an Resource is the most vital resource for any organization.

It is responsible for each andevery

decision taken, each and every work done and each and every result. Employees should bemanaged
properly and motivated by providing best remuneration and compensation as per theindustry
standards. The lucrative compensation will also serve the need for attracting andretaining the best
employees.

3.1 COMPENSATION

Compensation is the remuneration received by an employee in return for his/her contribution tothe
organization. It is an organized practice that involves balancing the work-employee relation by
providing monetary and non-monetary benefits to employees. Compensation is an integral part of
human resource management which helps in motivating the employees and improvingorganizational
effectiveness.

3.1.1. Components of Compensation System

Compensation systems are designed keeping in minds the strategic goals and business
objectives.Compensation system is designed on the basis of certain factors after analyzing the job
work andresponsibilities.

0Components of a compensation system are as follows:

3.1.2. Types of Compensation

Compensation provided to employees can direct in the form of monetary benefits and/or indirectin
the form of non-monetary benefits known as perks, time off, etc. Compensation does notinclude
only salary but it is the sum total of all rewards and allowances provided to theemployees in return
for their services. If the compensation offered is effectively managed,itcontributes to high
organizational productivity.

Direct Compensation

Basic Salary
Salary is the amount received by the employee in lieu of the work done by him/her for a certain
period say a day, a week, a month, etc. It is the money an employee receives from his/her employer
by rendering his/her services

House Rent Allowance

Organizations either provide accommodations to its employees who are from different state or
country or they provide house rent allowances to its employees. This is done to provide themsocial
security and motivate them to work.

Conveyance

Organizations provide for cab facilities to their employees. Few organizations also providevehicles
and petrol allowances to their employees to motivate them.

Leave Travel Allowance

These allowances are provided to retain the best talent in the organization. The employees aregiven
allowances to visit any place they wish with their families. The allowances are scaled as per the
position of employee in the organization.

Medical Reimbursement
Organizations also look after the health conditions of their employees. The employees are provided
with medi-claims for them and their family members. These medi-claims includehealth-insurances
and treatment bills reimbursements.

Bonus

Bonus is paid to the employees during festive seasons to motivate them and provide them thesocial
security. The bonus amount usually amounts to one month¶s salary of the employee.

Special Allowance

Special allowance such as overtime, mobile allowances, meals, commissions, travel

expenses,reduced interest loans; insurance, club memberships, etc are provided to employees to
providethem social security and motivate them which improve the organizational productivity.

Indirect Compensation

Indirect compensation refers to non-monetary benefits offered and provided to employees in lieuof
the services provided by them to the organization. They include Leave

olicy, Overtime

olicy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, RetirementBenefits,
Holiday Homes.
Leave Policy

It is the right of employee to get adequate number of leave while working with the organization.The
organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave),
andmaternity leaves, statutory pay, etc

Overtime Policy

Employees should be provided with the adequate allowances and facilities during their overtime,if
they happened to do so, such as transport facilities, overtime pay, etc.

Hospitalization

The employees should be provided allowances to get their regular check-ups, say at an interval of
one year. Even their dependents should be eligible for the medi-claims that provide thememotional
and social security.

33

Insurance

Organizations also provide for accidental insurance and life insurance for employees. This givesthem
the emotional security and they feel themselves valued in the organization.
Leave Travel

The employees are provided with leaves and travel allowances to go for holiday with their families.
Some organizations arrange for a tour for the employees of the organization. This isusually done to
make the employees stress free.

Retirement Benefits

Organizations provide for pension plans and other benefits for their employees which benefitsthem
after they retire from the organization at the prescribed age.

Holiday Homes

Organizations provide for holiday homes and guest house for their employees at differentlocations.
These holiday homes are usually located in hill station and other most wanted holiday

34

spots. The organizations make sure that the employees do not face any kind of difficulties
duringtheir stay in the guest house.

Flexible Timings

Organizations provide for flexible timings to the employees who cannot come to work duringnormal
shifts due to their personal problems and valid reasons.

3.1.2. Need of Compensation Management

A good compensation package is important to motivate the employees to increase theorganizational
productivity.

Unless compensation is provided no one will come and work for the organization.
Thus,compensation helps in running an organization effectively and accomplishing its goals.

Salary is just a part of the compensation system, the employees have other psychologicaland self-
actualization needs to fulfill. Thus, compensation serves the purpose.

