What is Payroll

PAYROLL MANAGEMENTUnfolding the Complexities of Payroll: Preparation, Analysis and Management

PRESENTED BY ABDUL WAHID AHMED

INTRODUCTION

1- What is PayrollApayrollis a company's list of its employees, but the term is commonly used refer to:

the total amount of money that a company pays to its employees,a company's records of its employees salaries and wages, bonuses, compensation and benefits and deduction applicable (taxes etc.)the company's department that calculates and pays these.

1.1 Responsibility of payroll preparationIt varies according to size and policies of the company or organization.Payroll may be dealt by: a separate payroll department. Human Resource department. Finance department but directed by Human Resource Department

1.2 Types of workman SalaryFixed PayVariable ( Hourly )CommissionWagesPerformance payAnnual PayWagesMinimum payStipendContractual Pay

1.3 Components of salaryBasic SalaryHouse Rent AllowanceMedical AllowanceProvident FundLeave encashmentUtility AllowanceVehicle Allowance Fuel Allowance

1.4 Laws for employees and workersMinimum WageWorking HoursHolidays

1.4.1 Minimum WageMinimum wages should be Rs. 13000/- per month as per budget 2015-16.It varies according to Federal and Provincial laws.

1.4.2 Working HoursAccording to Industrial Laws as applicable in Pakistan:Daily Hours (9:00 a.m. to 5:30 a.m.)Weekly Hours (5 days)Saturdays as per bank requirement

1.4.3 HolidaysGazette HolidaysAnnual LeavesSick LeavesMaternity LeavesEmergency LeavesUnpaid Leaves

2.0 What is TaxDefinition

Tax is a charge or levy imposed by a state upon a tax payer for no consideration and if fail to comply will be punishable by law.

Economical benefits and Importance

2.1 Types of TaxesDirect taxesTax imposed directly on person.Example: income tax, property tax etc.

Indirect taxesTax imposed indirectlyExample: Sales Tax, FED, etc.

3.0 SALARY

3.1 Taxable and Exempt SalaryTaxable SalaryMeans total salary as reduced by deductible allowances. Some allowances are wholly or partially exempted.

Exempt SalaryMeans Salary on which tax is not applicable.

Total SalaryIt includes both the taxable and exempt portion of the salary.

3.2 Provident FundPF is composed of the equal contribution of both the employer and employee which cumulate up to the conclusion of employment.

Types of fund are Recognized PF (deduction and benefits allowed)Unrecognized PF (deduction and benefits not-allowed)

3.2.1 Investment of Provident FundThe fund is required to be invested in a prescribed investment by SECP in Sec 227 of C.O.1984Deposit of amount within 15 days in(i) in a National Savings Scheme;(ii) in a special account to be opened by the company for the purposein a scheduled bank; or(iii) where the company itself is a scheduled bank, in a special

account to be opened by the company for the purpose either initself or in any other scheduled bank; orbe invested in Government securities; orin bonds, redeemable capital, debt securities or instruments issued by thePakistan Water and Power Development Authority and in listedsecurities subject to the conditions as may be prescribed by theCommission.]3.2.1.1 Investment of Provident Fund

3.2.2 Exemption from taxProvident fund Contribution of employerExempt up to 1/10th or Rs. 100,000 of the salary amount which ever is lower.Profit or Interest:Exempt up to 1/3rd of salary amount.

4.0 SALARY RELATED LAWS UNDER INCOME TAX ORDINANCE, 2001

4.1 Salary Laws by Income Tax Ordinance, 2001According to Section 12(2) salary includes following:Basic pay (Normally 1.55 of the gross pay or defined by the company policy)

Other Remuneration includes:Leave payPayment in lieu of leavesBonus commissionFees GratuityWork condition supplementsAny perquisite whether convertible to money or not

4.1 Salary Laws by Income Tax Ordinance, 2001According to Section 12(2) salary includes following:Allowances includes:Cost of livingSubsistenceRent UtilitiesEducationEntertainmentTravel allowance except that are solely incurred for performance of employees duties of employment.

4.1 Salary Laws by Income Tax Ordinance, 2001According to Section 12 salary includes following:Reimbursement includes:The amount of any expenditure incurred by an employee that is paid or reimbursed by the employer but these expenditure are other than expenditure incurred on behalf of employer in the performance of employees duties of performance.

