What is Payroll Processing?

What is Payroll Processing? It refers to managing the payment of wages by a company to its employees. It is an important business function that involves arriving at the ‘net pay’ of the employees after the adjustments of necessary taxes and deductions. While the summary sounds quite simple, there are many behind-the-scenes steps that need to take place before the actual processing work begins. For an efficient payroll management process, the administrator must plan each step carefully.

The steps involved in the process include gathering employee time information for a selected period, managing benefits and deductions, as well as distributing employee pay for the time period. There are four main ways employees can be paid (cash, check, direct deposit or debit card). Most companies use either payroll processing software or a third-party payroll processing service.

What are the different stages of Payroll Processing?

One might wonder how Payroll Processing work, the entire process is divided into three stages. The stages are “Pre-Payroll Activities, Actual Payroll Process and Post Payroll Process.” These stages are further divided into sub-stages as mentioned below.

Stage 1: Pre-Payroll Activities

1.1) Defining Payroll Policy

The first stage is where you establish policies to bank on during the Payroll process. These policies once approved by the management turn into standards. Pay policy, attendance policy, leave and benefits policy, etc. are a few examples of such policies.

1.2) Gathering Inputs

The second step is to gather inputs from the various departments to ensure accurate calculations of payroll. Some examples of the data to be collected could be getting data related to income tax declaration, salary structure, benefits eligibility, etc. from the staff. This could be overwhelming for some, thus a good idea is to outsource the payroll process.

1.3) Input Validation

Once all the required data have been gathered, it is important to verify its validity. This is because a single mistake can ruin the entire payroll process. One must ensure the list contains all the active employees and no records of inactive employees. They must check the data adheres to the company policy and is presented in the right format.

Stage 2: Actual Payroll Process

2.1) Payroll Calculation

Once you have the verified data, it is time to feed it into the payroll system. The result you will get is the net pay after adjustment of necessary taxes and deductions. Also, in this step, you recheck the process to nullify any chances of errors.

Stage 3: Post-Payroll Process

3.1) Statutory Compliance

In this phase, the payroll administrator needs to religiously adhere to the statutory compliances. Various statutory deductions like EPF, TDS, ESI are deducted during this process. These deductions are then paid to the respective authorities.

3.2) Payroll Accounting

An accurate book of accounts is required to be maintained by every organization. The salary paid is one of its important entries. Thus, as a step of the payroll process, all salary data must be fed into the accounting or ERP system.

3.3) Payout

Once all the above-given steps have been completed, you can finally pay the salaries. The salaries can be paid via cash, cheque or bank transfers. It is always more preferable to have salary accounts of the employees for hassle-free transfer. For payment to salary accounts, you need to send salary bank account statements with particulars such as employee ID, account number, salary amount, etc. to the branch.

3.4) Reporting

This is the last step in the payroll process. In this step, you have to prepare accurate reports containing information such as department or location-wise employee cost. These reports are then sent to the finance department or the management team for further analysis.

The whole process takes a lot of time and energy and can be overwhelming to some. Thus it is recommended to outsource it to a third-party service like OrangeIQ. 

Why Payroll Processing is important?

To begin with, we need to understand what is payroll Processing. This was explained above so the next step is to understand why payroll Processing is important. It is recognized as one of the most crucial and time-consuming administrative tasks which need to be taken care of with utmost attention. This is important as a company’s financial integrity depends on it. It can be used to identify problems like employee turnover and absenteeism beforehand. It protects the brand’s reputation by adhering to the country’s labour laws. Payroll Processing is important as it centralizes all employee’s crucial data in one place. 

Benefits for Payroll Processing

Now that we know what is payroll Processing, below is a list of benefits that one can get from outsourcing the same.

• It saves time and increases productivity.

Each year significant labour hours are spent doing other tasks such as preparing W2s and ensuring they are sent out in a timely. Outsourcing this can save the employees a lot of time and energy that can later be focused on more crucial tasks.

• Reduce costs.

By working with a payroll provider, the direct costs are greatly reduced. Big businesses can afford to maintain robust payroll departments. However small/medium-sized businesses can save a huge amount of money by outsourcing payroll to a third party.

• Avoid mistakes

Businesses sometimes run the risk of making mistakes. The penalties for errors, omissions or late payroll tax filings can be very costly. By outsourcing to a payroll service provider, they are far less likely to make a serious error.

• Team of experts

Most business owners and payroll-related staff do not have the time. They cannot study the constantly changing rules, withholding rates and government forms. By outsourcing payroll, a business can take advantage of the expertise.