Payroll Software is one of the most essential tools for startups and SMEs. I’ll tell you why. Payroll falls under the monthly ‘top expenses’ in any startup. Now maybe you’re thinking that COVID-19 has changed the payroll game. The answer is yes, and no.
Yes, the processes of executing payroll and its intricacies have changed. Remote working conditions need a more ‘cloud-based payroll technology.’ Now let me tell you why the conventional payroll game is fundamentally quite the same. Irrespective of the size for your business, getting your payroll process wrong has serious repercussions. It is NEVER okay to overlook payroll and what goes into it. Do not worry, I am here to help you figure things out.
In this extensive guide to payroll, I’m going to answer the following questions:
- What is Payroll?
- Which components are part of the payroll process?
- What is Payroll Software?
- Which steps are involved in running a payroll automation software?
- What is payroll software compliance?
- Which are the important Indian compliances?
- How to do manual payroll calculations?
- What are the Advantages and Disadvantages of manual payroll?
- Why should you use a Payroll Software?
- Why is startup payroll software essential?
- What are the key criteria to choose simple payroll software?
Let’s get started!
What is Payroll?
First, let’s answer the question, “what is payroll?”. You know me, always starting with the basics. Payroll, in its simplest terms, is the process of paying your company’s employees. Payroll includes everything from collating employee data, tracking the number of hours worked, calculating pay, distributing payslips, and, recording payroll expenses.
Which components are part of the payroll process?
Earnings (including allowances) and deductions are the three main components in an employee’s payroll.
1. Earnings and Allowances
Basic earnings include the monetary amount that a salaried employee receives every month. This amount does not include any payment or tax deductions. Basic salary earnings include bonuses, overtime wages, and additional compensations.
House Rent Allowance
House Rental Allowance is the allowance provided to employees for rental house accommodations, Furthermore, employees living in metro cities can get up to 50% of the salary amount. In all other cities, the HRA is up to 40% of the earnings.
A particular amount of the salary is also given to the workers as dearness allowance. The DA is different for government workers and private sector employees. As per the latest regulations, dearness allowance is 21% of the salary for employees and pensioners.
Leave encashment is defined as the number of paid leaves that are not used by the employee. As you may know, every salaried employee is entitled to a few annual paid leaves. In situations when the employee does not utilize his/her paid leaves, the employer must pay the required amount concerning those number of days.
A bonus refers to a reward given to the employee by the employer. Moreover, bonuses are provided as a way of showing appreciation for good work and keeping employees motivated. Bonuses are taxable at a rate of 30%. However, after the addition of a cess tax of 4%, a bonus is taxed at 31.2%.
Commissions or additional compensations work differently in different organizations. A commission is usually a sum of money paid on the completion of a particular task. Furthermore, it may also be provided on the sales of a certain amount of goods or services. Commissions can be paid either in addition to salary or in place of a salary.
Children Education Allowance
Children Education Allowance (CEA) is the allowance given to employees for educating their children in Indian educational institutes. CEA is given as INR 100/month per child for a maximum of 2 children. CEA is categorized as a tax benefit for employees to reduce their taxable salaries.
Hostel Expenditure Allowance
Hostel Expenditure Allowance or Hostel Subsidy is similar to CEA. Thus, it is also a tax benefit. Hostel subsidy is given as INR 300/mpnth per child for a maximum of 2 children.
Transport Allowance is also known as Conveyance Allowance. Moreover, it is given by the employer to employees who travel from their residences to the workplace during the term of employment. TA can either be a fixed or variable amount and is a tax-deductible benefit. Furthermore, transport allowance is applicable only to salaried employees and is assessed for TDS.
The Income Tax Department of India states: Helper Allowance or Assistant Allowance is exempt to the extent of expenditure incurred on helping duties for the benefit of the company. Subsequently, is partially taxable.
Travelling allowance is when an employee is given an allowance to meet expenditures incurred using transport during work duties. It is usually 70% of such allowance or INR 10,000/month.
Uniform allowance is provided to meet the expenses of purchasing or maintaining work uniforms. Furthermore, this allowance is partially taxable.
This allowance is provided to employees for expenditures incurred on days when the employee is absent for work purposes. Eg. work trips
City Compensatory Allowance
City Compensatory Allowance is the compensation given to employees living in metro cities. Therefore, CCA is a fixed amount for workers in a particular city to help with high living costs. It is fully taxable.
This allowance is given on working overtime hours, beyond working hours. The overtime allowance for every company is different and decided upon by the employer. Hence, overtime allowances are fully taxable.
Telephone allowance is the most common kind of allowance received by an employee. It is fully taxable.
Fixed Medical Allowance
Fixed Medical Allowance (FMA) is granted to pensioners not covered under the Central Government Health Scheme. Moreover, FMA includes daily medical expenses, excluding any type of hospitalization charges. It is fully taxable.
Entertainment allowance is the payment given to an employee for various activities such as client meetings, drinks, meals, hotel stays, etc. This allowance is also completely taxable for private-sector workers.
