Steps for Setting Up a Payroll System
Employee payroll system has come a long way from old punch card practice to a sophisticated software process. From capturing the clock in time of employees to the tax filing details, the new generation payroll systems has all the features that an organisation needs for its employees. This comprehensive systems has helped businesses save their time of processing the leaves and salaries of employees apart from reducing the human error considerably.
Hence setting up a payroll system is one of the vital things to be done, regardless of the size of the business. As an employer, having a well structured payroll system ensures that the employees are paid accurately and on time and the employee gets to view his account at any point of time. It also ensures that you stay on top of all your legal and regulatory compliance requirements. In a nutshell a well maintained employee payroll system protects both the employer’s and employee’s interests.
Here is a 7-step guide for setting up a payroll system for your business.
Obtain a Tax Deduction Account Number (TAN): For setting up a Payroll system in India a TAN number has to be obtained by the company. A TAN number is a Ten digit number issued on the name of the person / company / branch of the company etc. who are all responsible to deduct or collect tax on the payments made by them under the Indian Income tax Act 1961. You can apply for a TAN number by filing Form No. 49B. It can also be obtained through online govt. sites.
TDS: Under section 192 of the Income tax Act, 1961, every employer in India needs to deduct tax from employees wages if the salary is more than maximum amount exempted from tax. To know how much income tax to withhold from employee’s salary for TDS (tax deducted rate at source), get a withholding allowance certificate duly filled by them. You need to generate Form 16 (annual salary slip) within two months after the end of the tax year, and give it to the employee. If an employee claims a tax exemption, they must indicate that on their form each year with a valid reason.
Factor in Employee Compensation Terms: While setting up a payroll system, make sure it takes into consideration employee’s check-in and check-out time, overtime and number of leaves taken. Don’t forget to consider changes in each employee’s compensation terms such as health plan premiums, retirement contributions and different allowances that need to be deducted from employee salary and paid to the appropriate organizations.
Choosing a Payroll System: A payroll system is software that organizes all the tasks of employee payment and the filing of employee taxes. Before choosing a payroll system, first analyze the size of your organization. The payroll system must be flexible and compatible to your business and the budget you are willing to spend on it. Having a payroll system is more beneficial for mid-sized organizations with around 100 employees. You can download and use free or premium accounting and payroll software such as Tally.
Running a Payroll system: Once you have collected all the forms and employee information, start using the payroll system. You will have to enter in the employee wage information and number of working hours. The accounting or payroll software then automatically calculates all the information and withholding.
Maintain Records on regular basis: Business organizations need to maintain their employment records for auditing. Under Minimum Wages Act 1948, an Inspector can demand records for the last three years. It is better to maintain the records of last five years, in digital form or as a hard copy.
Payroll Tax Reports: The employer has to issue annual salary certificate to the employees in respect of tax deducted at source within 2 months from the end of the tax year. The employer has to submit the quarterly withholding tax reports to Income tax department in respect of the tax deducted at source in the course of the year on or before 15th of the month following the quarter, and in case of quarter ending on march 31 submit it on or before 15th may.
A credible employee payroll system helps to keep a check on any fraud in the company and keep the employees in confidence. Are you ready for a payroll system now?