Blueprint for a Robust Payroll System

Transcription

1 Blueprint for a Robust Payroll System By Vinod Gulvady ( HR & Payroll Veteran)

2 Index: Overview of payroll Typical activities performed by a paymaster Twelve golden steps to manage a great payroll proces Glossary CTC- Cost to Company PF- ESI- Provident Fund Employee State Insurance PTax- Professional Tax LWF- Labour Welfare Fund MIS- Management Information System F&A- Finance & Accounts PPD- Payroll Process Document C&B- Compensation & Benefits L&C- Legal & Compliance

3 Overview of Payroll Payroll is an essential function in every organisation as it involves processing of the salaries and benefits of employees. This function is indeed an intricate blend of scientific methodology, requiring logically-driven formulae, with systematic, regulated and well documented procedures that integrate well into company policies as well as laws of the land. What does Payroll mean? Every organisation must pay salaries to its employees in a timely & accurate manner in return for services rendered to the organisation. Additionally, it is obligated to be compliant with statutory laws related to compensation. Keeping in mind all of the above requirements, an organisation needs to have a robust methodology and procedure in place to manage this. That function is called Payroll. What is the importance & significance of this role? As a paymaster, this role touches upon each and every employee of an organisation making it a very crucial role. An organisation will trust the paymaster to keep it fully compliant in terms of employment laws at all the times. This role has strong links with other functions such as C&B, F&A, legal & compliance teams, etc. It is a niche role & is much sought after by corporates & MNCs. Blueprint for an effective payroll 1

4 What educational qualifications are required to be a paymaster? A Commerce graduate would be ideal since he/she will be already familiar with numbers and accounting aspects. However, any graduate who is systematic and has a strong flair for numbers can take up this role. Besides the qualification, one must have the right attitude to take up a challenging role. What is the specific role of a pay master? The primary role is to compute and disburse salaries as per the individual employee contracts. There are certain procedures to be followed to accomplish this activity. Also, there are certain post-payroll activities to be performed like accounting & reporting. 2

5 Typical Activities that a Paymaster Performs Payroll involves critical activities: Pre-payroll, Actual Payroll & Post-payroll activities. Pre-payroll activities Akin to receiving raw materials for manufacturing a product, the payroll process too begins with receiving salary related input data from various sources. The paymaster will then validate it in terms of adherence to company policy, authorisation/approval matrix, right formats and ensure that no active employee is missed out and no inactive employee is included for salary payment. Actual payroll process: The paymaster will now compute the gross and net salary of an employee, after adjusting necessary taxes or any other deductions. Post this, the net salary statement has to be sent to the bank for disbursement to individual employee s bank account. Post-payroll process: All statutory deductions made from employee s salary has to be remitted to the government in the prescribed formats. Then, the salary costs has to be accounted for in the books of accounts. MIS reports need to be generated and provided to appropriate stakeholders. Finally, the paymaster has to respond to employee queries (if any) regarding their salary. Payroll environment is severely dynamic in nature, prompted by constant changes in either statutory rules or to Company policies or upgrades in technology or for aligning to best practices, etc. As you see, it offers so much to learn & will mould a person to be open to changes, be systematic, accurate, prompt, logical, sensitive & dynamic. 3

6 Twelve Golden Steps To Manage a Great Payroll Process To run a payroll process, you will need to know whom to pay, what to pay, how much to pay, when to pay and where to pay, agreed? For that, we need to strictly and systematically go by a set of procedures as noted below: STEP-1: Foundational and one-time exercise We will begin with a need for a process document, which we will call as Payroll Process Document (PPD). The objective of this document is to lay down crystal clear requirements, procedures, workflow diagrams and set expectations internally as well as with your stakeholders. It is basically a design document or blue print, which outlines the procedures based on the payroll process can be configured. Firstly, obtain a pay element (or wage type) catalogue and all duly approved HR policies from C&B department. Each pay element will have specific set of rules or procedure for employees to be eligible. Some of these elements are mandatory to be paid, some are as per company s policies while some are discretionary in nature (stocks, incentives, etc). Broadly, pay elements can be categorised into fixed pay, allowances, reimbursements, benefits, deductions and adjustments. STEP-2: Familiarise yourself with your stakeholders input providers & output receivers Inputs could be of payment or deduction in nature. In large organisations, the input providers could possibly be recruitment team, HR business partner, team manager, finance team, legal team, C&B team, transport & general services, security team or employees themselves. In smaller organisations, inputs would be received from a consolidated source or from fewer teams. Adopt a standard format for receiving all types of inputs to receive regulated & valid data. Identify & mark certain critical columns in the format as mandatory fields to ensure completeness. On the other hand, outputs are basically post-payroll data or reports such as pay register, bank file, accounting entries, HR reports/mis, statutory reports, etc. The output receivers could be finance team, accounting team, bankers, compliance teams, various business heads, etc 4

7 STEP-3: Prepare a payroll calendar to define precise dates of every activity that needs to be performed, covering the entire financial year & clearly indicating the following (but not limited to): when the payroll input data is required with cut-off dates when the outputs will be ready when funds will be required in the bank when pay registers will be ready when bank files will be ready when the accounting files will be ready when MIS reports will be shared STEP-4: The first procedure is to receive payroll input data from input providers. A simple checklist containing all types of inputs (for both income & deductions - hard & soft copy) would help to ensure no inputs are missed out by any input provider. Some typical checkpoints to keep in mind would be: Have we received all types of inputs (payments or deductions or adjustments)? Are these inputs sent by authorised personnel only? Are the inputs provided in the right formats? Have all mandatory or required fields in the formats been updated correctly? Are all the inputs as per company policies? Do they have the required authorisations and approvals? Are there any exceptions and do they have additional approvals (if any)? Do they have all necessary back-up papers, documentation and are they sufficient? STEP-5: Enter the validated inputs in the payroll system. This should be a very systematic & disciplined process. Use a checklist to ensure all data has been entered correctly and in the right allotted modules of the system. 5