The most competitive compensation will help the organization to attract and sustain the best talent.
The compensation package should be as per industry standards.

3.1.3.

Strategic Compensation

Strategic compensation is determining and providing the compensation packages to theemployees

that are aligned with the business goals and objectives. In today¶s competitive

5scenario organizations have to take special measures regarding compensation of the employeesso
that the organizations retain the valuable employees. The compensation systems have changedfrom
traditional ones to strategic compensation systems.

3.2 COMPONENTS OF PAYROLL

ayroll refers to the administration of employees' salaries, wages, bonuses, net pay, anddeductions. It
consist of the employee I

D
, employee name, date of joining, daily attendancerecord, basic salary, allowances, overtime pay,
bonus, commissions, incentives, pay for holidays,vacations and sickness, value of meals and lodging
etc. There are some deductions such as

F,taxes, loan installments or advances taken by employee.

ayroll is administered on monthly basis and annual basis. While administrating the monthly payroll
basic salary, HRA, conveyance, and other special allowances such mobile, etc areconsidered. There
are some deductions which are provident fund (1

) of the salary, taxes andother deductions.

Figure: Components of Monthly Payroll

eductions such as tax and loan/advances taken by the employee from organizations arededucted
only where applicable.

earness Allowance and House rent allowance is provided at afixed rate stated by the employment
law.

rovident fund is deducted from the gross salary of employee on the monthly basis as per the
employment law, which is provided later to theemployee. Organizations also contribute the same
amount to the provident fund of the employee.

Annual payroll consists of leave travel allowances, incentives, annual bonuses,

mealvouchers/reimbursements, and medical reimbursements.

Figure: Components of Annually Payroll

Allowances, incentives, bonuses and reimbursements are based on organizational policies.
Someorganizations provided the allowances on a fixed rate say 10

or 1

of the basic salary. Someorganizations go for performance based incentives.

3. 3. PROCESSING OF PAYROLL

ayroll process typically functions, using a payroll supplier, an in-house payroll process assisted by
computer systems, or an in-house system that is entirely processed by hand. Thesedescriptions also
include flowcharts of each process and coverage of the exact controls that aremost useful for each
situation. Additionally, the chapter covers the types of documents used toset up a new employee in
the payroll system, how to organize this information into a personnelfolder, and how to process
changes to employee information through the payroll systemThe next three sections describe how
the payroll process flows for specific types of systemoutsourced payroll, in-house computerized
payroll, and in-house manual payroll. In this section,we cover the general beginning-to-end
processing of payroll, step-by-step, irrespective of thespecific payroll system, in order to show the
general process flow. Though some of these stepswill not apply to each of the processes noted in
later sections, it gives a good feel for how a payroll is completed. The steps are:

a)

Set up new employees

. New employees must fill out payroll-specific information as part of the hiring process, such as the
W-

4
form and medical insurance forms that may require payroll deductions. Copies of this information
should be set aside in the payroll department inanticipation of its inclusion in the next payroll.

b)

Collect timecard information

. Salaried employees require no change in wages paid for each payroll, but an employer must collect
and interpret information about hours worked for nonexempt employees. Having employees scan a
badge through a computerized time clock, punch a card in a stamp clock, or manually fill out a time
sheet.

c)

erify timecard information

. Whatever the type of data collection system used in the laststep, the payroll staff must summarize
this information and verify that employees haverecorded the correct amount of time. This typically
involves having supervisors review theinformation after it has been summarized, though more
advanced computerized timekeepingsystems can perform most of these tasks automatically.

d)

Summarize wages due

. This should be a straightforward process of multiplying the number of hours worked by an

employee¶s standard wage rate. However, it can be complicated byovertime wages, shift
differentials, bonuses, or the presence of a wage change partwaythrough the reporting period.

e)

Enter employee changes

. Employees may ask to have changes made to their paychecks,typically in the form of alterations to
the number of tax exemptions allowed, pensiondeductions, or medical deductions. Much of this
information must be recorded for payroll processing purposes, since it may alter the amount of
taxes or other types of deductions

f)

Calculate applicable taxes

. The payroll staff must either use IRS-supplied tax tables tomanually calculate tax withholdings or
have a computerized system or a supplier determinethis information. Taxes will vary not only by
wage levels and tax allowances taken but also by the amount of wages that have already been
earned for the year-to-date

g)

Calculate applicable wage deductions.