4.1 Salary Laws by Income Tax Ordinance, 2001According to Section 12 salary includes following:Amount other than salary received for: for entering into employment relationship, for condition to employment or change to employees condition for employment e.g. change in working hours or relocation, for termination of employment e.g. golden handshake, from provident or other fund for which employee is not entitled for deduction, e.g. interest on PF, restrictive covenant in respect of any past, present or prospective employment, e.g. not to join previous employer for two years,

4.1 Salary Laws by Income Tax Ordinance, 2001According to Section 12 salary includes following:Amount other than salary received for: for termination of employment e.g. golden handshake,Calculated as per following formulaA/B%WHERE;A is tax amount in the preceding tax year, andB is taxable amount in the preceding tax year.

Refer calculation.

4.1 Salary Laws by Income Tax Ordinance, 2001According to Section 12 salary includes following:tax amount which is paid by the employer in order to benefit employee is also added to the employees taxable salary,

Refer Calculation.

5.0 VALUE OF PERQUISITES

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Motor vehiclesa motor vehicle is provided by an employer to an employee wholly or partly for the private use of the employee, the amount chargeable to tax to the employee under the head Salary for that year shall include an amount computed asFully personal use 10% of the cost,Partially personal and partly official use 5%Fully office use 0%

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following: Housekeeper, driver, gardener or other domestic assistant:Where, in a tax year, the services of a housekeeper, driver, gardener or other domestic assistant is provided by an employer to an employee, the amount chargeable to tax to the employee under the head Salary for that year shall include the total salary paid to house keeper, driver, gardener or other domestic assistant in that year for services rendered to the employee, as reduced by any payment made to the employer by employee for such services.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following: Utilities:Where, in a tax year, the services of a housekeeper, driver, gardener or other domestic assistant is provided by an employer to an employee, the amount chargeable to tax to the employee under the head Salary for that year shall include the total salary paid to house keeper, driver, gardener or other domestic assistant in that year for services rendered to the employee, as reduced by any payment made to the employer by employee for such services.

Utilities include Electricity, gas, water and telephone.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Loan:If loan is given to employees at a rate lower than benchmark rate than the differential mark up if loan is given on benchmark rate shall be added to taxable salary of the employee.

Benchmark Rate is defined by income tax ordinance, 2001 and it is 10% for the current tax year.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Loan:If loan is given to employees at a rate lower than benchmark rate than the differential mark up if loan is given on benchmark rate shall be added to taxable salary of the employee. (Loan should not exceed Rs. 500,000)

Benchmark Rate is defined by income tax ordinance, 2001 and it is 10% for the current tax year.

Provided if the above said loan is used wholly or partly for any asset or property generating income that the mark up will not be added to taxable salary income.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Waiver:If employees is liable to pay any amount to the employer is waived than such amount is also added to taxable salary.

Owed amount paid by employer:If employees is liable to pay any amount to third person that is paid by the employer, than such amount is also added to taxable salary.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Transfer of Property or services provided by the employer:If any is transferred in the name of employee by employer than the fair market value of the property or service will be added to taxable salary of the employee.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Accommodation:If any accommodation is provided to employee by employer such amount will also be added employees taxable salary.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Any other perquisite:If any other perquisite as not mentioned, than the fair market value of such perquisite will be added to the taxable salary of the employee.

5.1 Salary Laws by Income Tax Ordinance, 2001 (Value of perquisites)According to Section 13 perquisites includes following:Any other perquisite:If any other perquisite as not mentioned, than the fair market value of such perquisite will be added to the taxable salary of the employee.

6.0 EMPLOYEE SHARE SCHEME

6.1 Employee Share SchemeAccording to Section 14

If any share of the bank is issued to an employee at value lesser than its fair value than the differential is liable to be taxed but if it is allowed to disposed it off at that time, and if it is restricted to be disposed on some future date than it will taxable on that future date.

