Accounts Notes: Payroll Basic Concepts

Tuesday, 12 April 2011

Payroll Basic Concepts

Definition:
The term payroll has several different meanings:
• The distribution of paychecks (physical or electronic) to employees each payday, as in "I finished doing payroll yesterday."
• The financial records for employee wages/salaries, withholding, deductions, bonuses, pay for time not worked (holidays, vacations, sick time, etc.) and other items on employee paychecks.
• It can also mean the record of total earnings of all employees for a company in a fiscal/financial year.
Subject - What are the general components of salary in India?

 Basic Salary
 Commissions/Incentives
 Bonus
 Dearness allowance
 Child Education Allowance (better give as reimbursement to save tax)
 Child Hostel Allowance (better give as reimbursement to save tax)
 City Compensatory Allowance
 Conveyance Allowance
 House Rent Allowance
 Leave Travel Allowance ( better give as reimbursement up to a maximum of
15,000/- to save tax)
 Lunch Allowance
 Medical reimbursement to a maximum of 15,000/ (otherwise it will go in tax)
 Newspaper allowance (better give as reimbursement to save tax)
 Special Allowance
 Gift voucher
 Club membership (save tax)
How often is payroll done?
Generally speaking, payroll is done weekly, fortnightly or monthly. However, in India, payroll is mostly processed once a month. In many other countries, payroll is processed weekly.
Coming back to India, some companies start processing around the last week of the month, so that employees will be paid by end of the month. This is normally for companies who are in services sector (like software and MNCs).
Companies in the manufacturing sector start processing around 1st of the month and pay by 5th or 7th of the next month.
For example, payroll for the April month is processed by some companies around 25th of April so that employees are paid by 30th of April. Others may process by 1st of May and pay by 5th or 7th of May. Please note that in either case, this is called as "April Payroll".
What are the steps involved in a typical payroll processing every month?
Payroll processing involves the following broad steps:
1. Update data of new Joined
2. Update data of Resigned employees
3. Update Salary increment data
4. Update changes in employee information
5. Update Loss of Pay or Working Days
6. Process Payroll
7. Generate Salary Register
8. Do Payroll Reconciliation
9. Distribute Salary to employees
10. Distribute Pay slips
11. Update Payroll data in accounting software
12. Generate PF, PT, ESI and IT reports.
13. Make payments to PF, PT, ESI and IT departments.
14. Generate other MIS reports
Salary Structure / Compensation Structure
Can Greytip Online handle compensation structure of our company?
Definitely! Greytip Online allows for unlimited salary components. Each component can be configured to be a hand entry component, formula, lookup value, etc. Any compensation structure from the simple to the most complicated can be configured.
What is a Compensation Structure?
Compensation Structure refers to the various heads (components) under which salary is paid to an employee, and the way in which these heads are calculated.
For example, an employee may be paid a salary under the heads: Basic, HRA, Conveyance, etc. Basic may be specified for each user and Conveyance may be Rs. 800 for all employees.
The above (components and calculation methodology) is called as Compensation Structure. Of-course, there will be lot more components and lot more complexity in a real-life compensation structure.

What are the salary components (heads) that are always present?
In most (Indian) companies, the following components are generally present:

Basic, HRA, Conveyance, Income (Gross), PF (Provident Fund), IT (Income Tax), Deductions and Net Pay.
What are Reimbursement components?
Reimbursements are a special set of components that are part of the payroll. This is typically introduced in the payroll to save tax. (Tax is to be paid by every employee to the government. The amount of tax is based on the income earned by the employee).
As the word suggests, reimbursements are money paid to you for some money that you have already spent. For e.g. A common reimbursement item is "Medical Reimbursement". This indicates that if you spend some money on medical expenses (medicines, doctor charges, etc), then the company will reimburse (pay) you for the amount spent by you. Another common reimbursement is LTA (Leave Travel Allowance)
All reimbursements are subject to upper limits. What this means is that you can claim (request for payment) reimbursements only up to a certain limit. If your Medical Reimbursement limit is 15000, then you can only claim up to 15000.
The process of asking for payment of a reimbursement is called as making a reimbursement claim.
What are the various types of components that make up a payroll structure?
Every payroll compensation structure consists of at least income or deduction components