Payroll processing is an integral part of every business. The law provides that employers process their employee’s payroll in a compliant manner. This is regardless of the size of your business. Whether you have just one or more employees, you must process their payroll. Payroll processing can be a complex task for employers, especially new employers who have to deal with calculating wages, salaries, deductions, and payroll taxes and doing it correctly. Because doing it wrongly can put your business at risk.

To help you process your payroll efficiently, we have created a guide to put you through. In this article, we will explore key aspects of processing payroll, steps to process payroll, and tips for accurate payroll processing.

What is payroll processing?

Payroll processing involves the management of an employee’s salary by an employer. The process covers everything pertaining to payroll, from adding an employee to your payroll to issuing them their payslip regularly and timely.

Businesses can carry out payroll processing manually, through software, or by outsourcing it. Manual processing of payroll includes the use of spreadsheets, pens, and paper to document your payroll process. This process can be tedious for small business owners and can lead to mistakes. One has to be extra careful when towing this route.

On the other hand, businesses can invest some money in getting software to automate the entire process. It is more efficient and gives employers more autonomy over their payroll. However, it has a steep learning curve, and businesses need to always be up to date with compliance laws.

Lastly, businesses can get an in-house accountant or an external payroll service provider to carry out the entire process. It is more efficient, reduces the risk of compliance, and increases the accuracy of payroll.

Pre-processing payroll measures

Pre-payroll measures are activities that occur before the actual payroll process. They include all the basic steps, like registering businesses with the appropriate authorities, and the necessary preparations businesses must put in place to run payroll.  

Get your employer’s tax identification number

Every employer must register their businesses with the appropriate regulatory bodies and obtain the tax identification number or employer identification number from local authorities. In Nigeria, you can obtain this from the Federal Inland Revenue Service (FIRS) and State Internal Revenue Service, which are present in every state. This step is mandatory for your business to remain operational and hire employees.

See also: How to manage payroll in Nigeria

Gather employee information

Employers need to aggregate employee information that will help them consolidate their payroll. These forms include personal information, bank information, Form A, job application forms, pension schemes, and health insurance forms.

Choose the appropriate payroll schedule

As an employer, you need to decide on the payroll cycle to pay your employees and stick with it. Common payroll cycles are weekly, biweekly, and monthly. Create a calendar that will track your payday all year.

Take note of other important days like when to file annual tax returns, monthly tax filing, leaves, and holidays. Having this in mind, you need to make sure your employees are aware of your payment schedule to know when to expect their pay.

Related post: Tips for effective payroll management

Determine how to perform payroll  

Payrolls may be run manually, automatically, or outsourced. Decide on the best route for your business. If you have adequate knowledge of payroll, running it won’t interfere with your other administrative and managerial tasks; you can run it yourself manually using a spreadsheet.

However, if you want a more efficient and streamlined process, you can pay for payroll software and automate the task.

On the other hand, you can outsource the entire process to a payroll provider like PoweredUp Consulting. Each of the methods has its cons and pros; carefully weigh them out and decide which is best applicable to your business.  

Determine the route to pay employees

Paying your employees promptly and efficiently boils down to the method you choose to pay them. There are different routes to pay your employees: direct deposit or transfer, check, and cash.

Direct deposit is the most straightforward; it requires you to liaise with your bank to direct your employees’ paychecks to their bank accounts at once.

You need to gather employee’s bank information with their permission before automating this process. Also, you can make use of checks, but it involves employees going to the bank to cash out the check. Lastly, you can decide to pay your employees by issuing cash directly to them.

This can look easy to accomplish, but the processes involved can be overwhelming. You need to ensure accurate counting of the money and other paperwork.  

Payroll process steps

Below are steps to process the payroll

Gather employee attendance

A proper record of employee attendance ensures an accurate payroll. Put in place a reliable time-tracking system. This can be manual attendance or an automated system for tracking time. If you use a biometric machine to track time, download the data and accurately calculate the hours spent per week or month, as the case may be.

Calculate gross pay

After working on the time card, you use the information to calculate the gross pay. Gross pay is the amount to pay to an employee before deductions such as taxes, social security, and insurance are withheld. Gross pay entails an employee’s salary, bonus, benefits-in-kind, and fee. Calculations differ for both hourly and salaried employees.

To calculate gross pay for hourly employees, you multiply the hourly wage by the number of hours worked for that period.

For example, if an employee makes N500 per hour and works for 48 hours, the gross pay becomes N500 x 48 = N24,000.

