How is payroll calculated?

If you're from the finance or HR department, you understand how important payroll processing is to your organization. One key area it affects is employee morale, productivity, and engagement. Continuous payroll delays and errors can make employees question your organization's credibility. If these issues don't resolve themselves, they are likely to leave your organization completely. At a time when organizations are developing better HR and recruitment strategies to stand out in a competitive job market, your organization cannot afford to lose its existing talent. That's why having a proper payroll process is essential. Fair and timely pay builds a culture of trust in your organization.

To ace payroll, you'll need a clear understanding of every step involved with it. No matter if you're an SMB trying to establish a better payroll process in your organization or a new HR or payroll professional, we've got you covered. Here's a general step-by-step rundown of how payroll is calculated in organizations:

• Finalize your organization's payroll policy

Drafting a proper payroll policy is the first step to implementing better payroll operations in your organization. Before drafting the policy, take some time to understand your regional and national payroll laws. Based on these laws, define your organization's rules regarding tax deductions, a standard work week, usual working hours, attendance, time off, benefits, and overtime pay. Determine how frequently you'd like to pay your employees. Also, you'll want to define the particular day on which payroll will be processed and the modes of payment your organization will support.  

• Collect employee information

The next step is to collect information from employees based on the payroll laws in your region. This includes, but is not limited to:

• Employee designation and hire date

• Tax forms

• Health insurance and retirement savings deductions

• Bank details to facilitate salary distributions

• Reimbursement claims

• Gather timesheet data

Before calculating payroll, you need to have a clear list of every employee's total number of payable days, worked days, and expected working days. If your organization has HR software with attendance, timesheets, and leave-tracking features, you can easily generate reports that highlight the total working hours of each employee. If not, you'll have to calculate employee attendance manually. One word of caution: Be sure to double-check everything. Even a small error during this step can lead to your employees getting over or underpaid. Ensure that all active employees are included and nobody misses out on their paycheck.

• Calculate net pay

Once you have the attendance information ready, you can start calculating the final net pay of your employees. The net pay is calculated by subtracting all the withholding and tax deductions from your employee's actual salary. Work closely with your finance team to understand the different deductions that apply to each of your employees. Coordinate with your fellow HR professionals to understand the benefits and salary revisions that apply to each employee. Once these details are sorted, you can calculate your employees' net pay. Ensure that it is consistent with your payroll policy and other payroll laws governing your region. If you have a payroll management system, all you have to do is input the collected data and the system will calculate employee salaries for you.

• Process payroll and distribute payslips

Once payroll is finalized, you can go ahead and process salaries on the payday specified in your policy. Try to keep to the same day or days every month to improve the trust your employees have in your organization. After payroll processing is over, don't forget to distribute payslips for your employees. This helps employees understand the different components of their salary. Most organizations use a self-service system in which they upload digital payslips for their employees to view or download.

• Maintain payroll records

This is one of the major steps that has to be managed efficiently to avoid compliance issues. Salary deductions need to be documented in case some salary disputes arise in the future. Also, many payroll laws dictate that organizations need to maintain payroll records for a specific period. So, include all the necessary details as per your payroll laws and document the files safely to avoid heavy penalties and license cancellations.

Effective payroll processing can bring so many benefits to your organization, but a notable one is higher employee satisfaction. This goes for all levels of management. Each person who receives a paycheck from your organization is benefited by a payroll process that is fast and reliable. That's why it's important to streamline payroll operations in a way that complies with legal standards and provides fair treatment to all employees. By knowing every step involved in the process, you can establish better payroll operations in your organization. Implementing payroll management software can help simplify and automate some of the more tedious aspects of payroll processing, giving your employees more time to focus on other employee management strategies.

Our HR software, Zoho People, is integrated with Zoho Payroll, our payroll management software. Zoho People provides the attendance and leave data so payroll can be processed within a few minutes without much effort. Learn more about how Zoho People's integration with Zoho Payroll can help your organization.

Please note that this blog has been written to give you a general idea about the different steps involved in payroll processing. While establishing the payroll operations in your organization, it's best to seek legal and tax advice to make the process consistent with the regulations governing your region.

Also Read: Can you do payroll yourself?