What is Payroll and how are Payroll Calculations Done? A Complete Guide

Mohammed Faizan N
October 14, 2020

Table of contents:

  • Introduction to payroll
  • What is the purpose of a payroll process?
  • What are the steps in the payroll process?
  • What is payroll software?
  • What are the uses of payroll software?
  • What size of organizations uses payroll software?
  • Is payroll software customizable?
  • How do I identify a good payroll software for my company?
  • How can I update the changing policies and deduction calculations according to change in government norms?
  • Where does my data get backed-up if I am not using a cloud backup system?
  • Is training required to use payroll software?

Introduction to Payroll

Payroll isn’t just about paying your employees salary for the number of hours they contribute towards tasks for your company.

It includes wages and deductions such as taxes (based on country), health insurance, allowances and much more.

Managing Payroll can be a tedious task for startups and SME’s and if mismanaged can affect the level of productivity and credibility of your employees.

Payroll is an integral part of an HR ecosystem as we have established earlier on. While HR software is important to any company, payroll plays a vital role in any organization. It is a monthly rigmarole activity that is time-bound and needs to be devoid of human errors.

As a founder of a company, you cannot shrug your responsibility off payroll processing. As an SME you cannot afford delayed salaries and erroneous calculations. As a CEO, you need to see that your employee salary requirements are well met to industry standards and support your business goals.

A salary is something that employees look forward to and any possible delay cannot be put across as an excuse. Though, there could be scenarios in which the salaries are delayed and some of them are as follows:

  • Late processing means late salaries.
  • Inaccurate calculations mean a breach of trust and irate employees. Reprocessing salaries, addressing employee queries, extra man hours, and double work.
  • Inadequate resources mean delayed payments and pending complaints. 
  • Loss of company reputation in the market.

All these hiccups and more are dependent on the way salaries are processed. But, are you ready to face the consequences? The bottom line is, mismanaged salaries mean triggering lower morale in employees, disengagement, discredited company value, and lack of trust if the experience is repetitive. This could have serious repercussions including, employee turnover, messed up payroll accounting records, and largely, bitter employee-employer relations and a chaotic situation that is irreversible.

What is the purpose of a payroll?

Payroll Processing ensures that employees receive salaries on time with the right deductions. The HR department has a major responsibility for remitting the funds by keeping various deductions in mind, set forth by the company.

Small and Medium Enterprise (SME) usually depend on their teams to process payroll. The payroll process can be initiated by setting the right payment policies, defining the payment components, including the mandatory deductions, gathering payment inputs, payment calculation, crediting employee payments along with payslips, paying mandatory deductions to government employees and the process repeats every month.

Keeping that mind, let’s quickly discuss the different stages in processing payroll:

  • Establishing Payroll Policies:

Salary is a fundamental right of an employee and therefore setting the right payment policies is necessary. The payment process is a critical one and therefore, it is imperative to define payment policies, regulations, and terms under which the employees will be paid. This will differ from employee to employee and permanent to temporary staff. Payment policies are also ground rules around payments paid and defaults.

  • Salary Components:

Salary components are the bifurcation of fixed and variable components including basic salary, bonus, HRA, etc. and Statutory components like ESIC and PF. Salary components and their percentage differ from company to company.  The said structure of assigning salary components works as a standard prototype for the entire company.

  • Gathering Inputs:

Gathering inputs is a cumbersome task. As it is a monthly process and very time-driven it needs to be done in a very short time frame; verified and then sent for processing. This is a crucial stage as the data that goes as input will be able to generate the output. 

And this becomes a mammoth task when we are talking about large organizations and corporate MNC's. Inputs can be across numerous verticals including canteen expenses, loans, vehicle expenses, petrol & diesel reimbursements, extra shift charges, paid leave, commission, relocation expenses and the list goes on. 

We can also agree that gathering data can be an even bigger task when multiple office location payrolls are centrally processed.

  • Validating Inputs

The data captured is then subject to validation, to eliminate any possible errors at a later stage. This is a very important and mandatory step as you need to abolish the inactive employees from the list and make sure every working employee is mentioned.

