the data:

  • Making sure that the list contains all active employees and it should not have any employees who are no longer with the company
  • Checking that the data is adhering to the company policy
  • Ensuring that the data collected is in the right format

Now you are ready to move on to the 2nd stage of the payroll process.

Stage 2: Actual payroll processing steps

  1. Payroll calculation

After the verification of the gathered data, you can now enter it into the payroll system. The results obtained will be equal to the net pay of the employees after adjusting the necessary taxes and deductions. This step requires you to recheck the process so that there is no chance of making a mistake. 

A payroll system is a software that automates the payroll process. You can integrate such systems with leave and attendance tracking systems and employee self-service portal. These systems are responsible for keeping track of employee’s working hours, calculating their salaries, calculating taxes and deductions, printing payslips, and more. 

Using a payroll system saves a lot of your time, enabling you to focus your time and energy on your business goals. 

Stage 3: Post-payroll process

  1. Statutory compliance

The payroll administrator must strictly adhere to the statutory compliances when conducting payroll processing. There are numerous statutory deductions such as EPF, TDS, ESI, and more, that can be deducted from the payroll of employees. These deductions are supposed to be paid to the respective authorities or government agencies. 

  1. Payroll accounting

Your company must be maintaining an accurate book of accounts and the net salary paid to the employees should be one of the most critical entries in it. Hence, the entering of salary data into the accounting or ERP system should be a part of the post-payroll process and ensure that no data is left or wrongly entered. 

  1. Payout

Now that you have completed all the steps mentioned above, it is time to finally pay your employees, their net salary amounts. You can pay them through cash, cheque, or bank transfers. Make sure that you are maintaining salary accounts of your employees for convenient payouts. 

  1. Reporting

The final task in the payroll processing steps is preparing accurate reports that will have information about the employees’ payroll such as department or location-wise employee cost. After the reports are prepared, they need to be sent to the finance department or to the management team so that they can be analysed further and cross-checked. 

These are all the payroll processing steps required in any organisation and if followed correctly, it will be fairly easier to manage the payroll of your company. 

Payroll Handling Methods

There are 3 possible options for managing the payroll of your organisation and they are as follows:

  1. Excel based payroll management
  2. Using payroll software
  3. Payroll outsourcing

Excel based payroll management

There are many small businesses, start-ups or organisations with a handful of employees that choose excel based payroll management. Excel based payroll management is carried out on Microsoft Excel spreadsheets with the help of standard payroll calculation template. There are pre-set mathematical formulas that are supposed to aid the payroll officer for managing the payroll of the employees. 

Using payroll software

As we have mentioned earlier, using payroll software is a great option as it saves up a lot of time and makes the job of payroll officer a lot easier. 

For successful processing of payroll, it is necessary to make sure that payroll inputs are being properly gathered from every source. Manually gathering inputs can be prone to errors but using a software can be immensely helpful. There are several payroll management software available in the market for you to choose from. 

These software not only automate payroll computation but also act as a platform for leave and attendance management, employee self-service portal, and HR management platform. 

Payroll outsourcing

There is also an option of outsourcing payroll which refers to taking the help of an external agency for managing your payroll processing steps. Organizations who cannot afford a payroll officer or someone to process their payroll, go for this method. 

Firms can provide data such as attendance, leaves, payment details, and more to a payroll service provider. On receiving this data, the payroll service provider will compute the payroll of each employee while taking into account statutory deductions. 

Need help in managing your payroll? Choose Workex. 

Managing payroll can be a hectic task and can take up a lot of your valuable time and budget which you can otherwise spend in achieving your business goals. Lucky for you, Workex is here to help you with that. 

At Workex, we provide payroll management services to organisations at a nominal fee. All you need to do is onboard all of your employees on our system. After this, we will take care of the attendance and leave tracking, filing taxes, and computing the payroll of your employees accordingly. 

Thus, this will not only decrease the need of hiring a payroll officer but you are also guaranteed to get top-notch payroll processing services. So, what are you waiting for? Contact us immediately for more details and we will get back to you. 

Conclusion

Hence, payroll management is a crucial task for any organization with employees to pay. However, it can be easily done if the steps mentioned in this guide are meticulously followed. 

All you need is a payroll officer or someone who is competent enough to follow the payroll processing steps and you’re good to go. You can hire one through our amazing job portal at Workex or you can use our payroll management services.

Automated-payroll-processing

Written by Sakcham Tiwari

Hi! I am a content writer and editor with a master's degree in Digital Publishing from Oxford Brookes University. I have worked for a myriad of websites, blogs, and digital magazines. When I am not writing/editing articles and content for clients, I am either immersed in books, or scribbling poems, watching Netflix, or just scrolling through Twitter.

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