Payroll calculation is essential for all businesses across India, irrespective of their scale of operation. In this article, you will learn how to set up employee payroll, particularly if you are considering launching your venture on a national or local scale.
As the gig economy grows and remote work becomes more prevalent, an increasing number of individuals are embracing freelance and independent contractor roles. For single employees who manage their own businesses or work independently, the question of whether payroll software is necessary may arise. In this comprehensive guide, we will explore the benefits of payroll software for single employees, how it can assist in managing payments to independent contractors, and address frequently asked questions surrounding its usage and implementation.
Are you Paying Independent Contractors?
Single employees who engage the services of independent contractors, subcontractors, or freelancers need a streamlined and organized method of managing their payments. Payroll software can play a pivotal role in simplifying this process by automating payment calculations, generating invoices, and keeping detailed records.
How can Payroll Software Help?
Automation and Accuracy
Payroll software eliminates the need for manual calculations and reduces the risk of errors in payment processing. It ensures accurate and timely compensation to independent contractors.
Invoice Generation
Payroll software often includes features to create professional invoices for the services rendered by independent contractors. These invoices can be customized with branding and payment terms, enhancing professionalism.
Payment Tracking
With payroll software, single employees can easily track payments made to different independent contractors. This helps in maintaining financial records and simplifies tax reporting.
Tax Compliance
Payroll software often incorporates tax-related features, such as calculating taxes and generating reports required for tax filings. This ensures compliance with tax regulations and avoids potential penalties.
Expense Tracking
Some payroll software may include expense tracking features, allowing single employees to keep track of reimbursements owed to independent contractors for business-related expenses.
How Does Payroll Calculation Take Place In India
In India, the accounting department deploys a constant formula to evaluate the payroll amount. We will jot down that equation for you but before that, let us understand two vital concepts:
- Gross salary/ gross income: This incorporates all the allowances, benefits, and one-time payments in addition to the regular salary.
- Gross deduction: All three types of deductions, such the statutory deductions, regular deductions, well as one-time deductions, are considered under this cap.
The final goal is to calculate the net pay. Net pay is nothing but the cumulative amount that the company owes to its employees against the service provided. The integral equation for the net pay is
|
Net pay = gross salary – gross deduction. |
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Establishing Employee Payroll in India
Knowledge of payroll setup is a must as lacking adequate infrastructure will contribute to inaccurate payments, tax evasion, and failure to secure case-sensitive company details. We have provided you with a detailed explanation of how to initiate the process of employee payroll in India:
- Appeal for TAN: The Indian Income Tax division allocates a 10-digit unique account number to your company, also referred to as the tax deduction account number. Companies must first apply offline or online procedures to get this TAN or authority to deduct tax at the source.
- In the next step, the hirer records all key data of his organisation’s active employees, which are later passed to the finance department for salary disbursement to take place smoothly. These details include the full name of the employee, PAN number, Aadhar ID, residential address, contact details, ESI and PF details, declaration form 12B, etc.
- Categorise the employees: Grouping staff into different categories is essential like permanent workers, part-time professionals, freelancers or hour-based employees. This classification determines how you will define tax deductions for each employee type. The employer must also mention the staff’s tax bracket and pay grade.
- Determine the pay structure: Each professional’s cost to the company or CTC needs to be calculated once planning has been confirmed on establishing employee payroll. While deciding the pay structure, elements such as allowances, coupons, health benefits etc., are duly considered. Also, the organisation holds the right to deduct 12% of an employee’s base pay if their monthly income crosses ₹10,000. This deducted amount is allocated to a staff’s PF account.
- Choose ERP software: This is essential to skim off unnecessary loads from the shoulders of the HR personnel. Many digital platforms deal with employee payroll adhering to all local and national laws once the manufacturer-specific designs them to an industry model.
- Record the TDS filing dates: Tax-oriented dates should be duly marked in calendars irrespective of the fact that the employee payroll systems manage every minute detail. This practice will help you avoid paying unnecessary fines.