Employers often give gifts to employees during festivals and other special occasions. These are collectively termed as gift coupons or vouchers. In addition, employees that receive less than INR 5000 annually are exempt from paying taxes on it. However, on gift amounts more than INR 5000, the gift coupon is treated as part of earnings and becomes taxable.
Project allowances are payments for tasks that are specific to a work project. They are temporary allowances and fully taxable.
Holiday allowances are paid annual leaves. Indian laws grant a minimum of 15 days paid leaves per year for employees.
Research allowance is provided to promote academic research or training. Moreover, it is exempt to the extent of actual research costs. Any amount that is remaining after the cost of research is considered taxable.
Food allowances (meal allowances) are allowances for food at eating joints provided at the workplace or by the employer. However, food allowances are exempt only up to Rs 50 per meal. If the amount exceeds Rs 50, the remaining lump sum is taxable.
Books and Periodicals Allowance
This allowance is provided on expenses relating to books, periodicals, journals, or newspapers for skill training of employees. The books and periodicals allowance is non-taxable if the bills are provided to the employer.
Notice Pay Deduction
As you may already know, an employee cannot leave a company without providing a notice period. The pay deducted on this notice is termed as notice pay deduction. It is a one-time deduction and is taxable as salary on a due basis.
Voluntary Provident Fund
Voluntary Provident Fund refers to the voluntary employee contribution towards the provident fund. It is over and above the 12% EPF contribution and is a recurring deduction. Furthermore, the maximum VPF contribution is up to 100% of the basic salary and dearness allowance (DA).
National Pension Scheme
The National Pension Scheme (NPS) is again a voluntary contribution like EPF and VPF. In the NPS, the entire corpus is exempted from paying taxes and pension withdrawal is completely tax-free.
What is Payroll Software?
On to our next question, ‘what is payroll software?’ Payroll automation software is used by HR professionals to automate payroll processes from the start to finish. It manages and streamlines the process of providing salaries to employees. Simply put, it deals with the entire life cycle of payroll operations.
It’s clear now that payroll isn’t a single step process. It comprises a series of tasks. I’ll dive into what these tasks involve, in the next section.
Which steps are involved in running a payroll automation software?
Running payroll involves a series of steps:
- Employee Onboarding
- Defining Policies
- Creating a Salary Structure
- Collecting Payroll Inputs
- Calculating Salary
- Generating Payslip & Tax Sheets
- Compiling Data Reports
- Filing Statutory Taxes
What is payroll software compliance?
Payroll Compliances are the set of laws that a country has for native business owners. I’m sure that you do not want your business to have a tainted compliance record. To ensure that, it is important to understand what compliances you are required to follow.
Adhering to statutory compliances can help facilitate your business’ expansion. It also shows that you are accountable to government laws. This helps your employees retain their trust in you and your working practices. Since compliances are so integral to business functioning, also make sure that you invest in payroll compliance software.
In case it isn’t obvious by now, non-compliance can cost you a ton of penalties and a negative reputation. So read on to know the compliances you need to abide by in India.
Which are the important Indian compliances?
In India, there are 5 main compliances you should know about:
1. Employee Provident Fund
One of the most important social security legislation for employees, EPF contributions form a big part of payroll compliance. Strive to stay compliant by generating payslips with accurate monthly PF deductions.
2. Employee State Insurance
ESI is an integrated social scheme to provide social security and health insurance for Indian employees. By following this compliance, you can help your employees in uncertain situations through regular contributions.
3. Professional Tax
If you have employees working in different states across the country, be mindful of this compliance. Professional Tax is the tax levied by the state governments. Your payroll system should allow for automatic tax deductions according to schedule.
4. Income Tax
Also known as TDS or Tax Deducted at Source, Income Tax is a direct tax imposed on an individual’s income. As a business owner, make sure you help employees understand their annual tax liabilities.
How to do manual payroll calculations?
Next, let’s answer this question ‘how to run payroll manually?”. While it’s great to automate everything as early as possible, a manual process does have its charms.
Manual payroll is defined as the payroll calculations processed by hand. When I say ‘hand’, I’m referring to either book-keeping methods or using MS Excel. Nowadays, a lot of people use the online cousin: Google Sheet.
What are the advantages and disadvantages of manual payroll?
It just requires an excel file or a google sheet to get started. Moreover, no large software installations are needed.
2. Low learning curve
All of us are used to basic excel functionality so it is easy to get started.
3. Ready-made templates
There are some ready-made excel templates for running payroll. This again helps in getting started quickly.
Manual payroll becomes increasingly complex to manage as the employee base grows.
2.Coordination across departments
Whenever an organization grows beyond 20 people, running payroll manually becomes a challenge. This is because coordination across Finance, HR, Leadership, and IT departments becomes difficult.
2.Tedious and Tiring
Manual payroll is definitely a tedious process and can take away a lot of your time. About 25% of the HR or Finance person’s time goes into running payroll. Additionally, if one of the co-founders is involved – that is further leadership time wasted in non-value added work. Finally, generating 30+ payslip by hand is a big waste of time.