There are both voluntary and involuntarydeductions. Voluntary deductions include payments into
pension and medical plans, whileinvoluntary ones include garnishments and union dues. These can
be made in regular amounts for each paycheck, once a month, in arrears, or prospectively. The
payroll staff mustalso track goal amounts for some deductions, such as loans or garnishments, in
order to knowwhen to stop making deductions when required totals have been reached

h)

Account for separate manual payments.

There will inevitably be cases where the payrollstaff has issued manual paychecks to employees
between payrolls. This may be caused by anincorrect prior paycheck, an advance, or perhaps a
termination. Whatever the case, theamount of each manual check should be included in the regular
payroll, at least so that it can be included in the formal payroll register for reporting purposes, and
sometimes to ensurethat the proper amount of employer-specific taxes are also withheld to
accompany theamounts deducted for the employee.

9
i)

Create a payroll register

. Summarize the wage and deduction information for eachemployee on a payroll register, which can
then be used to compile a journal entry for inclusion in the general ledger, prepare tax reports, and
for general research purposes. Thisdocument is always prepared automatically by payroll suppliers
or by in-house computerizedsystems.

erify wage and tax amounts

. Conduct a final cross-check of all wage calculations anddeductions. This can involve a comparison
to the same amounts for prior periods, or a generalcheck for both missing information and numbers
that are clearly out of line with expectations.

k)

Print paychecks

rint paychecks, either manually on individual checks or, much morecommonly, through a computer
printer, with the print outs using a standard format thatitemizes all wage calculations and
deductions on the remittance advice. If direct deposits aremade, a remittance advice should still be
printed and issued.

l)

Enter payroll information in general ledger

. Use the information in the payroll register tocompile a journal entry that transfers the payroll
expense, all deductions, and the reduction incash to the general ledger.

m)
Send out direct deposit notifications

. If a company arranges with a local bank to issue payments directly to employee accounts, then a
notification of the accounts to which payments are to be sent and the amounts to be paid must be
assembled, stored on tape or other media, and sent to the bank.

n)

Deposit withheld taxes

. The employer must deposit all related payroll tax deductions andemployer-matched taxes at a local
bank that is authorized to handle these transactions. TheIRS imposes a rigid deposit schedule and
format for making deposits that must be followed inorder to avoid penalties

o)

Issue paychecks

aychecks should, at least occasionally, be handed out directly toemployees, with proof of
identification required; this is a useful control point in larger companies where the payroll staff may
not know each employee by name, and where there is,

0therefore, some risk of paychecks being created for people who no longer work for thecompany

p)

Issue government payroll reports

. The government requires several payroll related reportsat regular intervals, which require
information on the payroll register to complete.

3.4. PAYROLL MANAGEMENT PROCESSES

Calculation of gross salaries and deductible amounts is a tedious task which involves risk. Someof the
organizations use the traditional manual method of payroll processing and some go for theadvanced
payroll processing software. An organization opts for any of the following payroll processing
methods available.

Figure:

arious Payroll Processes3.3.1. MANUAL SYSTEM

Manual payroll system is the traditional payroll system which involves pen and ink, addingmachine,
spreadsheet, etc instead of computers, software and other computerized aids. The process was very
popular when there were no computerized means for payroll processing.

1 Now-a-days it is only few small scale organizations in the remote areas that use the manual
payroll. Sometimes the construction industry and manufacturing industry also use the manual
payroll systems for the contractual labour, as theses contracts are on daily/weekly basis.There is full
control in the hands of owner. But the process is tedious, time consuming and riskyas it is more
prone to errors.

3.3.2. ACCOUNTANT

Accountant is a professional having a degree/diploma course in finance/accountancy. He/she

isresponsible for all the activities related to payroll accounting. He/she has the sound knowledge of
accounting principles and globally accepted standards.The process adds costs to the organization. It
involves paying someone who is responsible for calculating the salaries of others. The financial
control regarding salary goes in the hand of accountant.

3.1.4.

PAYROLL SOFTWARE

In today¶s computerized environment, payroll system has also developed itself into
automatedsoftware that performs every action needed by the payroll process. It helps in calculating
the payable amounts and deductions very easily. It also helps in generating the pay slips in lesser
time. Automated calculations result in no errors.

ata is validated automatically by the software.It needs professionals to make use of the software for
its efficient working.