Payroll Contributions
In India both the employees and the employers put up to the payroll taxation. The respective contributions have been discussed below:
Employee payroll contribution
In India payroll tax is levied to a staff’s salary based on the following table:
| Tax rate | Income bracket (annual turnover) |
| 0% | ₹0 – ₹2,50,000 |
| 5% | ₹2,50,001 – ₹5,00,000 |
| 10% | ₹5,00,001 – ₹7,50,000 |
| 15% | ₹7,50,001 – ₹10,00,000 |
| 20% | ₹10,00,001 – ₹12,50,000 |
| 25% | ₹12,50,001 – ₹15,00,000 |
| 30% | Above ₹15,00,001 |
Employer payroll contribution
The IT department of India demands the employer to contribute in the following manner:
| Tax rate | Employer contribution |
| 4.75% |
ESI , also referred to as Employee’s State Insurance This component is strictly inclusive as soon as the organisation recruits more than ten staff. |
| 12% |
EPF (Provident Fund for employees) and PFS (employees’ pension plan). These are compulsory where the companies have hired more than 20 professionals and dispense a minimum monthly salary of ₹15,000. |
| Aggregate (16.75%) | Total employment cost |
Payroll Cycle
In our country, the payroll is credited each month, particularly on the 28th date of that month or on any consecutive days after that. The payment of the 13th month is compulsory in India. This payment is a percentage or portion of the annual salary credited within eight months, counting from the conclusion of the fiscal year.
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Crucial Elements of Salary Structure in India
- Basic pay: This sum of money refers to 35-50% of an employee’s monthly salary. This is a definite sum that is disbursed before any deductions or increments resulting from incentives, overtime pay, allowances, etc.
- Allowance: Employees deserve allowances during their job tenure depending on the organisation’s policies. This income is partially or completely taxable. Different forms of allowances include medical allowance, travel allowance, dearness allowance, conveyance allowance, house rent allowance, etc.
- Gratuity: This term defines a lump sum fund furnished by the company to staff who retire from the organisation. Employees can receive gratuity once they have worked in the firm for five years or more.
- EPF: This is the abbreviation used for Employee Provident Fund. Each employee and the employer contribute each month to this fund which gradually develops into a benefits scheme. 12% of the staff’s net salary automatically gets credited to the EPF account, which is looked after by the EPFO.
- Professional tax: Various professionals such as chartered accountants, lawyers, doctors, etc., are referred to as salaried professionals. The taxation levied on their income is pointed to as a professional tax. Calculation of professional tax depends on state policies; a maximum of ₹2500 can be deducted in one year as professional tax.
FAQs
Who uses payroll software?
Payroll software is widely used by businesses of all sizes, including single employees, freelancers, startups, small and medium-sized enterprises (SMEs), and large corporations. It is beneficial for any entity that requires streamlined payment management and compliance with tax regulations.
Why do you need payroll software?
Payroll software is essential for single employees who engage independent contractors as it simplifies payment processing, ensures accuracy, maintains financial records, aids in tax compliance, and streamlines expense tracking.
How do I create a simple payroll?
Creating a simple payroll involves the following steps: Gather necessary information: Collect details of the independent contractors, including their names, contact information, and payment rates Choose suitable payroll software: Select a payroll software that aligns with your needs and budget. Set up payment schedules: Determine the payment frequency for each independent contractor. Enter contractor details: Input the information of each contractor into the payroll software. Calculate payments: Use the software to calculate the payments owed to each contractor based on their rates and hours worked (if applicable). Generate and send invoices: Create and send professional invoices to the contractors for payment. Track payments and expenses: Use the payroll software to monitor payments made and expenses incurred for each contractor.
What to consider when choosing payroll software?
When choosing payroll software, consider the following factors: Features: Ensure that the software offers the necessary features, such as payment calculations, tax compliance, invoice generation, and expense tracking. User-Friendliness: Opt for software with an intuitive interface that is easy to navigate and use. Integration: Check if the software can integrate with other tools and systems you use for accounting or business management. Cost: Compare the pricing plans and select software that fits within your budget. Customer Support: Look for software providers that offer reliable customer support in case of any issues or queries.
Conclusion
Payroll processing falls under the list of basic business-oriented managerial operations. Many elements must be addressed when doing an employee payroll; this includes take-home salary, allowance, deductions, prerequisites, etc. Payroll software is designed to calculate net salary after deducting all possible taxes, and thus they have become indispensable as a component of modern business solutions. Vakilsearch is constantly trying to update its library with the latest news on payroll procedures in India. Make sure you check them to gain more knowledge regarding employee payroll options.
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