Payroll is a list of a company’s employees and the amount of money they are to be paid for their services. Understanding payroll calculations is critical for any organization to avoid making costly mistakes that could be highly impactful.
Now, payroll formulas are not a mystery. They simply require combining some of the key elements to generate a sum for the total monetary amount which include but are not limited to gross pay, deductions, and taxes.
Here is everything you should know.
How is payroll calculated?
The payroll process involves deciding the employee’s gross pay based on their pay rate and hours worked. The required deductions or withholdings are subtracted from the gross pay to generate the net amount payable to the employee.
Calculating payroll consists of multiple steps, which depend on the type of payment the employee receives (hourly pay, overtime, salaried etc.), life changing events (promotions etc.) and the withholdings or deductions. These steps have to be followed precisely to ensure the net pay is accurate for each employee and tax withholdings and reporting is correct.
First, to calculate the time worked for payroll, this step has to be handled differently for hourly and salaried employees. To avoid payroll delays, hourly employees are required to complete and submit their timesheets (including any overtime which is paid at a higher hourly rate) for approval on the last day of each payroll period before close of business. Salaried workers usually receive a fixed wage for each pay period which can be calculated by dividing the annual salary by the total amount of annual pay periods.
Calculating Gross Pay:
Simply put, gross pay is the employee’s daily wage rate multiplied by the number of days they worked. For e.g., If the wage rate was ₹1,000, then for a 6 day work week, the employee’s gross pay would be ₹6,000 and for a 3 day week, their gross pay would be ₹3,000.
Calculating Net Pay:
The gross pay minus any withholdings or deductions (Professional tax, TDS, EPF, etc.) will give you the employee’s net pay. For e.g., if gross pay were ₹6,000 and their withholdings + deductions were ₹1,000, their net pay would be ₹5,000.
Issue Employee Paychecks:
After payroll calculation is completed, the payroll needs to be validated for accuracy and checked to ensure it is compliant with the company fiscal policy before it is finalized, and payment issued to the employee. Salaries are either paid directly into a bank account by direct deposit or via a paper cheque. Banks usually enable these online payments.
Approaches for Payroll Calculations: Typically, two approaches can be used to calculate payroll, a manual or automated method. In the manual approach, which is typical for small companies, the gross pay is calculated by adding up all the employee allowances and deducting tax, TDS, EPF etc. from it to generate the net pay. Hourly and salaried employees will need to be handled correctly. Using a Cloud-based Indian Payroll software in an automated way is preferred nowadays. This process is more accurate, time saving and can be used to generate reports for analysis by management.
A few best known methods to keep Indian Payroll calculations simple:
Ensure employees submit timecards on schedule and flag and issues with their pay slip in a timely manner.
Ensure payroll records are regularly updated, organized and compliant with company fiscal policies along with external laws and/or regulations to ensure a smoother pay process and allowing for discrepancies to be quickly identified.
For accuracy, ensure payouts made matchup between bank statements and employee pay slips. Always validate payroll prior to issuing payment to ensure consistency in accurate payouts to employees.
Securing professional help is a way to set up correctly and mitigate any uncertainties in navigating the payroll process.
In conclusion, payroll is not as complicated as it is made out to be if enough thought has gone into setting it up correctly and implementing it methodically. A good Indian Payroll system will ensure less issues and unnecessary headaches and allow for business owner to focus on doing what they do best, running a well-oiled and successful business!
This blog is written by Beehive, a leading HRMS and Cloud Based Payroll Software company headquartered in Mumbai. We would like to acknowledge some of our peers for the learnings we get from them to be able to assimilate and edit a blog of our own.