To start a new new business , a new establishment is full of challenges , even for the most experienced entrepreneurs. Because there are so many moving parts , it is the common for some elements to be pushed aside if they aren’t immediately pressing.
Some new business owners may be great at identifying and managing talented staff or marketing their services to grow a customer base . But without the commitment to efficiency running the fundamental operations of every business , those skills won’t have a chance to shine . One of those operations is payroll.
Understanding how to calculate payroll is essential . It ensures that your business is compliant with the various employment and tax policies in your area , as well as building confidence in your staff that their work will be compensated with reliability. Unfortunately , payroll is one area of business that entrepreneurs might not place much focus on or in which they might not be well versed.
But it doesn’t have to be a headache . Here is a quick breakdown of payroll process and why grasping the details can help your business grow.
How to calculate payroll ?
Much of the payroll process begin with calculating gross wages – whether hourly or salary – and then subtracting deductions and taxes from the amount of determine the final payment that employees receive in their paycheck. Those gross wage calculations and following deductions are dependent on several factors in each case , but here are some general guidelines and examples to keep in mind.
Many businesses pay their stuff on an hourly basis. This means keeping an accurate track of hours worked. Timekeeping is an essential part of the process . Not only does it determine how many hours need to be compensated but also if there are any changes in wages such as overtime or hazard pay.
For this example , if an employee makes an annual salary of ₹ 120000 and is being paid on a semimonthly schedule – assuming a general pre determined 40 hours workweek- the calculation for their gross pay would be as follows.
🟢 ₹ 120000 annual salary divided by 24 pays periods :
₹ 120000 /24 = ₹ 5000.
Calculating payroll for employees:
Step 1 : Determine Total Time worked for the period.
Step 2 : Calculate Gross Pay. ( Before deduction and taxes.)
Step 3 : Determine your payroll deduction.
Step 4 : Find the sum of payroll taxes.
Step 5 : Subtract Deductions and Taxes from Gross Pay.
Many businesses with full time employees offer various benefits in addition to monetary compensation. Whether providing healthcare , retirement savings , or other similar options, many of these benefits are offered on a ”pre- tax” basis . If there are any benefits the employees has elected to deduct from their pay checks , they need to be subtracted in the steps of process that is legally required , whether that is “pre- tax” or after taxes have been taken out.
Subtract necessary Taxes
Once any necessary benefits have been deducted from the employee’s paycheck , the most complex part of the process arrives. Understanding and currectly executing payroll taxes are an essential steps for every business.
Pay Your Employee.
Even when the gross pay has been calculated , benefits have been elected , and those taxes have been withheld , the payroll payroll process is still not yet complete. Employers must be able to execute their payroll to get employees the wages they have earned. This means finding a way to pay your stuff in full, and paying them on time.
Payroll calculation in India is an overwhelming process as it constitutes enormous financial elements like gross salary , net salary , bonuses , daily wages , leave, compliance , and may more such elements which are part of each employees ‘ hire to retire journey with an organization.
Employees are viewed as the most significant asset of an organization . Thus , company invest a generous amount of time and energy in recruiting , training and setting up an adequate process for each employee . One of the most significant chores in payroll exercise is the processing of payroll . In a way , employees rely on the company’s progress to get paid without any delays . Irrespective of the size of the organization , whether small, medium , or large, payroll plays a crucial role in HRM( Human Resource Management ).
How is Payroll calculated in India ?
1 ) Net Salary = Gross Salary – Gross Deduction .
2) Gross Salary = Basic salary + HRA + All types of Allowances + Reimbursements + Arrears + Bonus .
3) Gross Deductions = Professional Tax + Public Provident Fund + Income Tax + Insurance + Leave adjustment + Loan repayment (if any).
STAGES OF CALCULATING PAYROLL.
🟠 Pre – payroll:
Organizations of any industry cannot deny the fact that payroll is one of the most consequential functions performed in daily business activities as it is related to employee salaries as well as the company’s finance .So as to run an acqurate payroll , data inputs are assembled from multiple source in the company.
Payroll is a time consuming and tedious activity due to the various compliances to be adhered to. For the sake of a smooth payroll process , a sorted out procedure must be set up to guarantee an error – free payroll. The first phase, in such a process flow, are the pre – payroll activities .
Below are the activities majorly taken care of , in pre- payroll activities:
🟠Understanding taxable , non- taxable and particularly taxable components of the salary.
🟢 Gathering payroll data.
🟡Data required to run a payroll.
🔵Data validation before proceeding further.
Understanding taxable , non- taxable and partially taxable components of salary.
While the basic compensations completely taxable , there are different advantages offered to the employees as allowances and prerequisites . These recompenses are offered to employees for the cost they bear during work and can be totally liberated from tax collection, or they can be taxed , either partially or completely.
A salary slip consists of two categories – Earning and Deductions , however , the various terms listed under them can be confusing . Moreover , these different components have different tax implications, adding further to the havoc . While some components are fully taxable , some are fully exempted based on certain conditions.
Periodically , companies also offer perks to their employees that may or may not have tax liabilities . Here , you will understand the tax implications of the common constituents of salary.