This must be errorless processing to avoid any future misunderstandings.

  • Setting up Payroll Processes

After this pre-payment process of setting policies, collecting data and validation starts the actual payroll process. Payroll has been considered a very sensitive and mammoth task and the need to create error-free output is the primary motive. Payroll processes should be monitored closely by experts in the department to avoid any possible duplication of work.

  • Payment of Statutory Payments

Under the state and central government's statutory compliances, all the necessary payments are remitted and the accounts are thus maintained for future reference.

This is again a very important aspect of payroll management and needs to be taken care of as late payments and non-payments can result in huge fines. For the payment of TDS returns the employee has to be given a FORM 16 that the employee needs during filing individual tax returns.

The payroll process is marked by different steps and each step contributes in its way. The need to streamline the process might only come with the awakening of some payroll mismanagement cases in the past or the lack of structure in handling huge chunks of data, or for that matter delayed processes. Payroll software in India is aligned to the specific & standard payment process according to Indian salary standards.

How payroll is generally managed in startups and SME’s?

a. Payment processing on excel sheets:

A large number of SME's still practice their payroll management on excel sheets. It might be a comfortable practice until you have less than 10 employees. Once you exceed 10 employee mark, the data processing could be a task on an excel sheet. An excel sheet also has other shortcomings like-

  • Manual entry of data.
  • Manual processing of data.
  • Clerical and calculation errors.
  • Statutory compliances need to be entered from time to time.
  • Manually adding and removing entries.
  • These and many other drawbacks can be encountered while processing payroll on an excel sheet.

b. Outsourcing Payroll Process

The other source of payroll processing is by outsourcing. There are third parties who exclusively work on payroll processing and management. The company just needs to share the data and the necessary compliances and deductions to the third party from time to time. The challenge with payment process outsourcing is, your internal company data, employee data, and payment data that are sensitive are at high risk all the time with an outsourced partner, there are also good chances of errors and delayed processing if the payroll processing company is not very professional and overburdened.

What is Payroll Software?

sumhr payroll

Payroll Software is one process that is aligned to bring all the loose ends of inputs, validation, processing, and checks on one single platform, therefore giving better control on payroll processing.

Payroll Software is versatile and can be designed in a bespoke manner. However, the standard payroll software is designed to cater to the maximum requirements of a payroll process and can be slightly calibrated to introduce certain adaptations as per your company's requirements. Payroll Softwares present a holistic experience of payroll processing in a seamless manner. By now you must have realized the flip side and the good side of an HRMS in the context of time efficiency and error-free results. Therefore, an initial calibration of calculations and deductions makes it easier to process chunks of data, reduces dependability on external third-party resources, and offers a professional solution.

Payroll software and its uses:

Payroll software is not only an automated and streamlined process but also minimizes dependability on third parties, secures information, and can also be looked towards-

  • Scaling data

The software can accommodate and process large data and can also be adapted to increase the scale of processing by bespoke calibrations.

  • Ease of operations

As the process is automated every form and input is driven around your existing forms and processes. If your company already has an HR software or a web payroll, then there is no need to manually input data for payroll processing. The data can be sourced from your HR software towards payroll processing. All this requires further calibration and can be worked around. The automated system also prompts errors during inputs and it can be rectified then and there. Overall, the automated system offers different solutions in a matter of a few clicks. 

  • End-to-end solutions

The HR Payroll software is an end-to-end solution right from setting policies for reference, acquiring data, setting mandatory compliances and deductions, data validation, payroll processing, mandatory remits of essential government payments, creating form 16 and salary slips in addition to other necessary documents and payroll accounting, etc.

This ensures total control over the process and a one-window approach.

  • Integration with the different system within the company

The payroll software can be integrated across different systems in the company including the HR system to capture data inputs effectively. It can be integrated into different systems for:

a. Hourly captures:

Hourly captures are important for jobs like consultancy that are time-specific and every minute extra need to be recorded and accounted for, as it is charged.

