Payroll processing remains one of the most critical functions of HR. It is also a significant responsibility for an organisation to ensure that employees receive their salary accurately and on time. All organisations must have a good understanding of what payroll entails and how to manage payroll processing effectively. In this article, we look at the fundamentals of payroll processing and the steps involved.
Payroll is formally defined in two ways:
The amount of money paid to an employee is known as “net salary”, which is the amount due to the employee after removing required deductions from the “gross salary”.
Gross salary includes base salary plus any allowances plus any one-time benefits or payments.
Deductions can include regular sums such as contributions to a savings scheme, or one-off payments such as a recovery of an overpayment, or in some cases a statutory deduction such as a tax or regular pension contribution.
The net pay, which is the amount transferred to the employee, is the gross income minus the gross deductions.
The function of establishing a payroll involves six critical steps as shown below, and we can combine these into three phases – what happens before, during and after processing.
The organisation must establish documented and approved payroll-related policies as a base. These policies must comply with local labour laws and include elements such as time and attendance, leave, and benefits.
Core components that will be used to build the payroll must be defined, including base salaries and salary scales, flexible salary rates, and overtime rates.
Those responsible for payroll processing need to gather all the elements required as input to the salary at specified times in preparation for processing. There will usually be data needed from multiple sources such as IT systems, other departments and sometimes other organisations. This data needs to be checked and validated before being used in calculations to ensure the accuracy of salaries being paid to employees.
Some smaller organisations are still dependent on manual processing of payroll, usually with the support of spreadsheets. In contrast, others have invested in specialised payroll software or may even have an outsourced payroll solution. Whatever the case, the collated data needed for payroll calculation needs to be fed into whatever system is used for payroll processing. The payroll system will apply deductions to gross salaries and calculate each employee’s net salary as well as providing total payroll data.
After payroll calculations are complete and checked, salaries are distributed with documentation that summarises gross salary, deductions and net salary, commonly known as a payslip. Payslips may be paper-based or provided online based on the organisation’s policies and are typically distributed one month in arrears.
Salaries may be paid in cash, by cheque or, more often these days, by bank transfer directly to the employee’s bank account. Funds are released from the organisation’s bank account, and so the person responsible for payroll must notify the bank each month of the payroll sum to be provided.
In addition to the responsibility to pay employees, organisations must also pay any dues required by government entities or other organisations. Money due may include taxes or contributions to government pension schemes, for example. Typically, with any statutory requirement, there is a level of reporting required to relevant bodies to validate the payments. In addition, payroll must be accounted for as an operating cost for the organisation and forms part of audited accounts.
There are three main methods of managing payroll processing:
Small companies with few employees and standard salary profiles may use spreadsheets such as Excel for their payroll processing. Typically spreadsheets are set up with defined macros to simplify the processing and ensure accurate and consistent application of formulas and methods. The use of spreadsheets is the lowest cost option for managing payroll but has a higher risk of error as it is dependent on manual data entry. Excel-based processing is also more difficult when rules or policies change, and the spreadsheet macros need to be re-designed to meet new requirements.
Specialised payroll software is another common method for handling payroll processing. Payroll software ranges from those that provide simple handling of all core payroll tasks to more sophisticated systems that offer a higher level of data integration by handling payroll-related information such as time and attendance or benefits management. Often these systems can be integrated with other core HR systems in seamless workflows.
Outsourced payroll processing involves submitting employee data to a contracted specialist external service provider that processes the payroll and manages compliance on behalf of the organisation. Outsourcing payroll can be an effective way to manage this critical aspect of the business. It takes away the need for an organisation to maintain specialised skills sets, ensures implementation of the latest legislation and reduces the risk of processing errors. In this model, it is critical that the organisation selects a reputed and professional partner as their service provider.
Payroll can be a complicated and time-consuming activity and is subject to human error in processing. It requires specialised skills and up-to-date knowledge of the latest relevant legislation.
Our HRBluSky platform provides you with payroll processing seamlessly integrated across other modules, and with external service providers for salary processing using the WPS electronic salary transfer system.
HRBluSky has inbuilt UAE labour law, employee recruitment, visa, insurance and end of service benefits costs. These are all included in the system, enabling you to track hidden employee costs and support more accurate forecasting for your HR budget.
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