What is Payroll Processing & It’s 3 Stages

Payroll processing is an essential business function that involves arriving at the ‘net pay’ of the employees after the adjustment of necessary taxes and deductions. For an efficient payroll management process, the payroll administrator needs to plan the payroll process step-by-step.

What is Payroll Processing?   

Payroll processing in HR is an elaborate process that involves a lot more than salary calculations. The process can be intimidating if you do not know how to go about it which is exactly why this handy guide will navigate you through the intricacies of payroll processing. 

What is the meaning of Payroll Processing?

Payroll processing is an essential business function that involves arriving at the ‘net pay’ of the employees after the adjustment of necessary taxes and deductions. For efficient payroll management process, the payroll administrator needs to plan the payroll process step-by-step. 


Net pay = Gross income – Gross deduction


Gross income/Salary = Regular Income + Allowances + One-time payment/ Benefit

Gross deduction = Regular deductions + Statutory deductions + One-time deductions

What does Payroll Processing encompass? 

Here’s a list of tasks the payroll administrator needs to accomplish during payroll processing.

  • Develop the organisation’s pay policy that includes flexible benefits, leave encashment policy, and more 
  • Define payslip components – basic and variable pay, HRA, LTA, etc.
  • Collect other payroll inputs from the transport service provider or the food/canteen vendor
  • Arrive at the net pay by calculating gross salary and deducting the statutory and non-statutory sums
  • Finally, release employee salary. 
  • File returns and deposit dues such as TDS, PF, and more, with respective authorities.

A step-by-step explanation of Payroll Processing in India

Payroll Processing

The entire payroll procedure is divided into 3 stages.

STAGE 1: Pre-Payroll Activities

  1. Defining payroll policy

This is the first stage wherein you establish policies to bank on during the payroll process. To turn these policies into standards, they need to be approved by the management. Examples of such policies are – pay policy, attendance policy, leave and benefits policy, and more. 

  1. Gathering inputs

The next step is to gather inputs from various departments to ensure accurate calculation of payroll. 

EmployeesIncome tax declaration, facilities availed, and more. 
HR teamSalary structure, eligibility for benefits, etc.
Finance teamDeduction for recoveries. etc.
Leave and attendance systems Data from attendance systems, current work shift, etc.
General service providersTransport service provider, canteen vendor, and more.

All this data collection can seem overwhelming at first. You must, therefore, incorporate payroll software which comprises features such as leave and attendance management, ESS (Employee Self Service portal) and more to make it hassle-free.

  1. Input validation

Once you’ve finished gathering all the required data, you need to verify its validity. Because a single mistake here can cause ruin the entire payroll process.

  • Ensure that the list contains all the active employees and no records of inactive employees. 
  • Check that data adheres to the company policy.
  • Ensure the data present in the right format. 

Stage 2: Actual payroll process

  1. Payroll calculation

Now that you have the verified data, its time to feed it into the payroll system. The result you get will be the net pay after the adjustment of necessary taxes and deductions. In this step, you recheck the process again to nullify chances of errors. 

What is a Payroll System?

A payroll system is a software to automate the payroll process. These systems can be integrated with leave and attendance tracking systems and employee self-service portal and are used to keep track of employee’s working hours, calculate salaries, calculate taxes and deductions, print payslip, etc.

Payroll software, thus, minimises employers’ efforts so that they can focus on more pressing problems of the business.

Stage 3: Post-payroll process

  1. Statutory compliance

During the payroll processing, the payroll administrator needs to religiously adhere to the statutory compliances. Various statutory deductions – EPF, TDS, ESI – are deducted during payroll processing. These deductions are then paid to the respective authorities/government bodies. 

  1. Payroll accounting

Every organisation needs to maintain an accurate book of accounts. And the salary paid is one of its significant entries. Therefore, as a step of the payroll process, all salary data must be fed into the accounting or ERP system.

  1. Payout

After all these steps, you can finally pay salaries via cash, cheque, or bank transfers. It is preferable to have salary accounts of employees for hassle-free transfers. For payment to salary accounts, you need to send salary bank account statements with particulars such as employee ID, account number, salary amount, etc., to the branch. 

  1. Reporting

The last step is to prepare accurate reports containing information such as department or location- wise employee cost. These reports are then sent to the finance department or the management team for further analysis.

These are what goes into the making of an efficient payroll process in India. Now that you know the procedure in detail, make sure to leverage the information and amplify your organisation’s efficiency.

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    1. comment-author
      Smirithi Maya

      Yes, your blog nailed it. Many small business entrepreneurs are still not focusing on outsourcing their Company’s Payroll Administration. By outsourcing payroll to an expert, you save time, control costs, ensure enhanced accuracy, and minimize compliance risk, without having to give it a second thought. Payroll management is compulsory for any organization with employees, but there’s no reason it should take any focus away from the business itself. Leave payroll to the experts, and get back to what’s really important, the success of your business.

    2. comment-author
      Faylinn Byrne

      My favorite part of this article was when you mentioned that all salary data needs to be fed into the accounting system as a step fo the payroll process. Honestly, if I had my own business I would make sure that I look for bookkeeping services to help me out. When running a business you need to make sure that the people in charge are knowledgeable and focus on one thing only to succeed.

    3. comment-author
      Tofique Shaikh

      amazing content, My favorite part of this article was when you mentioned that all salary data needs to be fed into the accounting system as a step fo the payroll process. fantastic keep it up!

    4. comment-author
      Chiku Panchal

      It’s a really informative article about payroll processing. I especially liked the graphics of step by step explanation of stage of payroll processing.

    5. comment-author
      Vishal Mittal

      Hi Rishabh,

      Thanks for sharing the same, Its helpful. DO you have any SOP specifically for manufacturing on Payroll processing.

      Vishal Mittal

    6. comment-author
      Panda Info

      nice blog

      All these need to be calculated every month, and there is no place for calculation errors. Hence, outsourcing payroll management services is a convenient way to perform all these tasks without any complications and in a precise way.

    7. comment-author
      Anvika Jain

      Great piece!
      Payroll refers to the amount of compensation that a business has to pay to its employees after a particular period. This consists of salary or wages, Provident Fund, income tax, and other statutory payments.
      At the end of a payroll period, the employer calculates the earnings and deductions of each of his employees and pays the amount due to the employee. It is important to keep a detailed record of all the calculations and payments made. Some companies hire an Employer Of Record (EOR). with the right EOR, all your HR and payroll needs are taken care of for you. Some of the EORs are Omnipresent, Skuad, Velocity Global, etc., which can provide in-country resources to hire globally.
      Payroll is based on bookkeeping and requires a set of standard calculations to be done a day or two before the distribution of salaries. This is where a computerized payroll system comes into work. Once the attendance records are recorded, a payroll system calculates all earnings and deductions correctly.

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