3.1.5.
PAYROLL OUTSOURCING

ayroll outsourcing involves a third party (an outsourcing company) in the calculations of salaries and
deductions. The outsourcing organization is responsible for all the activities of the payroll
accounting. It saves time and cost for the organization. If there is more number of

employees (say more than

00-1000) in the organization, payroll outsourcing would be verymuch beneficial.The data is provided
to the consultants/outsourcing firms. The various payroll functionsundertaken by the outsourcing
organizations are as follows:

Analysis of

ayroll records, payroll taxes

Medical claim processing

Employee Insurance &

rovident fund processing

y

Quality Audit procedures & planning

Significance of Payroll Outsourcing

Outsourcing industry is growing at a higher rate. HR outsourcing helps the HR professionals

freethemselves from the daily routine work and take part in the strategic level
processes.Organizations really do not take HR as a strategic function; it is merely treated as paper
work division. Therefore they want to reduce the cost being spent on HR activities.In India payroll
outsourcing is one of the HR processes and is being outsourced since 1

99

7.

ayroll outsourcing involves an external organization performing all the activities related to payroll
management. Adecco has come up with payroll outsourcing.Outsourcing organizations strive for
providing cost saving benefits to their clients. Theorganizations use its marketing division thoroughly
to acquire more number of clients and retainthem.

ayroll outsourcing does not provide much cost reduction but it yield in high quality.
Sincecompensation outsourcing requires lot of market survey and industry knowledge, it is not
easyfor an organization to carry the tasks with its operational business activities

43

Figure: Benefits of Payroll Outsourcing

Outsourcing has benefited not only the service providers but also organizations and economy of the
country. It enables the management to focus on the core competencies and strategic planning.It
maintains the confidentiality of the pay package offered to employees as it is an external
bodyadministrating. Organizations do not have to keep the track of law related to salaries
andcompensation; it is the outsourcing firm which has to look after it. It offers qualitative results. Itis
very much time saving and cost effective. It also offers legal protection as the outsourcing firmis
responsible for all the legal matters.Outsourcing firms enjoys the revenue benefits as the services
are being offered to MNCs. Serviceexports have caused the economic system to develop more and
contribute to G

Why Payroll Outsourcing

In today¶s global competitive environment organizations need to focus on cost-cutting

strategiesand high qualitative results. Organizations has to deal with tax filling, they have to adhere
to thesate employment law. These complexities have force the organizations to outsource their
payroll processes. Outsourcing helps an organization to stay focused on the business operations. It
results

44

in cost-effectiveness and time saving. The organizations are relieved from law regulations andtax
formalities.

Cost-Effective

ayroll outsourcing results in cost effective benefits. A market study has revealed thatoutsourcing
payroll process is cheaper than administrating the process internally. Organizations have to set an
additional department for the purpose resulting in thesalaries of those responsible for performing
the activities of payroll process. It alsoincludes the cost associated with payroll checks, bank
accounts and other charges,record maintenance, computerized aids such as payroll software, etc
Time Saving

ayroll outsourcing saves a lot of time for management. Time spent on activitiesassociated with
payroll process can now be utilized for more strategic roles. Theorganizations can focus on their
strategic decisions and business operation

Less Legal Adherence

Organizations are not bound for any legal formalities. Outsourcing companies areresponsible for
following rules, regulations and filing the tax returns. They look after changes in the tax slabs and
state jurisdictions. This provides management a greatrelief and enables them to focus on business
operation.

Profit Generation

Organizations can make use of new opportunities and utilize the time and money onnew business
ventures and generate more profits.

Error Free

ayroll outsourcing results in error free reports. Internal payroll process is more proneto errors, but
the service providers recruit professionals and they make sure there areno mistakes.
Q

ualitative Results

The expertise and technological advancements results in qualitative results. There areno delays and
no errors.

