What is payroll and how it works?
Payroll is a method used by organizations for paying employee’s salary for each pay period. It is a financial record of compensation paid to an employee as salaries, wages, bonuses or deduction for a particular period of time.
The payroll process involves the calculation of employee salaries and tax deduction, administration of employee's financial records and disbursement of salary. The salary and wage disbursement have various key components structured together in every payroll. These components are essential for the employers and employees both to have an accurate calculation and disbursement.
Framing the salary components of an employee is one of the tedious and the most challenging tasks in every payroll management system. Therefore a payroll processing system is an important function for any business. And business owners need to ensure that whoever is handling payroll should be capable of handling the process and are knowledgeable about what rules, regulations, and other facets need to be considered. This will help to make the payroll tax efficient and compliant with government norms.
Payroll is one of the most important jobs which fall under HR professional. This is mostly overlooked but a small mistake in payroll hit the morale of the employees which ultimately affects business productivity. Therefore every company needs an organized payroll management system.
Payroll consists of salary calculations towards the work done by the employee, be it in the order of productivity, deductions, or benefits. Unfortunately, there is a huge gap with respect to how the salary is structured, what components should be included and not.
Every salary contains “taxable” and “tax-exempt” components, variable pay, constant pay, general and specific allowances, and some deductions.Let’s see what the payroll components are
What are the major components of a Payroll?These are the major components in the payroll management system in India
1. Gross Salary
The total amount paid to an employee before deductions, every month based on whether the employee is salaried or hourly. Gross salary may include commissions, bonuses, and other payment arrangements. This is calculated on a yearly basis and often referred to as CTC or cost to the company.
Deductions are elements of the salary that are part of CTC but are deducted from the gross salary that employees receive. Some components that are part of deductions are shown below:
3. Provident Fund (PF)
This is calculated at 12% of Basic + Dearness Allowance (DA) + Special Allowance. The employer and employee both make an equal contribution of 12% each.
4. Professional Tax (PT)
The professional tax is levied by Governments of certain states on salaried employees. The amount of professional tax varies from one state to another where they are applicable.
5. Employees State Insurance Corporation (ESIC)
This deduction is mandatory for employees whose gross salary is not more than Rs. 21000. Only applicable in companies where there are 20 or more employees within Rs. 21000 gross salary bracket. Employees contribute 1.75 % of the gross salary and the employer contributes 4.75% of the gross salary.
6. Labour Welfare Fund
This fund is a contribution made by salaried employees for the benefit of the labor class. The labor welfare fund is like a professional tax that varies from state to state where they are applicable and is relatively small. Employee and employer both contribute but the contribution of the employer is twice the employee. The payments are made every half-yearly in the months of June and December.