What is Payroll and How to Do Payroll Calculations?

What is Payroll and How to Do Payroll Calculations?
Reading Time: 6 mins
Published: January 17, 2024
Last Updated: July 15, 2024
  • What is payroll?
  • What is payroll in HR?
  • How to calculate payroll?
  • Ways to calculate payroll

Payroll is rewarding an employee financially for their time and effort. It is the most important yet complicated process of a business. It runs through steps like gross wage calculation, deductions, etc., involving detailed calculations and various considerations. 

In this blog, we’ll take a look at what payroll is and how we can calculate it.

What is payroll?

Payroll is a process of compensating a company’s employees over a certain time. It involves multiple departments like HR and Finance. You can calculate it manually, using a payroll calculator, through payroll software, etc. It begins with collecting all the employees’ information, followed by making the necessary deductions and disbursing wages. 

What is payroll in HR?

Payroll in Human Resources is the entire process of calculating, managing, and administering every employee’s compensation within a company considering the company policies and legal requirements. It requires the management to ensure timely and accurate payments to the entire workforce.

How to calculate payroll?

It requires tons of background work and involves the following stages: 

• Pre-payroll phase

Every organization has its approach to workforce management and work culture. So, it is essential to set up clear policies for calculating the pay cheques, which include: 

Business profiles – Payroll forms would require registered numbers to send tax forms and other essential documents. So, you will need a registered business number linked to your PAN and TAN. 

Work location – If your business operates in multiple locations, define a policy for every location. 

Attendance – Define your policies for calculating employee attendance for regular and shift hours, on-duty requests, half-days, etc. 

Leaves – Employees are entitled to different leaves like sick leaves, casual leaves, paid time off, and more. So set up a clear policy for leaves as it is essential to segregate paid and unpaid leaves and process salaries. 

Statutory components – Decide what statutory components you will want to offer to your employees from the standard list of PF (Provident Fund), PT (Professional Tax), ESI (Employee's State Insurance), IT (Income tax), Shops and Establishments Act, and LWF (Labour Welfare Fund).

Salary components – Define the earnings, allowances, deductions, reimbursements, and benefit plans that match your business policies.

Pay schedule – Decide a payday and pay schedule for your company.

After defining these, you need to collect the necessary inputs for processing an employee’s compensation. The required data comes from different departments and includes: 

Finance – An employee’s variable pay, bonuses or special commissions, deduction dues, etc. 

HR – Salary CTC (Cost to Company), payroll enrolment information, benefits, salary revisions, etc. You might also need F&F settlement (Full & final Settlement) and notice pay in case an employee leaves the company. 

Admin – Employee-related bills and transportation charges (if applicable). It is called as reimbursement process.

Apart from these, you’ll also need leave and attendance information, loss of pay reports, overtime reports, and shifts from your organization. 

Likewise, employee information like CTC-based reimbursement claims, income tax declaration information, proofs of investments, and other claims-related information is also essential to process employee payroll. 

• Payroll Calculation 

The next phase is the actual payroll calculation. After collecting the necessary information from the workforce and different departments, you need to calculate the gross pay and net pay for every employee. 

Gross pay – includes basic pay, HRA, PF, performance bonus, and all the payable components. 

Net pay – derived from gross pay after deducting taxes and other components.

Pro Tips

The formula generally used for payroll calculation is: 

Net Pay = Gross Salary –Deduction

Gross salary/pay covers the basic salary, HRA, allowances, and other bonuses/allowances, and deduction covers professional taxes, leave adjustments, income tax, PPF, and other deductions. 

The outcome of this calculation will be the actual amount paid to every employee based on the company’s pay schedule. Note that the inclusions and calculations might defer based on organizational policies and methods used to calculate payroll.

Ways to calculate payroll

Though this is the basic idea for calculating salaries, there are different ways of doing it. You can do it manually, use different tools, or outsource it.

Manually: It is a pen-and-paper method and not so accurate in modern times, as it is prone to errors. But if you want to cut budgets, you can maintain records and calculate your company’s payroll yourself. tools like Excel can also help with the calculation but can be a lot confusing when you have a bigger workforce. Plus, you need to update the sheets regularly and ensure to enter all the necessary information regularly.

However, this whole process becomes tough as the workforce increases and demands other ways. 

Payroll calculator: Different online tools are available to help calculate employee payroll. Just enter the essential information, and these payroll calculators will give you the results in no time. You can find both paid and unpaid versions of the same. Usually, the paid versions cover all the advanced features, and the free version covers the basics. You can also find trial versions where you can access the entire tool free of charge for a certain time post which charges are applicable.

Out-sourcing: You can outsource payroll calculations to third parties by providing all the information required for calculations. Various companies don’t have separate payroll departments and prefer to outsource the process, giving them the salary records, leaves and attendance data, etc. 

• Post-payroll phase 

This is the last stage and covers the following aspects:

Salary payments – The most crucial part of this phase, where you disburse the salaries to your entire workforce.

Accounting – Record the salaries paid to every employee, as it is the biggest expense for any organization.

Reporting and compliance – Remit the statutory deductions like TDS (automatically deducted during salary processing) to respective government agencies. You can file for returns after the governments record the dues.

This completes the entire process of payroll calculation. The cycle repeats weekly, bi-weekly, monthly, or however, your organizational policies are designed. One best ways to do this is to invest in good payroll software that aligns with your budget and business requirements. It comes in a suite and lets you maintain all the information like leaves, attendance, etc., within itself, so you don’t have to provide any additional information. You can choose offline suites or cloud-based solutions at your convenience.

Need expert advice on choosing the best payroll software? Get in touch with us, and our experts will assist you with everything you’ll need. 

Sruthi Vedula
Sruthi Vedula

Bringing over 3 years of content creation expertise, Sruthi Vedula is a seasoned content specialist. With more than 2 years of dedicated focus on SaaS content, she contributes a distinctive combination of experience and enthusiasm. Her pieces not only simplify intricate SaaS concepts but also actively involve and capture the interest of readers. Discover the world of technology and business through her insightful articles, available exclusively on our blog.

Decide with confidence.

You must conduct thorough research and read user reviews to choose the best software for your needs. So, take a look at our website to understand better!