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How to Set up Payroll for a New Business

Every business proprietor understands that compliance is one of the most significant challenges of starting a business. Each new company must observe the local employment and labor laws, which, if not followed, may damage earnings and the business’s image. The good news is that this can be solved easily by implementing a payroll system in your new company.

So, how do you set up payroll for a new business in India?

When it comes to payroll set-up, it is about more than having a plan. Compliance laws, employee data, pay structure, and taxes must be analyzed. Maintaining all these to set up a payroll for your new business requires a checklist.

In this article, you’ll get a step-by-step payroll setup guide for new businesses in India. It will also outline the mistakes that you need to avoid. But first, let’s understand why the payroll is essential.

Why is Payroll Important for a New Business?

Payroll processing becomes indispensable if you are considering starting a new enterprise. New businesses can find it challenging to establish payroll software and ensure that it works efficiently. But what is it that makes it so hard?

New business payroll processing complications stem from particular existing laws and regulations. For instance, a company that has just been established in India must adhere to established rules such as the Payments of Wages Act and the Minimum Wages Act, primary legislation for labour laws, the Payment of Bonus Act, etc.

Then there are issues with taxation on the salaries. For example, employee salary calculations must consider income tax, professional tax, and employee provident funds (EPF).

Similarly, payroll addresses statutory compliance needs, and accuracy becomes essential. To ensure accuracy in payroll processing, you need a robust system. You must set up a payroll system with better accuracy and compliance.

How to Set up Payroll for a New Business in India?

Setting up payroll for a new business incorporates significant procedures such as opening a tax account, collecting employee data, and choosing salary rates. Hence, it is essential to formulate a checklist for this procedure.

Here are the key steps to set up payroll for a new business, along with a comprehensive checklist.

1. Analyze the Taxation Requirements

It is crucial to analyze the needs for taxation and labor law compliance. To set up payroll for a new business in India, you first need a Permanent Account Number (PAN). This is an essential requirement for any company operating in India. The second most important requirement for a new business is to get a TAN (Form 49B).

The Tax Deduction and Collection Account Number, or TAN, is a mix of letters and numbers provided by the Department of India. TAN applications are possible both offline and online. The tax number is compulsory when deducting salaries.

2. Accumulate Employee Data

As an employer, you will file taxes on behalf of your employees. So you need crucial employee data like

• Employee name
• Aadhar Card Number
• Pan Card Number
• UAN number for PF
• Date of birth
• Current address
• Permanent Address
• Declaration form 12B

As mentioned above, data is crucial to setting up payroll for a new business.

3. Categorize Your Employees

Next, you must categorize your employees based on the type of employment they are hired for. These categories include permanent employees, freelancers, part-timers, and contractual staff. The categorization of the employees is vital because it will help determine the tax calculations and salary deductions.

4. Decide What to Pay

One of the critical steps in setting up payroll for new businesses in India is deciding on the pay structures. Based on the pay structure, the entire tax deduction is decided. This structure involves basic pay, HRA, allowances, and other components.

Together, these components annually form the cost to the company, or CTC. You can also calculate the cost of health insurance, food coupons, and other perks your business provides to employees.

5. Get Reliable Payroll Software

Payroll software helps automate the payroll process and ensure error-proof calculation. Efficient payroll software will enable you to calculate salaries and taxes accurately and generate payslips. This is crucial if you set up payroll for a new business, ensuring labor laws and tax compliance.

Find a payroll software that meets the following requirements:

• Maintains attendance and working hours records.
• Prepares Form 16 and other tax filing documents.
• Meets all the statutory requirements, such as EPF, ESI, and TDS
• Multi-format payment options – both bank transfers and cheques
• Customizes according to your business and employee needs.

6. Define a Payroll Calendar

A payroll calendar must be set up to ensure everyone gets paid on time. Choose how often to pay employees: monthly, weekly, or biweekly. Keep these points in mind.

• Pick a specific payday, like the 1st or 7th of each month.
• Follow labour laws that may require certain payment times.
• Make sure all payroll processes match your chosen schedule.

7. Generate and Maintain Payroll Records

Keep payroll records organized and updated for audits and compliance. Make sure you:

• Provide employees with monthly pay slips that show deductions and total pay.
• Keep tax documents handy.
• Regularly back up payroll data securely.
• Store records for at least seven years, as required by law.

8. Test the Payroll Process

Before processing payroll for the first time, test your system to find any mistakes or issues. Run practice payrolls to:

• Spot any errors in tax deductions or salary calculations.
• Check that all employee data is correct.
• Ensure that you meet all the legal requirements.

9. Conduct Payroll Training and Communication

Train your HR or payroll team to manage payroll efficiently. Talk to your employees about:

• Their pay structure, tax deductions, and benefits
• Tax-saving options and necessary paperwork
• Do they have any questions about pay slips and deductions?

