How do you set up Payroll for your Business?

Setting up a payroll system is a vital task for any organisation. It goes far beyond just paying salaries—an effective payroll setup ensures compliance, accurate employee compensation, and smooth business operations. A well-structured payroll not only guarantees timely payments but also boosts employee trust and engagement.

This guide outlines the essential steps for payroll setup, especially for businesses operating in India, and helps you decide whether to manage it in-house or outsource it for efficiency.

Why Payroll Setup Is Crucial

A payroll system is the backbone of employee compensation. It ensures:

• Timely and accurate salary disbursement

• Calculation of overtime, bonuses, and deductions

• Transparent record-keeping of employee work hours

• Legal compliance with tax regulations

An organised payroll also enhances employee satisfaction, reduces legal risks, and strengthens your company’s reputation.

Step-by-Step Payroll Setup Checklist

1. Establish a Payroll Policy

Start by creating a comprehensive payroll policy that outlines:

• Hours worked

• Leave and absences

• Bonus and overtime criteria

• Salary disbursement methods

This policy should also clearly define the responsibilities of HR, finance, and management personnel involved in the payroll process.

2. Obtain PAN (Permanent Account Number)

Every Indian business must acquire a PAN for tax purposes. This unique identifier is essential for all financial transactions and tax filings. It is mandatory for:

• Filing tax returns

• Deducting and paying taxes on employee salaries

• Opening business bank accounts

3. Apply for TAN (Tax Deduction and Collection Account Number)

To legally deduct taxes from employee salaries, companies must obtain a TAN. This can be done by submitting Form 49B to the Income Tax Department. TAN is mandatory for:

• Issuing TDS certificates to employees

• Filing TDS returns

• Ensuring tax compliance

4. Register Under the Shops and Establishments Act

Your business must be registered under the Shops and Establishments Act, which governs:

• Employee working hours

• Salary structures

• Deductions and perks

• Leave and holidays

Note that registration rules may vary across Indian states.

5. Decide Payment Frequency

Employers in India can choose between monthly, semi-monthly, or weekly salary payments. However, most states mandate monthly payments at a minimum. Also, be aware of any legal guidelines that dictate the maximum time allowed between the work period and salary disbursement.

6. Leverage Payroll Software

Using payroll software helps streamline processes, reduce manual errors, and maintain compliance. Good payroll software should offer:

• Automated calculations

• Tax and deduction management

• Direct deposit integration

• Payslip generation

Ensure the software complies with local labour and tax laws.

In-House vs Outsourced Payroll: What’s Better?

While setting up payroll yourself is feasible, it can become time-consuming and complex as your business grows. Manual processing increases the risk of:

• Tax errors

• Delayed payments

• Regulatory non-compliance

Benefits of Outsourcing Payroll:

• Expert handling of compliance

• Reduced administrative burden

• Enhanced accuracy and timely processing

• More time to focus on business growth

Conclusion

Implementing a robust payroll system is not just a regulatory requirement—it’s a strategic business decision. Whether you choose to handle it in-house or outsource it, ensure your setup includes the right registrations, tools, and policies to stay compliant and efficient.

If you’re looking to streamline your payroll operations, consider consulting Relativity’s payroll experts, with over 16 years of industry experience. From setup to compliance and processing, they provide tailored solutions to meet your business needs.