Figure: Reasons for Payroll Outsourcing

6The survey also reported that 5

3%

of the participant organizations outsource their payroll processes and from those who outsourced

believes that it results in more focused strategicdecisions. Most of the organizations agreed that it is
cost-effective measures.

can Resource is the most vital resource for any organization. It is responsible for each
andevery decision taken, each and every work done and each and every result. Employees
should bemanaged properly and motivated by providing best remuneration and compensation as per
theindustry standards. The lucrative compensation will also serve the need for attracting
andretaining the best employees.
3.1 COMPENSATION
Compensation is the remuneration received by an employee in return for his/her contribution
tothe organization. It is an organized practice that involves balancing the work-employee
relation by providing monetary and non-monetary benefits to employees. Compensation is an
integral part of human resource management which helps in motivating the employees and
improvingorganizational effectiveness.
3.1.1. Components of Compensation System
Compensation systems are designed keeping in minds the strategic goals and business
objectives.Compensation system is designed on the basis of certain factors after analyzing the
job work andresponsibilities.
3
0Components of a compensation system are as follows:
3.1.2. Types of Compensation
Compensation provided to employees can direct in the form of monetary benefits and/or
indirectin the form of non-monetary benefits known as perks, time off, etc. Compensation does notinclude
only salary but it is the sum total of all rewards and allowances provided to theemployees in
return for their services. If the compensation offered is effectively managed,itcontributes to
high organizational productivity.

Direct Compensation

Basic Salary
Salary is the amount received by the employee in lieu of the work done by him/her for a
certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer
by rendering his/her services

House Rent Allowance

Organizations either provide accommodations to its employees who are from different state
or country or they provide house rent allowances to its employees. This is done to provide
themsocial security and motivate them to work.
3
1

Conveyance
Organizations provide for cab facilities to their employees. Few organizations also
providevehicles and petrol allowances to their employees to motivate them.

Leave Travel Allowance

These allowances are provided to retain the best talent in the organization. The employees
aregiven allowances to visit any place they wish with their families. The allowances are
scaled as per the position of employee in the organization.

Medical Reimbursement
Organizations also look after the health conditions of their employees. The employees
are provided with medi-claims for them and their family members. These medi-claims
includehealth-insurances and treatment bills reimbursements.

Bonus
Bonus is paid to the employees during festive seasons to motivate them and provide them thesocial security.
The bonus amount usually amounts to one month¶s salary of the employee.
3
2

Special Allowance
Special allowance such as overtime, mobile allowances, meals, commissions, travel
expenses,reduced interest loans; insurance, club memberships, etc are provided to employees
to providethem social security and motivate them which improve the organizational
productivity.

Indirect Compensation
Indirect compensation refers to non-monetary benefits offered and provided to employees in
lieuof the services provided by them to the organization. They include Leave
P
olicy, Overtime
P
olicy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits,
RetirementBenefits, Holiday Homes.

Leave Policy
It is the right of employee to get adequate number of leave while working with the organization.The
organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave),
andmaternity leaves, statutory pay, etc

Overtime Policy
Employees should be provided with the adequate allowances and facilities during their
overtime,if they happened to do so, such as transport facilities, overtime pay, etc.

Hospitalization
The employees should be provided allowances to get their regular check-ups, say at
an interval of one year. Even their dependents should be eligible for the medi-claims that
provide thememotional and social security.
33

Insurance
Organizations also provide for accidental insurance and life insurance for employees. This
givesthem the emotional security and they feel themselves valued in the organization.

Leave Travel
The employees are provided with leaves and travel allowances to go for holiday with
their families. Some organizations arrange for a tour for the employees of the organization.
This isusually done to make the employees stress free.

Retirement Benefits
Organizations provide for pension plans and other benefits for their employees which
benefitsthem after they retire from the organization at the prescribed age.

Holiday Homes
Organizations provide for holiday homes and guest house for their employees at
differentlocations. These holiday homes are usually located in hill station and other most
wanted holiday
34
spots. The organizations make sure that the employees do not face any kind of difficulties
duringtheir stay in the guest house.

Flexible Timings
Organizations provide for flexible timings to the employees who cannot come to work
duringnormal shifts due to their personal problems and valid reasons.
3.1.2. Need of Compensation Management

A good compensation package is important to motivate the employees to increase

theorganizational productivity.

Unless compensation is provided no one will come and work for the organization. Thus,compensation
helps in running an organization effectively and accomplishing its goals.

Salary is just a part of the compensation system, the employees have other psychologicaland
self-actualization needs to fulfill. Thus, compensation serves the purpose.

The most competitive compensation will help the organization to attract and sustain the best
talent. The compensation package should be as per industry standards.
3.1.3.