You cannot receive real-time analytics or trends analysis. This makes it difficult to assess business performance.
4.To Err..is Error
I know, it goes like this, “To Err is Human.” Exactly! We are bound to make errors while collecting information and making calculations. This can result in penalties for your business.
Manual payroll takes time and is erroneous. Both these factors contribute to employee dissatisfaction; no one wants either delayed or inaccurate payslips.
6. High Cost in the long run
I know, I know. I mentioned the low cost in the advantages section. However, running payroll becomes expensive in the long run due to errors. Additionally there may be penalties due to tax calculation or filing issues.
So what are the advantages of Payroll Software? Read on for more…
Why should you use a Payroll Software?
We have reached the part you are probably most unsure about. I understand the natural resistance to change. However, do remember that software is eating the world. While manual payroll is simple, it is a major roadblock to growth for startups. If you just want to dip your toes, start by carrying out payroll automation in excel.
One of the biggest features is payroll automation. Payroll software can automate complex calculations. Additionally, it eliminates the risks of human error. Even functions such as year-end reporting can be made easily organized, easy, and efficient.
Payroll is not a one-time action. It is a recurring expense for any business, which is why it is more important to invest in software in the long run. As I said, manual payroll tends to become difficult and inaccurate as the business grows. Payroll software helps increase the visibility of monthly payrolls by tracking expenses and making records. Your profit and loss statements are heavily dependent on business expenditures, don’t let them get over your head!
Secure Payroll Data
Payroll information includes vital employee details such as salary, taxes, bank account particulars, and more. By enhancing the privacy of data through access controls, payroll software maintains the utmost data confidentiality. It allows for staff collaboration and easy interface but only lets the payroll team view necessary details.
Efficient Tax Management
I know for a fact that you do not want your business to be penalized for inaccurate tax payments. Payroll software helps you to adapt to changing tax regulations, choose which statutes are applicable to your business, manage PF contributions, etc. Consequentially, this boosts the employer’s reputation as you will be seen as an organization that makes reliable tax deduction decisions.
Easy App Integration
If all of this sounds hard to work with, I have a surprise for you. Payroll software enables multiple people to receive payroll inputs every month. By integrating into your daily work platforms such as Slack or MS Teams, payroll software allows for data access across workspaces. Asanify’s Payroll chatbot optimizes payroll operations through seamless app integrations.
Why is startup payroll software essential?
As a small business financial manager, you want to make sure you use your overall budget in the most frugal way. Payroll systems are beneficial to startups or SMEs in several ways.
It helps to hire the right staff that is crucial to the business’ success. Payroll also helps you maintain employee compliance. When you have an effective payroll system it prevents unnecessary fees and fines. This ensures you don’t end up spending exorbitantly on tax penalties, keeping your budget intact.
So you can see, payroll affects all facets of a small business. Its advantages include maintaining employee morale in preserving financial stability.
What are the key criteria to choose simple payroll Software?
So, now you’re convinced why payroll automation is necessary. Let’s take a quick look at the key criteria to keep in mind.
1. Combines manual with automation
A good payroll software allows you to upload past data from excel. Asanify offers an exclusive feature to run payroll directly from Google Sheet! Invest in a payroll platform that makes your life easier. Also, consider a software that provides you with edit and review facilities.
2. Easy Data Transfer
A big concern if you’re currently using manual payroll can be the migration of existing data onto a software. Choose software that helps design templates to import salary and employee details. This will eliminate duplicates and reduce your work.
3. Schedule Payments
A good payroll software will allow you to pick a routine that fits your personal routine. You can choose your own payday specific to your industry.
4. Customizing salary slip
By customizing employee earnings for holidays, payroll software should enable the easy application for pre- and post-tax deductions.
5. Efficient Salary Hikes and Appraisals
Be judicious when rewarding your talent because it’s your team. So, structure your increment and appraisal process to attract and retain the right employees. Use a payroll software to revise the CTC and pick a date to notify employees on hikes.
6. Accurate Deductions
Payroll deductions can be complicated to handle. Pick a software that has the option of setting up appropriate profiles to deduct the right tax amount each time.
7. Offline and Online Payments
Efficient software allows for the disbursement of offline and online payments. Payroll software credit employee salaries online or offline for easy recording.
8. Employee Exit Management
Termination payroll to handle your employees’ notice pay can be a difficult process. Thus leave encashment, comp off calculations, exit requirements, and final payslips can be made simple with a payroll platform.
9. Computerized Gratuity Rewards
A good organization appreciates long-serving staff. With payroll software, you do not have to worry about carrying out gratuity calculations manually.
Today we discussed the basics of a payroll software. We saw that a good payroll software such as Asanify can really help streamline your internal processes. Moreover, a good payroll software will give you back your most valuable resource – time. So what are you waiting for? Give us a shout to unlock growth!
Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant or Labour Law expert for specific guidance.