What Is payroll and how to manage it efficiently
When you think about HR, the first thing that might come to your mind is recruiting. In fact, HR consists of seeking, training, recruiting future employees, and legitimizing relations with them. And payroll is perhaps the most complex process related to HR. Today, we'll cover the importance of the payroll for each business in all countries.
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What is Payroll?
Payroll is the process of calculation, formalization, and payout of employees' salaries. Starting from tracking working hours and counting net salary, ending with tax reporting.
Achieving a quality payroll is a complex task. Many companies experience difficulty in achieving a consistent payroll function (at least at some point in time). According to the American Payroll Association, an error rate in payroll is between 1-8% in companies that manage payroll traditionally. It means that by doing payroll manually, your business is going to lose thousands of euros yearly even considering a minimal error rate.
The main reason for that is various rules and regulations. Each company regardless of location and size has the personnel and, therefore, is obliged to manage payroll by law.
Payroll is the core of the company's HR, accounting processes, and back-office management altogether. In order to stay compliant with regulations and avoid mistakes, a company must pay the closest attention to payroll.
Key Parts of Payroll
A payroll report is a key document in payroll management. This report consists of various data. Payroll report reflects legal information about a company and a certain employee: names, addresses, contact data, and so forth. Besides, there are highlighted payment periods and the number of hours worked by an employee. Also, the payroll report indicates information about the gross and net amount paid which include: regular payments, bonuses, and various reimbursements.
Checkbox: Payroll Manual Management
Collect information about relevant labor law and payroll taxation
Ask your accountant or explore web sources regarding the payroll management process. Determine when you'll be obligated to pay salaries, which taxes you'll have to pay in your country, and how to establish the payroll process properly.
Establish your payroll schedule
Based on the insights from the previous step, establish your payroll schedule. Determine when your employees will be paid: weekly, biweekly, or monthly. After that decide how many paychecks each employee will get yearly: 12, 26, or 52 accordingly. Note that the shorter payment periods are, the more complex the payroll process is, especially for big companies. That's why we advise using monthly payments.
Calculate your employees' salary
The data above will let you calculate your employees' net pay. For this task, you can use net salary calculators for your country that can be easily googled (for Estonian company you can use our Estonian Social Tax and Salary Calculator).
Keep all payroll data organized and properly stored
You never know when you will require old information, and it's not only a governmental obligation but also common sense. That's why we advise you to explore requirements regarding payroll data.
Gross and Net Pay Formulas
Gross pay = Hourly rate x Total hours worked in the period + Reimbursements + Bonuses + One-time pays
Net pay = Gross pay — All tax withholdings and deductions
Sore Points of Payroll
Costly errors
Worldwide statistics indicate that payroll is the most challenging back-office process for most companies. For instance, according to The Workforce Institute, 49% of employees would begin searching for a new job after two issues with their paycheck. Even one small mistake in payroll may affect the well-being of employees and ultimately their efficiency in the workplace. Everyone wants salary to be paid on time, so it's vitally important for employers to make the payroll process absolutely accurate.
Diverse legislation
When it comes to payroll, there are federal and local authorities with diverse, country-specific rules and serious penalties. Moreover, European labor legislation is quite intricate — it's quite hard to keep up-to-date with the law permanently. So, HR and legal departments are caught in the middle and have to comply with all requirements on different levels.
Time-consuming process
Another complexity with payroll is that it is a great time-waster for your HR department and one of the most expensive operations for a company. The source shows that an average HR team dedicates 35% of the time to payroll and correction of errors. The third of HR's working hours is spent on this overwhelming process that now can be easily outsourced and highly automated.
Various types of employees and intricate taxation
In the modern era, your team might consist not only of regular employees but also of different contractors (digital nomads, freelancers). Another significant hurdle, specifically for IT companies, is that many businesses are now distributed and operate remotely. Therefore, companies must find a way to work with non-citizens and stay compliant along the way. It's easy to get lost in different tax rates and rules that apply for employees that might perform the same tasks. All of the above will surely reflect the payroll management process and will become one more headache for your HR department to deal with.
Constant changes in payroll components
Another challenge is that each worker's salary rate, taxes, and deductions are changing constantly. It means you cannot calculate payroll once and use the same data again. Your employees are likely to unexpectedly go on vacations, sick or parental leaves, change the number of working hours or get a bump — all of this requires formalization. Everything mentioned above permanently reflects the payroll — it is a never-ending and extremely labor-intensive process.
Various data sources
As we marked above, to process the payroll manually, you'll have to aggregate a huge amount of data from different sources. You'll need to check the validity of the labor law, refresh the data of your employees, track working hours, calculate net pay, and so much more. And you'll have to visit dozens of sources of information and spend precious hours preparing the payroll — no automation, simplification, or integration in here.
How to Automate the Payroll Process
Unsurprisingly, almost all companies manage their payroll manually. As Deloitte states, only 6% of companies already started using automation in their payroll processes. Manual payroll management is a highly risky operation — automated software will calculate all payments and take care of all taxes more accurately. This is the sphere where one misprint might result in heavy fines.
You can benefit from automation only if as many business processes as possible are streamlined and united in one place. It's not efficient to have dozens of software solutions for each operation without a trace of integration. In case of payroll, it should be closely merged with the accounting process to simplify and accelerate reporting and ultimately save time for what matters most.
Our Control panel will help you with HR processes. For now, our solution lets you manage accounting, banking, payroll, and use dozens of other governmental services in Estonia — all under a single subscription and in one company's profile. Quite soon we'll release our HR solution for Estonian companies that will let you forget about all challenges mentioned in this article — no more Excel and manual calculations, just automation and a clear interface. Stay in touch with our releases by subscribing to our newsletter.
How Enty's HR Solution Works
Our in-depth HR solution collects all needed information about your employees, let you automatically generate docs, acts, and agreements, generate payroll, and tax reports, calculate net salary. And surely we'll collect all the needed records.
Our goal is to let businesses focus on the vitally important operations while we'll take care of the boring back-office stuff. With this in mind, we are developing an end-to-end solution letting you manage key back-office processes in one place under a single subscription. Explore our solution with a starter plan right now for free!