Strategic Compensation
Strategic compensation is determining and providing the compensation packages to
theemployees that are aligned with the business goals and objectives. In today¶s competitive
3
5scenario organizations have to take special measures regarding compensation of the
employeesso that the organizations retain the valuable employees. The compensation systems
have changedfrom traditional ones to strategic compensation systems.
3.2 COMPONENTS OF PAYROLL
P
ayroll refers to the administration of employees' salaries, wages, bonuses, net pay,
anddeductions. It consist of the employee I
D
, employee name, date of joining, daily attendancerecord, basic salary, allowances, overtime
pay, bonus, commissions, incentives, pay for holidays,vacations and sickness, value of meals and
lodging etc. There are some deductions such as
P
F,taxes, loan installments or advances taken by employee.
P
ayroll is administered on monthly basis and annual basis. While administrating the monthly payroll basic
salary, HRA, conveyance, and other special allowances such mobile, etc areconsidered. There
are some deductions which are provident fund (1
2
%
) of the salary, taxes andother deductions.
Figure: Components of Monthly Payroll
3
6
D
eductions such as tax and loan/advances taken by the employee from organizations
arededucted only where applicable.
D
earness Allowance and House rent allowance is provided at afixed rate stated by the
employment law.
P
rovident fund is deducted from the gross salary of employee on the monthly basis as per the
employment law, which is provided later to theemployee. Organizations also contribute the
same amount to the provident fund of the employee.

Annual payroll consists of leave travel allowances, incentives, annual bonuses,

mealvouchers/reimbursements, and medical reimbursements.
Figure: Components of Annually Payroll
Allowances, incentives, bonuses and reimbursements are based on organizational policies.
Someorganizations provided the allowances on a fixed rate say 10
%
or 1
2
%
of the basic salary. Someorganizations go for performance based incentives.
3
7
3. 3. PROCESSING OF PAYROLL

P
ayroll process typically functions, using a payroll supplier, an in-house payroll process
assisted by computer systems, or an in-house system that is entirely processed by hand.
Thesedescriptions also include flowcharts of each process and coverage of the exact controls
that aremost useful for each situation. Additionally, the chapter covers the types of
documents used toset up a new employee in the payroll system, how to organize this
information into a personnelfolder, and how to process changes to employee information
through the payroll systemThe next three sections describe how the payroll process flows for
specific types of systemoutsourced payroll, in-house computerized payroll, and in-house
manual payroll. In this section,we cover the general beginning-to-end processing of payroll,
step-by-step, irrespective of thespecific payroll system, in order to show the general process flow.
Though some of these stepswill not apply to each of the processes noted in later sections, it gives
a good feel for how a payroll is completed. The steps are:
a)

Set up new employees

. New employees must fill out payroll-specific information as part of the hiring process, such as the W-
4
form and medical insurance forms that may require payroll deductions. Copies of this
information should be set aside in the payroll department inanticipation of its inclusion in the
next payroll.
b)

Collect timecard information

. Salaried employees require no change in wages paid for each payroll, but an employer must
collect and interpret information about hours worked for nonexempt employees. Having
employees scan a badge through a computerized time clock, punch a card in a stamp clock, or
manually fill out a time sheet.
c)

V
erify timecard information
. Whatever the type of data collection system used in the laststep, the payroll staff must
summarize this information and verify that employees haverecorded the correct amount of
time. This typically involves having supervisors review theinformation after it has been
summarized, though more advanced computerized timekeepingsystems can perform most of
these tasks automatically.
3
8
d)

Summarize wages due

. This should be a straightforward process of multiplying the number of hours worked by an
employee¶s standard wage rate. However, it can be complicated byovertime wages, shift
differentials, bonuses, or the presence of a wage change partwaythrough the reporting period.
e)

Enter employee changes

. Employees may ask to have changes made to their paychecks,typically in the form of alterations to
the number of tax exemptions allowed, pensiondeductions, or medical deductions. Much of
this information must be recorded for payroll processing purposes, since it may alter the amount of
taxes or other types of deductions
f)

Calculate applicable taxes

. The payroll staff must either use IRS-supplied tax tables tomanually calculate tax withholdings or
have a computerized system or a supplier determinethis information. Taxes will vary not only
by wage levels and tax allowances taken but also by the amount of wages that have already
been earned for the year-to-date
g)

Calculate applicable wage deductions.