Salaried employees’ gross pay is calculated from the annual gross pay and the number of pay periods per year. For example: if an employee is on a monthly payroll with an annual gross pay of NN1,200,000, the monthly gross pay will be N1,200,000/12 = N100,000.

Calculate payroll tax

After getting your employees’ gross pay, you need to calculate the tax each of them will pay. This payroll tax will be deducted from the gross pay. Using a tax professional like PoweredUp Consulting can help you simplify this process.

In Nigeria, employers remit personal income tax from their employee’s gross pay. The personal income tax encapsulates any form of salary, wages, allowances, and fees. All bonuses, benefits, and premiums are taxable. The personal income tax is remitted to the resident State Internal Revenue Board, while residents in the federal capital remit taxes to the Federal Internal Revenue Service. The tax ranges from 7% to 24%, depending on the annual income.

Determine employee deductions

Next, after withholding payroll taxes from the employee’s gross pay, you need to withhold deductions. Some common deductions are 

·         Healthcare insurance scheme

·         Life assurance premiums

·         Pension scheme

·         Gratuities

·         Mortgage

Ensure you deduct every necessary deduction from your employees to avoid mistakes and ending up paying what you shouldn’t pay.

Determine net pay

After a thorough calculation of employees’ gross, withholding employees’ tax, and subtracting necessary deductions, the next step is to calculate their net pay. An employee’s net pay is the amount of money they take home after taxes and deductions. You can calculate the net pay using this formula

Net pay = gross pay – total deductions – income tax

For example, if an employee earns an annual income of N2,400,000 on a monthly pay schedule, the gross pay is N200,000, with a tax of N14,000 based on a 7% charge and deductions of N15,000. The take-home pay will be N171,000 per month.

Approve payroll

Following the determination of your employee’s net pay, the next step is to approve the payroll. But before going ahead to do so, make sure you thoroughly verify the calculations to ensure the accuracy of the payroll. A messy payroll can be costly. After affirming that everything is correct, you can go ahead and approve the payroll.

Pay employees

You can pay your employees once you approve the payroll. There are a variety of methods for paying employees to choose from:

1. Cash
2. Direct deposit
3. Cheque
4. Mobile wallets

You should include this plan in your pre-processing step. After paying your employees, you may distribute payslips for them to view the breakdown of their payroll.

How long do you need to process payroll?

There’s no specific answer to this question, as the time taken to complete a payroll process depends on a variety of factors. For instance, adopting a manual payroll means spending more time processing payroll. However, using software or outsourcing reduces the time. Sometimes, employers spend 1–2 days when done using software, while it may take 3–5 days when done manually. Also, it depends on the number of employees you have; a large number of employees means you spend more time preparing the payroll than with a smaller number of workers.

To get the actual figure, you have to take into consideration the different factors that may influence the time spent processing payrolls.

Tips for efficient payroll

Here are some tips that will help you have a robust and efficient payroll:

Keep payroll records

Consider maintaining accurate and detailed payroll records. In Nigeria, payroll records should be kept for up to 6 years. These payroll records will include your payroll taxes, payslips, deductions, and other benefits. Keeping payroll becomes helpful when dealing with employees who may disagree or submitting payroll tax documents at the request of FIRS, or the State Revenues Board.

Re-assess your payroll process

You may consider re-evaluating your system for processing your payroll from time to time. Through this, you may come across areas where you can improve or do away with them. You may review your pay schedule annually and ensure you communicate any adjustments with employees.

Maintain payroll tax compliance

Payroll tax compliance is necessary to prevent the risk of fines and charges. Payroll taxes are taxes employers pay on behalf of employees and based on the employees’ salaries and benefits. Ensure timely filing of accurate payroll taxes with the relevant agencies at every level to avoid penalties.

Consider outsourcing your payroll

You may consider outsourcing your payroll process to a payroll company. To proceed with these, you need to provide all necessary information regarding employee names, hours spent daily, overtime, benefits, social security, allowances, paid leaves, and tax deductions. The company uses this information to calculate and prepare your payroll. Since they are aware of local and federal laws, they ensure your payroll complies with them.

How can PoweredUp consulting help you streamline your payroll processing?

PoweredUp Consulting integrates a robust payroll system to deliver quality and timely payroll processing. You can trust us with your payroll and have it executed in a timely and accurate manner. You don’t need to stress yourself over going through the difficulty of preparing payroll; leave that to us and get quality and compliant service. For more information on our payroll services, book a free consultation with us. Our experts are here to serve you.