7.0 TAX RATE SLAB FOR SALARY 2016

Current Tax Rates TY 2016S.No.Taxable IncomeRate of tax1Where the taxable income does not exceed Rs.400,0000%2Where the taxable income exceeds Rs.400,000 but does not exceed Rs.500,0002% of the amount exceeding Rs.400,0003Where the taxable income exceeds Rs.500,000 but does not exceed Rs.750,000Rs. 2000 + 5% of the amount exceeding Rs.500,0004Where the taxable income exceeds Rs.750,000 but does not exceed Rs.1,400,000Rs.14,500 + 10% of the amount exceeding Rs.750,0005Where the taxable income exceeds Rs.1,400,000 but does not exceed Rs.1,500,000Rs. 79,500 + 12.5% of the amount exceeding Rs.1,400,0006Where the taxable income exceeds Rs.1,500,000 but does not exceed Rs.1,800,000Rs. 92,000 + 15% of the amount exceeding Rs.1,500,000

S.No.Taxable IncomeRate of tax7Where the taxable income exceeds Rs.1,800,000 but does not exceed Rs.2,500,000Rs.137,000 + 17.5% of the amount exceeding Rs.1,800,0008Where the taxable income exceeds Rs.2,500,000 but does not exceed Rs.3,000,000Rs. 259,500 + 20% of the amount exceeding Rs.2,500,0009Where the taxable income exceeds Rs.3,000,000 but does not exceed Rs.3,500,000 Rs. 359,500 + 22.5% of the amount exceeding Rs.3,000,00010Where the taxable income exceeds Rs.3,500,000 but does not exceed Rs.4,000,000Rs.472,000 + 25% of the amount exceeding Rs.3,500,00011Where the taxable income exceeds Rs.4,000,000 but does not exceed Rs.7,000,000Rs.597,000 + 27.5% of the amount exceeding Rs.4,000,00012Where the taxable income exceeds Rs.7,000,000Rs.1,422,000 + 30% of the amount exceeding Rs.7,000,000]

Current Tax Rates TY 2016

7.1 Reduced Tax RatesAccording to second schedule of the Income Tax Ordinance, 2001

7.2 Calculation of Taxable SalaryCase Study on excel sheet according to Income Tax Ordinance, 2001 and Income Tax Rules, 2002

8.0 TAX CREDIT

8.1 Tax CreditsSalaried person is allowed a tax credit for following:

For donationsFor investment in shares and insurance For Contribution to an Approved Pension Fund

8.1.1 Formula and guidelines for calculation of tax creditsExcel Sheet attached.

8.0 TAX ADJUSTMENT

8.1 Tax AdjustmentsAdjustable taxes that deducted at sources or withheld by the withholding agent are available to be adjusted against the tax liability on salary income. For example:Adjustable taxes on bank profits, any service income, any interest income, on vehicle registration, taxes on electricity or telephone mobile phone bills or on internet bills payments.

9.0 OTHER WITHOLDING TAXES

9.1 Other Withholding Taxes as per Income Tax Ordinance, 2001Document Provided including list of withholding taxes their rates (filer and non-filer) and their rules.

9.2 Withholding Tax paymentA tax deducted or collected at source, especially one levied by some countries on interest or dividends paid to a person resident outside that country.In Pakistan withholding tax is levied by Federal Board of Revenue on Salaries, dividend, profit on debt, commission, payment for contract, payment for goods or services, advertising and others.

9.3 Withholding Tax on SalariesAccording to Section 149 of the income tax ordinance, 2001, every person acting as a withholding agent making payment of salary at the time of payment shall deduct tax at the rate prescribed in the ordinance.The amount deducted shall be deposited in the Government Treasury within fifteen (15) days by the withholding agent.

9.4 Withholding AgentDefinition:

A person required by law to deduct or collect tax for tax authorities and than deposit such amount in Government Treasury within specified time period.

9.5 Withholding Tax PaymentTo generate PSID on FBR PortalSeparate guidance manual.

9.6 Withholding tax statementsAnnually u/s 165 of the Income Tax Ordinance, 2001Format In excel workbook

9.7 Withholding Tax CertificatePrescribed Format as per Income Tax RulesAnnexure 2

10.0 FINAL SETTLEMENT

10.1 Final SettlementNotice period salaryProvident fundGratuity fund paymentInterest on Provident fund payment if applicableLeave encashmentAssets if given to employees e.g Car, mobile etc

10.2 Provident FundAlready discussed above.

10.3 Gratuity FundGratuity fund:Gratuity fund payment is exempt from tax if it is approved.If it is unapproved than amount above Rs.200,000 is taxable.