Gathering data to run payroll :
Gathering the data for processing the payroll is a task in itself. The traditional pattern of working towards data assembling is done by paper based sheets or excel sheets. Recent evolution in technology has led to thedevelopment of web based systems. These can be aimed at both managers and employees. There is no doubt that excel is a very useful tool to create charts ,carry out complex calculations and present insights.
Data required to calculate payroll :
1️⃣ Leave and attendance data.
2️⃣ Payment and deduction.
3️⃣ Income tax information.
🟢 Actual payroll calculating:
While calculating actual payroll , the following elements plays a major role :
➡ Salary components and structures Configuration.
➡ Statutory Compliances.
➡ Finance setting , HRA , tax considerations for bonus given to employees , old/ new tax regime.
➡ IT Declarations – globally.
➡ IT – Declarations – employee.
➡ Loan facility.
➡ Freezing the salary by finalizing payroll.
Payroll calculation ,:
🟥 Running the payroll .
🟧 Leave attandence and LOP data .
🟨 New joiners and exits .
🟩 Salary revisions , Arrears and Bonuses payments.
🟦 One time payments and deductions.
🔵 Post payroll:
Post payroll activities are following :
🟢 Review , generate and issue of Payslips , TDS Reports , Cash Reports .
🟢Accessing the Bank Statements and downloading them by choosing a financial year, frequency , perios and batch.
🟢 Employee information like employee count , CTC , Gross and net pay., bonus and loss of pay., commissions, processed date , processed by etc.
🟢 PF , ESI, PT challans , to be generated in ECR format and along with arrears.
Form 24 Q : Form 24Q is used to file the return for tax deducted at source from salary payments .Form 12 B : Form 12 B is a statement to be provided by the employer to an employee if he is joining in the middle of the year.
Form 12 BB : Form 12 BB is an investment declaration form in which employees would mention all investment made by them for tax saving in a financial year.
Form 15 H : Form 15H is for senior citizens , those who are 60 years or older to file ITR valid for one financial year.
Form 15 G : Form 15G is for everybody else to file ITR valid for one financial year.
Form 16 A : Form 16 A is the certificate of deduction of tax at source and issued on deduction of tax by the employer on behalf of employees. These certificates provide details of TDS/ TCS for various transactions between deduction and deducted.
Form 16 B : Form 16B certifies that the tax has been deducted at source on the income earned from the sale of immovable property ( building or part of it.) other than agricultural land, and the TDS has been deposited by the property buyer with the income tax department.
Form 10 C : Form 10 C is filled and submitted when you want to claim benefit under the Employee Pension Scheme (EPS).
Form 26 QB: Form 26QB is a return cum challan for payment of TDS to the government.
Form 26AS : Form 26AS ( Tax Credit Statement ) is the annual statement in which the details of tax credit are maintained for each taxpayers as per the database of the income tax department. Form 26AS will reflect the tax credit against the PAN of the tax payer.
Form 27C : Form 27C is a document that can help getting tax exemption from the tax deducted at source . Both buyers and sellers can use this for all the goods specified at the Income Tax ACT..
Form 24 G : When TDS for a salaried individual or a non- salaried individual or even a person who is not a resident of the country , is not salaried but still has to pay tax , the Accounts Officers who process such need to use a form to submit information about the deduction. Form 24G is used to submit such information for processing.
Form 64A : Form 64A contains the statement of income paid or credited by Venture Capital Company and credited by Venture Capital Fund to be furnished under section 115U of the income TAX ACT 1961.
Form 24Q : The employer has to file a salary TDS return in Form 24Q.
24Q is to be submitted on a quarterly basis . Details of salary paid to the employees and TDS deducted on such payment is to be reported in 24Q.
Form 12BA : Form 12BA is a detailed statement showing particulars of perquisites, other fringe benefits , and profits in lieu of salary.
Form 27 EQ : Form 27EQ is a quarterly certificate thet contains details of tax collected at source or TDS under section 206C of the income tax act 1961.
Form 49B : Form 49B is an application form under section 203A of the income tax act 1961 for the assignment of TAN number or TAN deduction and payment account number.
🔶 HOW TO USE EXCEL IN CALCULATING PAYROLL.
1 . GROSS EARNING:
To calculate the gross earning of an employee during a certain pay period , multiply the cell with the number of
hours worked, by the cell with the rate of pay , using the format = (A1) * (B1)
2 . Deductions like income tax or health benefit can be calculated by subtracting their percentage from gross earning .
3 . Paid time off : If your employee are entitled to paid time off , then you likely to have a system for accruing vacation time for every day or hour worked. If it is accrued hourly , you first need to devide the total number of vacation hours that they are entitled to in a year by the number of working days in the year.
Excel has a variety of built- in-formulas which can be used to calculate payroll.
How Understanding Payroll Can Help Grow Your Business.
Running an efficient payroll calculation is more than just paying your employees. It adds value in various other ways . Having a complete understanding of your business ‘s payroll can help you determine whether hourly or salary wages make more sense. It can assist in your process of deciding whether adding more stuff is possible or determining how much certain tasks or roles are costing your business based on the time employees are spending doing their job.
Knowing the payroll system inside and out can also paint a picture of what tax effects might be brought on my staffing decisions and can steer you away from any costly errors.
Thanks For Reading.
Rupa Banerjee – Payroll Editor.