How does a Payroll System work?

payroll-system

Payroll systems manage everything related to the payment and application of taxes for the employees. They are used to track working hours, calculate wages, withholding taxes and other deductions, print and deliver checks and pay government employment taxes.

Software is often used for payroll purposes and requires employers to have minimum input. Employers are intended to input wages and working hours and the software then uses this information to calculate and deduct withholdings automatically. 

Most payroll system software is updated automatically when tax laws change and notify employers when to file certain tax forms.

This article will discuss:

What are the Stages to Processing Payroll?

A payroll officer needs to do careful planning. There are always ongoing tasks requiring attention and a constant need to monitor changes to withholdings, contribution to social security funds, etc. The entire process can be split into three stages, pre-payroll, actual payroll, and post payroll activities.

Pre-Payroll Activities

  • Defining Payroll Policy:

The net amount to be paid is affected by multiple factors. The company’s various policies, such as pay policy, leave, and benefits policy, attendance policy, etc., come into play at that time. As a first step, such policies need to be well defined and approved by the management to ensure standard payroll processing.

  • Gathering Inputs:

The payroll process involves interacting with multiple departments and personnel. There can be information like mid-year salary revision data, attendance data, etc.

In smaller organizations, these inputs are received from a consolidated source or fewer teams. However, in a larger organization, the task of gathering data may look overwhelming. If you are using smart payroll software with integrated features like leave and attendance management, employee self-service portal, etc., the input collection process does not remain a problem.

  • Input Validation:

Once inputs are received, you need to check for validity of the data concerning adherence to company policy, authorization/approval matrix, right formats, etc. You also need to ensure that no active employee is missed out and that no inactive employee records are included for salary payment. Read top 6 payroll validations to ensure accurate payroll.

Actual Payroll Process

  • Payroll Calculation:

At this stage, the validated input data is fed into the payroll system for actual payroll processing. The result is the net pay after adjusting necessary taxes and other deductions. Once the payroll process is over, it is always a good practice to reconcile the values and verify accuracy to avoid any errors.

Post-Payroll Process

  • Statutory compliance: 

At the time of processing, all statutory deductions like EPF (Employee Provident Fund), TDS (Tax Deduction at Source), and ESI (Employee State Insurance) are deducted. The payroll administrator then sends the amount to the appropriate government agencies.

The frequency of this process can vary depending on the dues. Most of these fees can be made through specific forms set in place. After all the dues are paid, return reports are filed.

  • Payroll accounting: 

Every organization must keep a record of all its financial transactions for the payroll process.

Salaries are one of the most vital parts of operating costs recorded in your book of accounts. Payroll management should always ensure that all salary and reimbursement data is accurately entered into the company’s accounting or ERP (Enterprise Resource Planning) system.

  • Payout: 

Salaries can be paid out by cash, check, or bank transfer. Typically, employers deposit salaries directly into an employee’s bank account.

Once payroll is processed, a company needs to ensure its bank account has enough funds to make salary payments.

The next step is getting a salary bank advice statement to the company’s branch. This statement includes details like employee id, bank account number, and amount of wages.

If you’re using payroll software with an employee self-serve portal, it will be easier to publish payslips, and employees can log in to access their accounts and payslips.

  • Reporting: 

After you’ve completed payroll for a particular month, your finance department or management team might ask for a report on things like department employee costs or location employee costs.

A payroll administrator will need to gather the data and extract the required information to share these reports.

The Importance of a Payroll System at your company:

Payroll can be one of those jobs that nobody wants to tackle; the endless loop of paper pushing and spreadsheet filling is enough to drive the sanest administrator to madness. And not only this but, as you can imagine, filling out a spreadsheet for hours on end is a prime target for human error.

Ten years ago, there were maybe one or two software solutions provided with the intent of speeding up the process, and even they were clunky and obtuse to implement. However, thanks to the advancements in technology, there are now literally hundreds of solutions for employers to take advantage of.

While using a payroll system can streamline your business and eliminate the human error factor, its main allure is that, ultimately, the payroll system assumes responsibility for your employees’ salary; and in doing so, it provides vital protection for complying with payment regulations.

Payroll has a massive effect on the day-to-day running of a business, yet people often fail to realize its importance. Payroll affects each and every aspect of a business from its reputation to the general feeling amongst employees. To highlight this importance, we have compiled a list of reasons why it is imperative you have a payroll system at your company.

Reputation

A company’s reputation is everything and having a payroll system in place helps to maintain this. Not only does it ensure that all your employees are paid on time, it ensures that your company is adhering to all the tax and employment regulations. Ensuring all of this legislation is met with further establish your company as a reliable and reputable employer. This will ultimately add value to your company and attract new customers and talented potential employees.

Regulation

The ever-watching eye of HMRC is always bearing down upon a profusely sweating accounts administrator somewhere in the country. And indeed, making sure that stringent regulations are adhered to can often be more time-consuming than actually doing the job, to begin with. Newer payroll systems take the weight and hassle away, streamlining and de-stressing the process.

Employees

Your employees are what make your company. Ensuring that morale is upkeep is key to a good working environment. Your employees will want to feel safe and secure in their job with the knowledge that they will be paid consistently and on time each month. Any late or incorrect pay may lead to employees being upset and questioning their financial future at the company. This will ultimately create an unrestful and negative workplace, so using a reliable payroll system is of such importance.

Financial Future

One of the most significant benefits an employee will find from payroll is looking towards the future and seeing their annual salary, and seeing their net worth. Systems allow them to see what they will be earning and their bonuses, benefits, and any pay increases as this is all provided in the payroll system. This is likely to improve your employees’ performance and ultimately improve the efficiency and day-to-day running in the workplace.

Ultimately, it’s obviously prudent (for those who haven’t already) to switch from old school methods and outdated practices to a streamlined and secure payroll suite. Products now can tailor their solution to any conceivable industry and slot in nicely and without significant adjustment to procedures. 

How to Make a Payroll System in Excel

Creating a manual payroll calculator can be tedious, but Microsoft has a free payroll calculator template for Excel for both Windows and Mac computers. There is also software that can be used to automate your payroll and make your life much easier.

Here are instructions on how to use this tool.

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