Relief:Only relief available is that it may be taxed on the average tax rate of preceding three year if permitted by income tax commissioner.

11.0 PAYROLL SYSTEM AND MANAGEMENT

11.1 Payroll Preparation and ManagementPayroll preparation is supposed to be a highly confidential process and its document and information required to be keep confidential.It involves primarily HR and finance department and secondarily head of each department.

11.2 Elements of payroll systemCharacteristics of populationNumber of employeesNature of employment Permanent Temporary Contractual Third party relationship

11.2 Elements of payroll systemGross salaries of the employees Basic Salaries Allowances Deductions (Taxes, unpaid leaves, EOBI and others) Other remuneration.

11.2 Elements of payroll systemEmployees involve in payroll preparation, their designation, their remuneration and other facilities available to them.Accounting systems used for payroll preparation and data management.Approval and authorization of payroll.Payment of salaries to employees.

12.0 INTERNAL CONTROL OVER PAYROLL

12.1 Internal Controls over payroll managementFive Element of internal control:The control environmentRisk Assessment ProcessThe information system Control ActivitiesMonitoring of controls

12.2 Internal ControlsGeneral payroll controlsAudit. Have either internal or external auditors conduct a periodic audit of the payroll function to verify whether payroll payments are being calculated correctly, employees being paid are still working for the company, time records are being accumulated properly, and so forth.

12.2 Internal ControlsGeneral payroll controlsChange authorizations. Only allow a change to an employees marital status, withholding allowances, or deductions if the employee has submitted a written and signed request for the company to do so. Otherwise, there is no proof that the employee wanted a change to be made. The same control applies for any pay rate changes requested by a manager.

12.2 Internal ControlsGeneral payroll controlsChange tracking log.If you are processing payroll in-house with a computerized payroll module, activate the change tracking log and make sure that access to it is only available through a password-protected interface. This log will track all changes made to the payroll system, which is very useful for tracking down erroneous or fraudulent entries.

12.2 Internal ControlsGeneral payroll controlsError-checking reports. Some types of payroll errors can be spotted by running reports that only show items that fall outside of the normal distribution of payroll results. These may not all indicate certain errors, but the probability of underlying errors is higher for the reported items. The payroll manager or a third party not involved in payroll activities should run and review these reports.

12.2 Internal ControlsGeneral payroll controlsExpense trend lines. Look for fluctuations in payroll-related expenses in the financial statements, and then investigate the reasons for the fluctuations.

12.2 Internal ControlsGeneral payroll controlsIssue payment report to supervisors. Send a list of payments to employees to each department supervisor, with a request to review it for correct payment amounts and unfamiliar names. They may identify payments being made to employees who no longer work for the company.

12.2 Internal ControlsGeneral payroll controlsRestrict access to records. Lock up employee files and payroll records at all times when they are not in use, to prevent unauthorized access. Use password protection if these records are stored on line. This precaution is not just to keep someone from accessing the records of another employee, but also to prevent unauthorized changes to records (such as a pay rate).

12.2 Internal ControlsGeneral payroll controlsSeparation of duties. Have one person prepare the payroll, another authorize it, and another create payments, thereby reducing the risk of fraud unless multiple people collude in doing so. In smaller companies where there are not enough personnel for a proper separation of duties, at least insist on having someone review and authorize the payroll before payments are sent to employees.

12.2 Internal ControlsPayroll Calculation ControlsAutomated timekeeping systems. Depending on the circumstances, consider installing a computerized time clock. These clocks have a number of built-in controls, such as only allowing employees to clock in or out for their designated shifts, not allowing overtime without a supervisory override, and (for biometric clocks) eliminating the risk of buddy punching. Also, you should send any exception reports generated by these clocks to supervisors for review.

12.2 Internal ControlsPayroll Calculation ControlsCalculation verification. If you are manually calculating payroll, then have a second person verify all calculations, including hours worked, pay rates used, tax deductions, and withholdings. A second person is more likely to conduct a careful examination than the person who originated the calculations.