8 STEP-6: Run the assigned program in the payroll system for it to process the pay. Each system will have its own procedure or sequence of activities to be followed by the payroll officer. In this stage, the system will compute gross salary based on the inputs submitted, apply and deduct applicable income taxes and social security contributions, perform adjustments of any nature and finally arrive at the net pay of the employee. This run is generally called the first cut run and will generate a report called pay register. Gross income = All types of regular income + allowances + any one-time payment or benefit Gross deduction = All types of regular deduction + statutory deduction +one-time deduction Net pay = Gross Income (-) Gross deduction A pay register is a monthly statement reflecting earnings and deductions by each component of all employees individually. It is a primary source document (1) for gross and net pay of employees (2) for list of statutory deductions made and remittances to be made (3) for accounting data to book salary costs in books of accounts (4) to respond to employee queries (5) for reference, audit & inspections (6) for generating various management reports (7) for generating payslips, reimbursement statement, tax forms to employees. 6

9 STEP-7: Once the draft pay register is generated, it is time for validating the results for accuracy of pay and statutorily compliance. This step is very critical in terms of checking the health of the month s payroll. 1. Input vs output validation The first step in while validating is to check if all the inputs have been considered by the system accurately. There could be instances where the system may not recognise some input data (numbers or values) due to syntax/ format error or invalid record, etc. If so, these inputs must be re-entered correctly. The total number of line items or hash totals of items in the input file must match with the payroll results by each pay element and with the source document. A source document is the original data. 2. Perform a head count validation Take last month s closing active employees headcount (Add) new hires of current month (Less) separations during the month. You get the current month s active employees head count. This headcount number should match with your net pay count of employees. If not, investigate for any salary on hold, negative salary cases, full month loss of pay cases, etc, until you are satisfied with the number. 4. Duplications: One important validation is to check for duplicate employee numbers or names or data. It is quite possible that inadvertently, an employee may get included twice or a data file is submitted twice. A formula-based manual check in excel worksheet would be safest (example: incentive input file submitted twice in the system may result in double payment to employees). 5. Month-on-Month; Year-on-Year cost validation A most common dip-stick method is to compare the total gross salary amount with the previous month s payroll. Any variance should be explainable and backed with reconciliation or data. Many systems offer variance reports by employee and by component. If the totals of these variance reports match to the overall difference in costs between the two months, then the variance is self-explanatory. 3. Cursory checks Observe or generally eye-ball the pay register to detect anomalies or at least inquisitively look into large payments or absurd deductions that do not look right. There is no set technique for this but one would develop this skill over a period of time. 7

10 STEP-8: Once the validation process is complete, you might have a list of corrections to be made to any data (if any). Submit those corrections and re-run payroll in order to generate the final pay register. It will be a good practice to perform a few random checks to be fully satisfied with the results and needs to be signed off by authorised personnel. Once signed off, the process is frozen, no changes whatsoever should be made to the data. STEP-9: Generate bank file through the system. Generally the report will contain the employee number, full name, location, bank name & branch, IFSC code, bank account number and the net pay amount. This file needs to be sent to the Company s bank for further disbursement to employees bank accounts after duly adhering to the internal approval matrix. Once the bank file is sent to the bank, ensure to obtain an acknowledgement from the bank stating that salaries have been credited. All banks have an option for online banking which is the safest & recommended method. Payroll system Sent to bank Company bank Generate salary bank transfer file Bank send s acknowledgement Salary credited to employee salary bank account STEP-10: Generate the accounting files for F&A teams to book salary costs in the General Ledger. Apart from actual costs, we need to accrue costs for any unpaid wages or benefits that are payable but not yet due for payment. This is required as per accounting standards or GAAP. Example: statutory bonus is a percentage of basic salary or gratuity is based on a formula. 8

11 STEP-11: Generate the relevant statutory reports from the payroll system and remit the statutory liabilities and file the relevant returns with respective government agencies. There are specific dates/formats by which the remittances need to be made and returns need to be filed. Example: Income tax, Provident Fund, ESI & Professional Tax. Remittances can be made online to the government s bank account while returns can be filed online through their respective portals. Once remittances are done or returns filed, ensure you obtain acknowledgement and store it safely for future audits. There are some seasonal compliances which you need to comply with such as LWF, statutory bonus, unpaid salaries, Form-16 issuance, etc. To avoid missing out on some of these activities inadvertently, it is advisable to include such activities too in the payroll calendar at the beginning of the year itself. STEP-12: Once the payslips are distributed, there are bound to be queries from employees regarding their salaries. In spite of best efforts and care, there are possibilities of errors creeping in unexpectedly due to a clerical or system errors. In anticipation, keep ready at hand the pay register, input files, links to company policy or tax rules, etc to quickly address any issues and close them out. With this, the payroll cycle for the month comes to an end! greythr is India s leading HR and payroll software platform. It s an advanced payroll software with in-built core HR, leave and attandance, expense claim and statutory compliance system. Trusted by enterprises, small and medium businesses and 500+ CA firms and global consultancy firms. Your Wikipedia for all HR and payroll statutory compliance Visit StacoWiki Attend live webinars Visit our website Write to us for any queries info@greytip.com