Payroll best practices

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taxBy implementing best payroll practices, a company can greatly improve its level of efficiency, information reporting, especially within the payroll function, lower error rates, and improve service to employees.

India's service sector accounts for more than half of its GDP. The input that fuels the service sector is its employees. With the payroll costs accounting for more than 40-50% of the total costs for most companies, implementing best practices becomes obligatory. By implementing best practices, a company can greatly improve its level of efficiency, information reporting, especially within the payroll function, lower error rates, and improve service to employees.


Level 1 Best Practices (These are basic practices that could be mandatory in nature)


*   Statutory Deduction as per Law


*   Income Tax


*   Profession Tax


*   ESI


*   Provident Fund


*   Labor Welfare Board Payments


*   Employee Reimbursements only against bills


*   TDS to be computed in line with declaration and not as input


*   Use marginal and Average rates for Tax Deduction at Source


*   Decentralized registration for Professional Tax (State wise), ESI Sub Code and other Local labour laws


Level 2 Best Practices (These are recommended best practices


*   Minimise or disallow Salary Advances to Employees


*   Employee Self Service Option - For Historical Data, inputs for the current process and Simulations (Tax calculator)


*   Minimize Deductions through the payroll System


*   Easy availability of information on Payroll process, Cut off dates, Forms and Rules


*   Web based payroll System


*   Integrated Time / Attendance management with the payroll system


*   Integrated Leave tracking mechanism


*   Issue electronic forms wherever possible (payslips, tax computations, even the Annual Form 16 can be in electronic form now)


*   Centralized process hub for payroll - Centralize data flow and Structured Communication


*   Single point contact for Query resolution


*   Direct deposit to employee Bank accounts


*   Focal bank for Salary accounts and web access to Bank account


*   Automate Leave Encashment accruals


*   Link payroll changes to employee events


*   Link the payroll and human resources databases


*   Minimize payroll cycles (One per month is ideal)


*   Outsource the payroll function


*   Duplicate best practices throughout an organization


*   Reconcile Payroll Database with accounting entries and the HR Database periodically


*   Negotiate at-par facility; minimize/ prohibit company disbursement


*   Standardized formats for application and data inputs


*   Separate Code for Contractors


*   Cut off date for Input Data to Payroll Department or Outsourcing agency


*   Inputs in Standard format


*   No off payslip payments and adhoc adjustments


*   Suggested Cut off Dates for Tax


*   May 1st Investment Declarations


*   January 15th Proof of Investments


*   Single Location for TDS & PF Payments


However, before implementing best practices in payroll, the organisation needs to consider current technology, local labour law requirements, employee skill levels and computer literacy, cost - benefit analysis, technology upgrade and the use of new technology.


Best practices implementation is not a one time exercise; it needs to be implemented, reviewed and improved upon to achieve its objectives. A greater benefit from following best practices would be a better compliance with law and transparency. 


Raghu nandan is the Co-founder and Director of Bizprout Corporate Solutions Private Limited. Bizprout provides solutions in the Accounting and Payroll Space. He can be contacted at 91-9845126340 or Email:

Issue BG91 Oct 08


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