12.2 Internal ControlsPayroll Calculation ControlsHours worked verification. Always have a supervisor approve hours worked by employees, to prevent employees from charging more time than they actually worked.

12.2 Internal ControlsPayroll Calculation ControlsMatch payroll register to supporting documents. The payroll register shows gross wages, deductions, and net pay, and so is a good summary document from which to trace back to the supporting documents for verification purposes.

12.2 Internal ControlsPayroll Calculation ControlsMatch timecards to employee list. There is a considerable risk that an employee will not turn in a timesheet in a timely manner, and so will not be paid. To avoid this problem, print a list of active employees at the beginning of payroll processing, and check off the names on the list when you receive their timesheets.

12.2 Internal ControlsPayroll Calculation ControlsOvertime worked verification. Even if you do not require supervisors to approve the hours worked by employees, at least have supervisors approve overtime hours worked. There is a pay premium associated with these hours, so the cost to the company is higher, as is the temptation for employees to claim them.

12.2 Internal ControlsPayroll Calculation ControlsPay change approval. Consider requiring not just one approval signature for an employee pay change, but two signatures one by the employees supervisor, and another by the next-higher level of supervisor. Doing so reduces the risk of collusion in altering pay rates.

12.2 Internal ControlsPayroll Payment ControlsUpdate signature authorizations.When check signers leave the company, remove them from the authorized check signer list and forward this information to the bank. Otherwise, they could still sign company checks.

12.2 Internal ControlsPayroll Payment ControlsHand checks to employees. Where possible, hand checks directly to employees. Doing so prevents a type of fraud where a payroll clerk creates a check for a ghost employee, and pockets the check. If this is too inefficient a control, consider distributing checks manually on an occasional basis.

12.2 Internal ControlsPayroll Payment ControlsLock up undistributed paychecks. If you are issuing paychecks directly to employees and someone is not present, then lock up their check in a secure location. Such a check might otherwise be stolen and cashed.

12.2 Internal ControlsPayroll Payment ControlsMatch addresses. If the company mails checks to its employees, match the addresses on the checks to employee addresses. If more than one check is going to the same address, it may be because a payroll clerk is routing illicit payments for fake employees to his or her address.

12.2 Internal ControlsPayroll Payment ControlsPayroll checking account. You should pay employees from a separate checking account, and fund this account only in the amount of the checks paid out. Doing so prevents someone from fraudulently increasing the amount on an existing paycheck or creating an entirely new one, since the funds in the account will not be sufficient to pay for the altered check.

13.0 RISK INVOLVED

13.1 Risk in payroll preparationDuplication of employees.Salary paid after termination of employment.Doubling of salary payment.Dummy employees.Excess or short payment.Excess or short deductions.Wrong bank account details of the employee.Not duly approved or authorized.Segregation of duties not followed.

14.0 RECORD

14.1 Record RetentionFor the period of 10 years

15.0 Managing Increment, Deduction and Approvals

15.1 IncrementsTypes of increments

Merit IncreasePromotionsMarket AdjustmentOne time IncentivePay for performanceCompetitive positioning

15.2 Changes that justify incrementsAn employee's characteristics change in a way that affects his/her market priceThe market price for the employee's skills has changedThe value of the employee's work to the company has changed

16.0 PAYROLL SCHEDULES

16.1 Preparing Payroll SchedulesSchedule attached in excel sheet.

17.0 ENTRIES FOR RECORDING

17.1 Recording of payrollBasic general entries

DateAccount CodesParticularsDebitCredit29-Feb-161122Salaries Expense xxx2211Salaries payablexxx1221EOBI payablexxx2112Income Tax payablexxxTotalxxxxxxTo Record Salaries Expense for the period ended

17.2 Recording of payrollBasic general entries

DateAccount CodesParticularsDebitCredit29-Feb-162211Salaries payablexxx2112EOBI payablexxx2112Income Tax payablexxx2222BankxxxTotalxxxxxxTo Record Salaries Payment for the period ended

17.3 Year End adjustmentDateAccount CodesParticularsDebitCredit30-Jun-163333Profit and Loss Accountxxx1122Salaries Expense xxxTotalXxxxxxTo Record Salaries Expense closing entry

QUESTIONS AND ANSWERS

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