There are both voluntary and involuntarydeductions. Voluntary deductions include payments
into pension and medical plans, whileinvoluntary ones include garnishments and union dues. These can
be made in regular amounts for each paycheck, once a month, in arrears, or prospectively. The
payroll staff mustalso track goal amounts for some deductions, such as loans or garnishments,
in order to knowwhen to stop making deductions when required totals have been reached
h)

Account for separate manual payments.

There will inevitably be cases where the payrollstaff has issued manual paychecks to
employees between payrolls. This may be caused by anincorrect prior paycheck, an advance,
or perhaps a termination. Whatever the case, theamount of each manual check should be
included in the regular payroll, at least so that it can be included in the formal payroll register
for reporting purposes, and sometimes to ensurethat the proper amount of employer-specific
taxes are also withheld to accompany theamounts deducted for the employee.
3
9

i)

Create a payroll register

. Summarize the wage and deduction information for eachemployee on a payroll register,
which can then be used to compile a journal entry for inclusion in the general ledger, prepare
tax reports, and for general research purposes. Thisdocument is always prepared
automatically by payroll suppliers or by in-house computerizedsystems.
j
)

V
erify wage and tax amounts
. Conduct a final cross-check of all wage calculations anddeductions. This can involve a
comparison to the same amounts for prior periods, or a generalcheck for both missing information
and numbers that are clearly out of line with expectations.
k)

Print paychecks
.
P
rint paychecks, either manually on individual checks or, much morecommonly, through a
computer printer, with the print outs using a standard format thatitemizes all wage
calculations and deductions on the remittance advice. If direct deposits aremade, a remittance
advice should still be printed and issued.
l)

Enter payroll information in general ledger

. Use the information in the payroll register tocompile a journal entry that transfers the
payroll expense, all deductions, and the reduction incash to the general ledger.
m)

Send out direct deposit notifications

. If a company arranges with a local bank to issue payments directly to employee accounts,
then a notification of the accounts to which payments are to be sent and the amounts to be
paid must be assembled, stored on tape or other media, and sent to the bank.
n)

Deposit withheld taxes

. The employer must deposit all related payroll tax deductions andemployer-matched taxes at
a local bank that is authorized to handle these transactions. TheIRS imposes a rigid deposit
schedule and format for making deposits that must be followed inorder to avoid penalties
o)

Issue paychecks
.
P
aychecks should, at least occasionally, be handed out directly toemployees, with proof of
identification required; this is a useful control point in larger companies where the payroll staff
may not know each employee by name, and where there is,
4
0therefore, some risk of paychecks being created for people who no longer work for
thecompany
p)

Issue government payroll reports

. The government requires several payroll related reportsat regular intervals, which require
information on the payroll register to complete.
3.4. PAYROLL MANAGEMENT PROCESSES
Calculation of gross salaries and deductible amounts is a tedious task which involves risk.
Someof the organizations use the traditional manual method of payroll processing and some
go for theadvanced payroll processing software. An organization opts for any of the
following payroll processing methods available.
Figure:
V
arious Payroll Processes3.3.1. MANUAL SYSTEM
Manual payroll system is the traditional payroll system which involves pen and ink,
addingmachine, spreadsheet, etc instead of computers, software and other computerized aids.
The process was very popular when there were no computerized means for
payroll processing.
4
1 Now-a-days it is only few small scale organizations in the remote areas that use the
manual payroll. Sometimes the construction industry and manufacturing industry also use the
manual payroll systems for the contractual labour, as theses contracts are on daily/weekly
basis.There is full control in the hands of owner. But the process is tedious, time consuming
and riskyas it is more prone to errors.
3.3.2. ACCOUNTANT
Accountant is a professional having a degree/diploma course in finance/accountancy. He/she
isresponsible for all the activities related to payroll accounting. He/she has the sound
knowledge of accounting principles and globally accepted standards.The process adds costs
to the organization. It involves paying someone who is responsible for calculating the salaries
of others. The financial control regarding salary goes in the hand of accountant.
3.1.4.

PAYROLL SOFTWARE
In today¶s computerized environment, payroll system has also developed itself into
automatedsoftware that performs every action needed by the payroll process. It helps in
calculating the payable amounts and deductions very easily. It also helps in generating the
pay slips in lesser time. Automated calculations result in no errors.
D
ata is validated automatically by the software.It needs professionals to make use of the software for its
efficient working.
3.1.5.

