What is Payroll Cycle?
A payroll cycle is a period during which an employee’s pay is calculated.
Since the employees are paid according to their payroll cycles, it can also be defined as the period between when an employee is paid their salaries.
Payroll cycles help the organization strategize its employee payroll, ensuring accurate compensation, while also making it easier to adhere to regulations such as the tax guidelines set by the regulatory bodies.
The payroll cycle is set by the organization based on several factors such as the employees’ requirements, attendance capture methods, statutory rules and regulations, the company’s budget constraints, industry practices, etc.
What are the Steps in a Payroll Cycle?
Since employment is a relationship between an employee and their employer, both parties are required to fulfil certain obligations laid out in the employment contract. While the employees are required to accomplish their tasks according to their KPIs and undertake their responsibilities according to their KRAs, their employers are required to compensate them accurately on time, according to their promised wages.
To fulfil this commitment, the payroll cycle consists of different steps:
1. Update Employee Data
Before the start of the payroll process, it is essential to update employee information in the system including the details of any new recruits such as their designation, allowances, insurance details, tax information, etc. Additionally, the system should also be updated with any changes in the tax policies, tax slabs, etc. to ensure compliance with the labour laws.
2. Enter Productive Hours
The next step is to collate the attendance information of the employees within the organization. Since the final payment of the wages is undertaken using the productive hours as the base of the calculation, it is essential to ensure that the attendance information is accurate and foolproof. Hence, it is ideal to utilize biometric attendance system that are integrated with payroll software, for capturing accurate attendance data and providing accurate information for payroll processing.
3. Process Payroll
The next step in the payroll cycle is payroll processing where the attendance information is converted into the net pay and the additional components are added to the salary to arrive at the gross pay amount. Once again, it is essential to ensure that the components added to the net pay are in accordance with the ones promised by the organization, to ensure employee satisfaction.
4. Deduct Taxes
Once the gross pay is calculated, the statutory deductions are undertaken to deduct the taxes from the employee salaries, which are authorized by law. Any other deductions are also undertaken to ensure that the salary is accurate for the payroll cycle. For example, deductions for medical premiums, professional tax, etc. are undertaken at this stage of the payroll cycle.
5. Disburse Wages
The final step of the payroll cycle is to distribute the wages through the chosen medium, that has been decided by the organization. Companies can choose to disburse their wages via direct bank deposits, wire transfers, in the form of a paycheck, or even handing out cash to their staff members. Once the payroll is distributed, companies provide the details of the same to their employees through payslips.
Types of Payroll Cycles
Payroll cycles are divided into different types according to their duration. Different types of payroll cycles exist, as they are based on the organization and the employees. While Asian countries mostly prefer monthly payroll cycles, companies in other parts of the world may opt for any of the other cycles based on their convenience. However, the same should be communicated to their staff members when they are appointed.
The most common types of payroll cycles are:
➔ Monthly Cycle
The monthly cycle is the most common payroll cycle as the employees are paid on the last day of a month for their work during that month. As a result, 12 monthly payroll cycles occur in a financial year. It is easiest for the HR teams as it helps streamline taxes and deductions. However, employees are required to wait longer for their wages, which can become cumbersome for employees earning lower wages.
➔ Bi-weekly Cycle
The bi-weekly payroll cycle pays employees every two weeks, which provides them with increased flexibility in how they manage their finances in a month. On the other hand, it is more expensive for the organization to manage bi-weekly payroll cycles as it becomes tax calculations tend to get difficult.
➔ Weekly Cycle
In the weekly payroll cycle, employees are paid every week for their contributions. Companies usually pay their contractual employees weekly as their attendance and employment may not be ‘regular’ according to company policies. However, this cycle is also more expensive for the organization as it requires additional time and manpower to process.
➔ Off-Cycle
Off-cycle is a special type of payroll cycle in which employees are paid out of their normal payroll cycle. It occurs when special payments cannot be pushed to the next salary cycle. For example, some kinds of bonuses and commissions are required to be paid outside of the normal payroll cycle, and hence, they are paid in the off-cycle.
How to choose a Payroll Cycle?
Since a payroll cycle is critical for processing payroll smoothly, one needs to be extra cautious when choosing a payroll cycle. Employers should consider the company policies, the local labour laws, and multiple other factors such as the employees’ requirements, when trying to choose the ideal payroll cycle for their organization.
Following are some of the major factors to consider while choosing a payroll cycle for your company:
1. Check Laws and Regulations
There are various local and international laws on how and when to pay employees working in an organization. Hence, you should comply with these regulations and ensure that any changes are updated in the company policies. As a result, you should have a good understanding of these local and international labour and employment laws and configure your payroll cycle according to it, to ensure that your employees are compensated according to the rules and regulations.
2. Consider Payroll Costs
Since you require money to pay your employees, you should ensure that the payroll cycle falls after cash inflow. Employers sometimes keep their payroll funds different from their business funds to ensure that they have enough money to pay their employees despite any adverse business conditions. Hence, it is essential to consider when you can fill such funds, to enable smooth payroll disbursals.
3. Understand Employee Requirements
You should also consider your employees’ requirements when setting up the payroll cycle. While different employees might have different opinions on which cycle they should be put in, you will be able to understand the common consensus once you undertake surveys to understand their reasons for suggesting a specific payroll cycle.
4. Check Reporting Feasibility
Payroll management also requires the organization to submit various reports to the income tax department as well as deposit the taxes deducted from employee salaries. Hence, employers should also consider the frequency of these reports and payments when deciding the payroll cycle within their organization.