Roles like consultants, auditors, specialized freelance assignments, etc. all can be monitored through the payroll processing software.

b. Attendance & Time Management:

Captures the time-in and time-out data electronically through biometrics, GPS punch-ins, multi-device tracking, work-from-home, or other mediums for accurate inputs.

c. Leave Management System

Captures leave data of absenteeism, different kinds of leave like sick leave, holidays, PL, paid leave, etc., as well as leaves applied, cancelled, and emergency leave. This information is very useful to calculate the deductions and extra pay.

d. Accounting System

The accounting system needs to be integrated into the payroll system such that the payroll data processed can be sent to the accounting system that further releases salaries. 

The detailed accounting of salaries and other benefits are clubbed as employee expenses and need to be monitored and accounted for.

e. Cloud-Based Systems

And this is not all that is to a Payroll Software, but it can be adapted and integrated into cloud systems also. This eases the data access from anywhere and anytime. 

Cloud systems are also a good backup against your physical data or in-office data that is susceptible to damage, loss, or theft. A cloud-based system ensures your data is secure and is only accessible to people who have the specific rights to access.


In today’s era, no matter what field you are in, you need everything to be quick, secure, error-free.

With that said, Using payroll software can really get a lot out of your shoulders and put you in a relaxing zone. Whether you're an HR professional, CEO, Founder, or an employee of an organization an HR software can help you ease your payroll process, track attendance, monitor your employees’ performance, automate and structured on-boarding and exit processes with ease.

Struggling to manage all the tasks related to the HR department? Don’t worry! Try our HRMS where you can choose a pocket-friendly plan or create a customized plan based on your requirement, and get access to features like:

  • Automating payroll and expense claims
  • Managing your HR data easily
  • Review performance and Objective and Key Results (OKR)
  • Track attendance and leaves.
And much more.

Get a demo of sumHR free of cost today or grab a 7 days free trial and be HR Hero of your organization.


1. What size of organizations uses payroll software?

Companies that have employees ranging from 25 to 5000 can adapt to software for SME, that effectively caters to the segment.

2. Is payroll software customizable?

Yes. Some payroll software like sumHR offer a high degree of configurability and scope of customization to company-specific requirements.

3. How do I identify a good payroll software for my company?

In the context of your individual company's requirements, the dynamics of employee numbers, specific policies, and salary components might differ, but one should look at a software that can easily be integrated across different mediums, is scalable to small-medium enterprises and beyond, creates exhaustive and specific reports, is customizable and lastly cloud compliant for worldwide access of data.

4. How can I update the changing policies and deduction calculations according to change in government norms?

The changing policies and norms related to the government need to be internally adjusted to your payroll software. Be it the IT declarations, changing tax norms, form submissions, full and final settlement towards ESIC & PF, every alert should be incorporated to make your payroll process compliant to government needs and standards. Not all software offers the facility of changing this inhouse and you might have to depend on the development company. So, choose a software that gives you the flexibility to change parameters internally at just a few clicks.

5. Where does my data get backed-up if I am not using a cloud backup system?

Other sources of back-up including the company's storage platform can be utilized to maintain the back-up of your payroll data.

6. Is training required to use payroll software?

The payroll process is usually driven by the HR or accounting department and necessary training is imparted by the software development company. 

Bringing ease to your processes and teams is what we at sumHR have been doing with our Payroll Software. Our mission is impacting HR teams and businesses towards automating mundane and chaotic payroll management to a streamlined payroll process. We think, you should no more depend on paperwork, spreadsheets, and outdated software, as our online payroll software can be adapted to different industries and sizes of businesses. It can also be easily integrated into specific processes and systems in the company. 

If your company's payroll management is taxing you, it is time to break free of the clutches of the regular challenges and adapt to payroll software now.

Written by
Mohammed Faizan N
Faizan is an SEO Specialist at sumHR, a passionate marketer with 3 years of experience in building a website, establishing organic visibility on Google and building an online presence on Social Media.
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