As a salaried person, you may have often heard the term – payroll. This is one of the buzzwords used by any organisation's HR and Finance departments. But what is payroll, and how does it affect you?
As part of the great Indian workforce, you are expected to be aware of the different systems and functions that operate in the background, collectively referred to as – support functions. So, let us go ahead and understand the definition of payroll and everything that it entails.
Simply put, payroll is the list of all the official employees of a company that qualify for salaries and other benefits. It also contains the details of their designation, function, role, department, pay scale, and other entitlements as per their offer letter.
While in its truest form, payroll is as defined above – a list, you can well imagine the shape and form it can take in today's digital age. So, let us refer to it as a database of employees and the employer's financial commitments toward them. This is when payroll starts taking the structure of a process that acts as one of the key inputs towards determining and paying your eventual salary.
Over the course of your career, you will hear payroll being referred to as a function, a department, a system, and even a process. Don't let that confuse you, as they are all right in a way.
It all depends on the context and the way your organisation is set up. For example, in small and medium businesses, the number of employees is usually less. Hence, the employees' payroll can be easily managed in-house, mostly as a combined activity with the HR function.
Most larger companies with thousands of employees prefer to outsource this function to third-party specialists who also have the expertise in running this function for various companies. This improves efficiency while reducing costs. A payroll system is the software suite being used to manage the database and ensure timely and accurate disbursement of salaries of the employees.
The payroll process is a layered and vital one. You can understand its value if you consider this question – what will your reaction be if you're not paid on time or have not been paid all your dues? Yes, disgruntlement would be an understatement.
The database needs to be accurate and updated regularly to reflect any changes such as promotions, increments, changes in fixed versus variable structure, etc. The complexity increases multifold for large organisations that have cross-border offices. In such a scenario, the local regulations, taxes, and other perquisites must also be considered. That is another reason why such companies tend to outsource this function to experts.
The payroll function cannot operate in isolation. While it serves as an input to the finance and accounting team to calculate the actual salary and pay it out to the employees, its inputs are also needed for taxation purposes, contributions to the employee provident fund, and management of the employees' retirement corpus.
It is easy to imagine the chaos if all these systems worked in silos. There would be a lot of duplication of data and effort, delays, and possibilities of errors. This is why modern-day payroll systems integrate a lot of the functionalities into one.
First, a clean database is built, consisting of all existing employees and their relevant information. Most of this information comes as input from the HR function and contains their name, date of birth, PAN number, PF account number, salary bank account number, etc.
Apart from HR and finance, another aspect that influences the payroll process is the time management system, which includes the number of working days clocked in the period, sick days or leaves taken, overtime worked, etc. As and when new employees are onboarded, they are assimilated into the existing system, and their details are punched into the database.
Any well-defined system has three key stages – input, processing, and output. You have seen what the payroll inputs are and also how the process interacts with other functions. Now let us see its output.
Naturally, the key objective of the process is to ensure timely and precise payment of salaries to the employees. But that is not all. Both from an internal accounting perspective and as mandated by the law, a detailed salary slip needs to be made available to each employee that clearly depicts the amounts paid and deducted. Ideally, this is done online for posterity and quick reference of all involved.
Furthermore, there is a matter of compliance with the legal and regulatory authorities such as the Income Tax department, Labour Law, Provident Fund Act, etc. Non-compliance to their rules can lead to harsh penalties and a loss of brand reputation for the employer.
Finally, the concern of data privacy and security is also taken into account. An ideal example of a payroll output that encompasses all these aspects is your Form 16. Whenever your employer provides you the Form 16 for the financial year, it contains all the details about the amounts paid to you as salary and bonus, other allowances, taxes deducted at source, contributions to the provident fund, etc.
You must now be in a position to realise the complexity and the amount of effort and detailing that goes into ensuring that your salary reaches your account on time. While the nuances might vary for your particular organisation, as different companies choose to handle payroll differently, the general principles are the same.
Payroll is a mechanism through which various inputs are collected regarding the services provided by an employee for the period and processed into their paid-out salary.
Payroll also contains the details of what each employee is owed by the company, amounts that have been paid in the past, and the deductions already made and to be made in the future.
A robust payroll also ensures the generation of a detailed salary slip and maintains compliance with all the relevant laws that govern employment in the country.
Payroll is the overall process that maintains a record of all employees' financial details and ensures timely and accurate payment of their salaries. Typically handled by HR or accounting departments, payroll contains a large database of all employees and their relevant job-related and personal financial details.
Salary, on the other hand, is simply the compensation paid to employees for the services they provide. Here, gross salary means the overall income before any deductions, while the net salary is the gross salary minus income tax, contribution to PF, etc.