Payroll Calculation or How is payroll calculated?

payroll calculation

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It is difficult for businesses with many employees to manually do payroll calculations, especially when paying employees monthly. Payroll processing is one of the most essential functions of any finance or HR department. Payroll delays or errors can affect your organization’s credibility. Check out the top payroll software providers for your business, with practices that can be applied to streamline all the essential payroll functions. Such techniques can also ease the payroll math and make you more efficient in payment delivery.

Payroll calculation includes many things, such as basic pay, arrears, HRA, PF, tax deductions, and many more. However, the following steps will help you quickly calculate the entire payroll.

Formulating Payroll Policies

Formulating proper policies is like laying the foundation for a successful payroll functioning. Before formulating any policy, make sure that you are following all the payroll laws to avoid any problems in the future. Also, make sure that your policies consist of everything your organization includes in the payroll like working hours, overtime pay, performance rewards, benefits, etc.

Only Formulating payroll policies is not enough. You must ensure that your employees are able to understand all the policies and not have any doubts about the policies. It is important to explain all the policies to each of your employees.

Collect Employees Data

The next step is collecting employee data based on their CTC structure and payroll laws. This includes the information regarding :

  • Employee designation and CTC structure
  • Income tax information
  • Bank details
  • Reimbursement claims
  • Other benefits information

Integrate Attendance & Performance Data with Payroll

Before calculating payroll, you need to have a list of employees’ attendance to know their worked days and decide their total number of payable days and amount. If you are paying variables to your employees according to their performance, then you also need to have their performance data.

Calculating the payroll manually with all these attendance and performance variables can be tough and time-consuming. It would be wise to use a online payroll software that does the whole payroll calculation with integrated attendance and performance software so that your employees get exactly what they deserve.

Payroll Calculation

After getting the employee’s all the basic details along with their attendance and performance data, now you should start calculating employees’ gross pay and net pay. A gross pay consists of all the components like basic pay, PF, HRA, LTA, performance bonus, professional tax, etc. while net pay will be derived from gross pay after deduction taxes and other components.

Formula for calculating payroll

Net Pay = Gross Salary – Gross Deduction


Gross Salary = Basic salary + HRA + DA + Allowances + One-time payment/incentive (Reimbursements, Arrears, Bonus, etc.)

Gross Deduction = Professional Tax + Employees’ State Insurance + Public Provident Fund + Income Tax + Insurance + Leave adjustments + One-time deduction (Loan recovery)

You need to work closely with your finance team calculate all these components accordingly. Sort out all the components and apply them to each employee according to their CTC structure. Ensure that you are following all the statutory compliances. Once all these details are sorted then, you can calculate employees’ net pay.

While calculating the net pay, it is necessary to know the CTC structure in detail. To learn in-depth about CTC’s various salary components, read our blog on How to calculate the CTC structure.

Process Payroll & Hand out Payslips

Once the net pay is finalized, then you can go ahead and process the employees’ salaries through the specified mode of payment on the specified date of the month mentioned in your payroll policy. Make sure that you are not delaying the process and paying the employees on the same date every month to build the trust of your employees.

After processing the payroll, distribute the payslips to each employee so they can understand their salary components. It also helps employees in getting loans, income tax planning, future employment and acts as a legal document of employment.

Maintain Payroll Records

After ending the payroll calculation, it’s important to record all the payroll processes for numerous reasons. The first reason to do so is to ensure that there are no compliance issues in the future. If there are any salary deductions, then they must be recorded to help in the case of salary disputes in the future. Payroll laws also mention that all organizations must maintain their payroll records periodically.

What are the Options for Calculating and Recording the Payroll?

The calculation of payroll shown above can be stored and tracked in ways such as software, manually, or through excel sheets. But what matters the most is to ensure accurate payroll processing. These methods can be defined more based on the type of your company rather than considering their usefulness. Though you are a small, medium, or large enterprise, you must be aware of these three methods and use the most satisfactory one.

1. Manually

As the method includes pen and paper-based math, it is less useful in this advanced era of technologies. Also, this method is most prone to errors due to human intervention and will consume a lot of time in payroll calculation.

Manual calculation and recording can take a lot of time. But if you don’t want your budget to be compromised, you can use the manual methods. The person supposed to run the payroll must know the procedures and laws that can be used to bring more efficiency to the system.

2. Excel Sheets

Using excel sheets is also useful, but don’t get confused in the maze of rows and columns. Plus, excel sheets can be a victim of data theft. However, excel sheets can help you distribute the hours, minutes, and other conversions efficiently and quickly into the sheets.

Update the sheets after every payroll. But ensure to double it, as human presence can bring error. Also, ensure that you are considering the laws that are made.

3. Cloud-Based Software

The most effective and error-free solution to all your needs is a cloud-based software. If you are used-to to the sheets, you can integrate them with the software to obtain the result in seconds after the click.

Moreover, the software will calculate and convert the rates that you need without any human hand. Additionally, the salary systems can be pre-integrated with time and leave management solutions. This way, the system can directly gather the data it needs.

The cloud solutions come at a reasonable price because you can use them without any mismanagement and ill-functioning once you buy them in the long run, thus giving you a better option for your budget limitation.

Ending Notes

Payroll calculations can be confusing and time-consuming, but choosing the right method can help the company to bring more productivity and encouragement. If you are handling your payroll by hand, ensure to use the conversion chart for a faster transaction. Salary distribution is a kind of function that satisfies the employees most. If there are any errors, the company will receive wage violation complaints.

This calculation method will ensure that you are always on top of your payroll, which can bring so many benefits, one of the most important being employee satisfaction.

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