Payroll Setup for Small Business in India: PF, ESI, PT & Your First Payroll Run

Payroll setup for a small business in India is more than just the task of calculating monthly salaries. But before you start sending a salary, you have to check all the necessary data. Check who all are qualifying as employees, learn the existing laws on payroll regarding PF/ESI/TDS/PT, and register with the necessary authorities. After completing the entire process, you have to establish a pay cycle and create a repeatable approval and payment process.

Whether you run a start-up, agency, IT business, consultancy, or retail business, payroll involves much more than deciding how much to pay employees. 

This makes payroll a significant aspect for small business owners, as it helps them run their business smoothly. 

Through this blog, we will understand how it is important to execute the payroll setup for small business in India from the very beginning in order to avoid mistakes like late payments and compliance issues. And how the first payroll run checklist will help overcome the losses beforehand. 

Before Payroll: Decide Who Is an Employee and Who Is a Contractor

Before you issue an invoice or payslip, ask yourself.

Is the individual an employee or an independent contractor? This difference will help you analyze how you pay them, what the tax deduction will be, and apply employment-related compliance.

Employee vs. Contractor: What is the difference?

PAN/ TAN vs PF/ESI Codes: What You Actually Need

Check Whether PF, ESI, PT and TDS Apply to You

Is your company eligible to apply for PF? 

The regulations of EPFO do not merely imply that the law applies to every organization that employs 20 or more individuals. Whether the company is applicable depends on the classification of the organization and the number of employees within that organization.

Is your company eligible to apply for ESI? 

ESI is applicable to all the non-seasonal factories that have ten or more employees. As per the ESI officials, the monthly wage limit for employees is Rs. 21000 per month. In the case of disabled employees, this limit is Rs. 25000. 

Actax India Expert Opinion 

As we have worked with many startups and small businesses. After seeing the hustle, we now advise every growing company to file for its PF and ESI requirements on time. Many companies make the mistake of postponing the registration, and then they suffer penalties. At Actax India, we make sure that your company’s PF and ESI registration process is easy and hassle-free. 

Professional Tax (Karnataka)

Employers falling under the category of Karnataka’s Professional Tax law must register for professional tax, deduct the tax from the salaries of employees, and send money to the government. This process is carried out using the Karnataka Professional Tax portal. 

Key Takeaway 

The professional tax rules and tax slabs in different states may differ, and one should not apply the Karnataka rules in other states without confirming.

TDS on salary

TDS on an employee’s salary does not depend only on the percentage of basic pay. The payroll department has to determine the approximate tax amount payable by the employee for the financial year. Based on this amount, the deductible amount of TDS from the employee’s salary may also be determined.

This process will help prevent over- or under-deduction of TDS and mistakes in the Form 16 issued at the end of the year.

Choose a Pay Cycle and Run Your First Payroll

Verify the employee records

Before you start the pay cycle, make sure that all the details about the employees are correct. Check for PAN, bank account, joining date, salary, Provident Fund (PF)/Universal Account Number (UAN), ESI, and tax information.

Add attendance and leave data

Make sure you have all the attendance and approved leave of employees for the month.

Calculate the salaries

Calculate the individual salary of every employee. In case the employee has joined or is quitting during the month, calculate the salary only for the days that were actually worked.

Identify deductions

Calculate the deductions such as PF, ESI, taxes, etc., wherever it is necessary.

Calculate the net salary

Deduct the total amount from the total payment to get the net salary. This is the total amount that will be received by the employee.

Run the payroll approval and payment workflow

The employee records are checked by HR. The calculations are being verified by the finance team. The management gives approval for the salary payments. And then the payments are released. 

Create payroll records

Prepare the payslips and payroll register. 

For most small firms in India, payroll every month is a tedious task, as it takes a lot of time and effort. 

Actax India Expert Opinion

When we were working with early-stage businesses, we often came across three payroll problems. The first was that the employee data is often stored in many worksheets instead of a single sheet. Second, when the payroll registration is done at the time of setting up the company, no effort is made to check if all activities are up to date and maintained. Third, payroll is approved without verifying the information against existing records. But when the payroll process starts, there is no single place where all the information is compiled together. So we at Actax India suggest that they invest in a single platform for payroll management. 

First Payroll Run Checklist for a Small Business

Running payroll for the first time is not only about calculating salaries, but it also requires completing the process of employer registration as well as collecting documents from employees. Use this first payroll run checklist to make sure that everything is in place before running payroll for the first time.

Employer setup

• Is PAN accessible?
• Is TAN acquired as necessary?
• Is PF applicable and established?
• Is ESI applicable?
• Is PT applicability in Karnataka valid?
• Have all essential registrations been done?
• Have payroll account/payment methods been confirmed?

Employee setup

• Has employee agreement/appointment documentation been arranged?
• Is a PAN obtained?
• Is the bank information verified?
• Is the joining date settled?
• Is the salary structure authorized?
• Are PF/UAN details verified?
• Is ESI information collected/noted?

Payment processing

• Attendance entered
• Leave taken accounted for
• New hires assessed
• Departures accounted for
• Total compensation determined
• Mandatory deductions taken out
• Withholding tax calculated
• Take-home pay computed

Final approval

• Payroll log checked
• Bank transfer confirmed
• Pay stubs produced 
• Management approval obtained
• Payment made through bank transfer
• Compliance calendar updated 
• Payroll documents secured

Expert Opinion

Payroll does not become ready just after the first salary is paid to the employees. It actually becomes ready when the company starts running its payroll properly every month, verifies the details, maintains records, and complies with the law as its employees begin to grow in number.

How Actax India Helps Small Businesses in India

Are you unsure of which registrations you need to complete? Want to get payroll set up for a small business in India, which will help you with evaluation before your first payroll run?

Once you get your payroll right for your first several employees, set up a simple process that you can use to scale your payroll process. 

Actax India helps businesses in Bangalore to manage payroll by providing services from employee onboarding and PF/ESI registration process to professional Tax, TDS, payroll processing, and continuous compliance. 

Talk to Actax India about your PF, ESI, PT, and payroll compliance requirements.