PAYROLL OUTSOURCING

P
ayroll outsourcing involves a third party (an outsourcing company) in the calculations of salaries and
deductions. The outsourcing organization is responsible for all the activities of the payroll
accounting. It saves time and cost for the organization. If there is more number of
4
2
employees (say more than
9
00-1000) in the organization, payroll outsourcing would be verymuch beneficial.The data is provided
to the consultants/outsourcing firms. The various payroll functionsundertaken by the
outsourcing organizations are as follows:
y

Analysis of
P
ayroll records, payroll taxes
y

Medical claim processing

y

Employee Insurance &

P
rovident fund processing
y

Quality Audit procedures & planning

Significance of Payroll Outsourcing

Outsourcing industry is growing at a higher rate. HR outsourcing helps the HR professionals
freethemselves from the daily routine work and take part in the strategic level
processes.Organizations really do not take HR as a strategic function; it is merely treated as
paper work division. Therefore they want to reduce the cost being spent on HR activities.In
India payroll outsourcing is one of the HR processes and is being outsourced since 1
99
7.
P
ayroll outsourcing involves an external organization performing all the activities related
to payroll management. Adecco has come up with payroll outsourcing.Outsourcing
organizations strive for providing cost saving benefits to their clients. Theorganizations use
its marketing division thoroughly to acquire more number of clients and retainthem.
P
ayroll outsourcing does not provide much cost reduction but it yield in high quality.
Sincecompensation outsourcing requires lot of market survey and industry knowledge, it is not easyfor an
organization to carry the tasks with its operational business activities
43

Figure: Benefits of Payroll Outsourcing

Outsourcing has benefited not only the service providers but also organizations and economy
of the country. It enables the management to focus on the core competencies and strategic
planning.It maintains the confidentiality of the pay package offered to employees as it is an
external bodyadministrating. Organizations do not have to keep the track of law related to
salaries andcompensation; it is the outsourcing firm which has to look after it. It offers
qualitative results. Itis very much time saving and cost effective. It also offers legal protection
as the outsourcing firmis responsible for all the legal matters.Outsourcing firms enjoys the
revenue benefits as the services are being offered to MNCs. Serviceexports have caused the
economic system to develop more and contribute to G
D
P
.

Why Payroll Outsourcing

In today¶s global competitive environment organizations need to focus on cost-cutting
strategiesand high qualitative results. Organizations has to deal with tax filling, they have to
adhere to thesate employment law. These complexities have force the organizations to
outsource their payroll processes. Outsourcing helps an organization to stay focused on the
business operations. It results
44
in cost-effectiveness and time saving. The organizations are relieved from law regulations
andtax formalities.

Cost-Effective

P
ayroll outsourcing results in cost effective benefits. A market study has revealed
thatoutsourcing payroll process is cheaper than administrating the process
internally. Organizations have to set an additional department for the purpose resulting in
thesalaries of those responsible for performing the activities of payroll process. It
alsoincludes the cost associated with payroll checks, bank accounts and other charges,record
maintenance, computerized aids such as payroll software, etc

Time Saving

P
ayroll outsourcing saves a lot of time for management. Time spent on activitiesassociated
with payroll process can now be utilized for more strategic roles. Theorganizations can focus
on their strategic decisions and business operation
4
5

Less Legal Adherence

Organizations are not bound for any legal formalities. Outsourcing companies areresponsible
for following rules, regulations and filing the tax returns. They look after changes in the tax slabs
and state jurisdictions. This provides management a greatrelief and enables them to focus on business
operation.

Profit Generation
Organizations can make use of new opportunities and utilize the time and money onnew
business ventures and generate more profits.

Error Free

P
ayroll outsourcing results in error free reports. Internal payroll process is more proneto errors,
but the service providers recruit professionals and they make sure there areno mistakes.

Q
ualitative Results
The expertise and technological advancements results in qualitative results. There areno
delays and no errors.
Figure: Reasons for Payroll Outsourcing
4
6The survey also reported that 5
3%
of the participant organizations outsource their payroll processes and from those who
outsourced
2
5
%
believes that it results in more focused strategicdecisions. Most of the organizations agreed
that it is cost-effective measures.
4
7
CHAPTER 4
INTERNSHIP ASSIGNMENTS AND DUTIES