10. Evaluate and Update the Payroll System Regularly

Review your payroll system regularly, as laws and employee needs can change. Make sure to:

• Update the system based on new tax laws or regulations.
• Pay attention to what HR and employees have to say.
• When necessary, update the software to manage and scale expansion.

Now that you know the steps to set up payroll for your new business, you must understand some common mistakes to avoid.

Common Mistakes to Avoid while Setting up Payroll for a New Business

When setting up payroll for a new business in India, avoid these common mistakes to ensure efficiency, compliance, and employee satisfaction.

1. Classifying Employees Correctly

Make sure you classify employees correctly. Treating full-time workers as independent contractors can lead to legal and tax issues.

2. Staying Updated with Rules

Payroll must comply with various laws, such as tax regulations, the Employees’ Provident Fund (EPF), Employee State Insurance (ESI), and professional tax (PT). Staying informed is essential to preventing penalties.

3. Calculating Taxes Accurately

Ensure correct tax deductions, such as Tax Deducted at Source (TDS). Incorrect calculations can lead to compliance issues and penalties. Use reliable and trustworthy payroll software to help with this.

4. Meeting Payment Deadlines

Pay salaries, EPF, ESI, and taxes on time. Delays can upset employees and result in fines. Use a clear payroll calendar to track due dates.

5. Choosing the Right Technology

Avoid manual payroll systems as they are prone to errors. Automate payroll processes for accuracy and efficiency while helping with compliance.

6. Keeping Records Organized

Maintain payroll records, including employee data and proof of payment. Poor record-keeping can complicate audits and reviews.

7. Following Employee Benefits Rules

Comply with laws regarding employee benefits like gratuity and bonuses. Ignoring these rules can lead to legal problems and lower employee morale.

8. Complying with Multi-state Rules

If you have employees in multiple states, follow different local laws, including professional tax and labor welfare fund contributions. Centralized payroll management can help with the same.

9. Completing Employee Onboarding

Collect documents such as Form 16, PAN, and Aadhaar from new hires. Missing these can lead to payroll errors.

10. Communicating Payroll Policies

Clearly explain payroll processes to employees, including tax deductions and payment schedules. Transparency helps build trust.

11. Handling Overtime and Back Payments

Pay overtime correctly and check wage adjustments for errors. Mismanagement can lead to unhappy employees and compliance issues.

12. Securing Data

Protect sensitive employee information to prevent data breaches or leaks. Use encryption and limit access to payroll data.

Get Ready to Setup Payroll for a New Business

If you are a new company or a startup trying to penetrate the Indian market, it is advisable to know the local compliance laws. Understanding such compliance needs is essential to setting up payroll in India.

After that, classify your employees, obtain the necessary information, and draft the required papers. This also relates to your choosing the appropriate payroll software for your setup. It is not only about having a list of things to do; different salary components need to be worked out accurately, and this is where software comes in.

Using appropriate payroll software will eliminate errors and ensure adherence to regulations. Therefore, select appropriate software when organizing your start-up’s payroll, as it will also enhance compliance and precision.

Frequently Asked Questions

What is Payroll?

Payroll is the process of managing employees’ payments. This includes calculating wages, withholding taxes, and making payments for salaries, bonuses, and required deductions like taxes and provident fund contributions. It also means keeping records and following the law.

How do I Set Up and Manage Payroll?

To set up and run payroll, follow these steps:

• Get the necessary registrations, like a Tax Deduction Account Number (TAN).
• Classify your employees correctly and gather the documents such as PAN card and Aadhaar card.
• Choose how you will calculate payroll, either manually or with the software.
• Set up payroll software, add tax and benefit calculations, and decide when to pay employees.
• Follow legal requirements for deductions and file necessary reports with authorities.

Why Should I Use a Payroll System?

A payroll system simplifies the payroll process. It reduces mistakes, ensures compliance with laws, automates tax calculations, and increases efficiency. This system saves time, keeps accurate records, and improves employee satisfaction through timely payments.

How is Payroll Tax Calculated?

Payroll tax is based on employee earnings, the tax brackets that apply, and legal deductions like the Provident Fund (EPF), Employee State Insurance (ESI), and Professional Tax (PT). Employers must also account for TDS (Tax Deducted at Source) and other local contributions.

What is Manual Payroll?

Manual payroll involves processing employee payments without special software. You calculate salaries, deductions, and contributions by hand using spreadsheets or calculators. This method can save money but may lead to mistakes and compliance issues.

When Should I Outsource Payroll?

Consider outsourcing payroll when:

• You need dedicated HR help for payroll management.
• You need help to keep up with complex tax laws and labor rules.
• You want to focus on your main business tasks while ensuring accurate payroll.
• It helps reduce administrative burdens and errors and meet legal requirements.

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