What Are Payroll Policies and Procedures?

Why should you have great payroll policies and procedures? Paying your employees their salary on time improves employee engagement. It also impacts your reputation as an employer in a good way. That tag of a ‘Great Place to Work’ was not secured in a day. Just as Rome was not built in a day, it takes time to build a great place to work. Now how exactly does a payroll policy help?

Having a great payroll system in place, backed by robust payroll policies and procedures is one way of doing it. This article will help improve the payroll policies and procedures you have set up or assist you in setting up payroll policies from scratch.

What Is a Payroll Policy?

A payroll policy or payroll management policy is a set of rules that a payroll system and the payroll team must adhere to. This includes the guidelines for the management of salaries, timekeeping, other payments and the schedules for payment.

A payroll policy is composed of several aspects such as policy objective, the scope of the policy, how frequently it must be reviewed and sometimes even who the stakeholders are in the policy. There are several payroll policy and procedure examples, but we will not be going into detail on them in this article.

What are the Different Components of a Payroll policy?

A payroll management policy is generally designed by the HR or possibly by a separate payroll team itself. A company payroll policy includes several components that help determine its scope. A payroll policy encompasses:

Payroll cycle: When are the payments made: monthly, weekly or bimonthly?

Payment methods: Are the employees paid via cash, check or bank transfer?

Deductions: What are the deductions from the salary, including TDS, EPF etc.

Other benefits: What are the benefits you want to give the employees?

Timekeeping: How is timekeeping handled? Is there a separate software to manage attendance?

Compliance: Payroll policy compliance is also equally important, to ensure that the payroll is carried out in an accurate and timely manner and that statutory compliance and non-statutory compliances are followed.

You will find several payroll policy and procedure examples on the Internet, which will help you draft a payroll policy of your own in very little time.

What is the Importance of a Company Payroll Policy?

A company payroll policy is important because it gives more clarity for the payroll team. They know what aspects of payroll they need to focus on, such as payroll schedule, payment methods, overtime benefits, tax and other deductions etc. A payroll policy in most companies is a living document that is restricted for access to only key stakeholders in payroll.

What Are Payroll Procedures?

The different payroll procedures are:

1. Establishing payroll policy and process

This payroll procedure involves the establishment of a payroll management policy by consulting all the stakeholders, getting the approval of the management and then ensuring that the compliance team is also okay with the payroll policy.

2. Defining components of the payslip

The different components of the payslip are the month when it was issued, the various components of the salary, both fixed and variable and the incorporation details of the company and internal codes or other details.

3. Calculating gross salary

Then in the next stage, the gross salary is calculated. This includes the salary and all the benefits that the person is eligible for. It also includes any other reimbursements that are due to the person.

4. Calculating statutory and non-statutory deductions

Then the statutory (government level) and non-statutory (organizational level) deductions are made from the gross salary and the net pay or the amount that is to be credited to the employee is arrived at.

5. Releasing salary and payslips to employees

The salary and the payslips are then released to each employee. The credit is made according to the payroll schedule followed by the company and also mentioned in the payroll management policy.

6. Depositing dues like TDS, and PF with appropriate authorities

Then begins the deposition of deductions with the authorities from the government or state. Examples of such dues are TDS, PF etc. and these are generally managed by the compliance team.

7. Accounting for payroll-related expenses

Then in the last stage of the payroll process, the books of accounts are tallied, especially the payroll accounts are tallied against the general ledger and if any discrepancies are observed, they are reported, and appropriate action is taken.

What Are the Stages of Processing Payroll?

A business owner understands the complexities involved in payroll policies and procedures, as they make up the highest expenses of a company every month, and to add to that, it is a time-consuming task.

Some of the steps to follow to successfully execute the payroll process from ground zero are:

1. Create an employee list

The first step is simple. The employer must make a list of existing and newly onboarded employees.

2. Define your payroll system and policy

To ensure a standard, seamless payroll execution, companies need to clearly define policies and have those pre-approved by management. These policies include a leave and attendance policy, a pay policy, a benefits and compensation policy, etc.

3. Collect employee data

Make sure to have gathered the necessary data from each employee, like their PAN, address, bank account details, etc., to start payroll processing. It is advised to collect all the required employee input at the time of joining by the teams concerned.

4. Verify employee data

After receiving data from employees, verify the details concerning company policy, approval model, etc. Ensure that active employees are taken into consideration and former employees are excluded from salary and compliance payments

5. Calculate payroll

Calculating the employee payroll is the most crucial step of the payroll process. Payroll calculations are usually carried out using payroll software. The four important elements in payroll calculation are:

1. Calculation of gross pay, considering the number of hours worked, PTO, if worked overtime and other additional pay elements
2. Calculating payroll taxes and other deductions like additional insurance etc.
3. Determine the net pay by subtracting the employee’s deductions from the gross pay. The left-over amount is the net pay or what you call “take-home pay” of an employee.
4. Check the payroll results for accuracy

 6. Pay employees’ salaries

After deductions from the gross pay, they are calculated as the net pay or take-home pay, which is what you will be paying your employees. Depending on the schedule you have established for salaries, whether monthly or quarterly, you must disburse it into your employees’ accounts accordingly. The mode of payment could be by paper checks, direct bank deposits, or even cash, depending on your preferred method.

7. Filing and Payment of taxes with adherence to statutory laws

As per government rules and regulations, you need to file and deposit taxes by adhering to the defined labor laws. Some of the common statutory requirements that businesses must follow include the provision for minimum wages, paying overtime wages to workers, deduction of TDS, contribution to schemes such as PF, ESI, etc., generation and distribution of pay slips, and tax computation sheets.

Distribute pay slips along with the tax computation sheets to the employees. An automated payroll system does this job for you. Employees can log in to their accounts and access their pay slips at any time.

Outsource Your Payroll to the Right People

Payroll policies and procedures cannot be managed by a smaller HR team. Many startups and smaller businesses often make this mistake. You need a separate team to manage payroll and payroll compliance. We would go so far as to say that you would need separate teams for both payroll and payroll compliance to be effective at it, but that’s your call. If you need assistance in achieving higher payroll efficiency, talk to Alp Consulting, a leader in payroll management and compliance. You can outsource your entire payroll and payroll compliance processes to us, and we will manage them for you.

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Yugandhara V. M

AVP HRO

Yugandhara V. M serves as the Assistant Vice President – HRO at Alp Consulting Ltd., bringing over 14 years of rich experience in Human Resource Outsourcing, payroll management, and statutory compliance. He specializes in driving process excellence across HR operations, ensuring seamless service delivery and compliance with labor laws. Yugandhara’s expertise lies in managing large-scale client engagements, optimizing HR processes, and implementing efficient workforce management systems that enhance organizational performance. He also leads comprehensive payroll services, ensuring accuracy, timeliness, and compliance for diverse client portfolios.