Payroll compliance guide

Payroll tax compliance

Ensuring payroll tax compliance in India can be challenging due to the wide range of relevant regulations, including the Income Tax Act, Provident Fund laws also state & local Municipal laws. Here are eight steps to help your company ensure payroll compliance:

1. Register as an employer: if you hire one or more employees, you need to register with the relevant authorities, such as the Employee Provident Fund Organisation (EPFO) and the Employees’ State Insurance Corporation (ESIC).
2. Establish a reliable payroll system: implement a payroll system that calculates wages, deductions and contributions correctly based on Indian labour laws.
3. Determine the employment status of workers: assess whether workers are classified as employees or independent contractors, as this affects tax and compliance obligations.
4. Deduct and report taxes: withhold appropriate taxes such as Income Tax under the Tax Deducted at Source (TDS) and send them to the government before any deadlines.
5. Ensure payroll compliance: follow the provisions of labour laws, such as The Payment of Wages Act, The Minimum Wages Act, Employees’ Provident Fund & Miscellaneous Provisions Act, Employees’ State Insurance Act and state specified professional tax to maintain compliance.
6. Maintain accurate records: keep precise records of employee details, payroll transactions and tax filings for auditing and compliance purposes.
7. File statutory returns: submit any necessary filings such as TDS returns, EPF returns and ESIC returns and Professional tax returns within the stipulated deadlines.
8. Stay up to date with legislative changes: regularly review updates to labour laws and tax regulations to make sure your company complies with any changes.

Importance of payroll compliance

Payroll compliance has wide-ranging implications for companies of all sizes. From avoiding penalties and preserving your company’s reputation to building trust with employees and making sure your business runs smoothly — adhering to payroll regulations is critical to your company’s success.

Legal obligations

Complying with payroll regulations isn’t just a good practice; it’s a legal requirement. Employers are responsible for following the laws set by the central and state governments. Failing to meet these legal obligations can have severe consequences, including hefty fines and even severe legal action.

In some cases, non-compliance can lead to investigations by government authorities, which can disrupt normal business and draw resources away from core activities. What’s more, payroll compliance helps you avoid losing any government benefits, incentives or subsidies.

Employee satisfaction

Processing payroll accurately and on time keeps employees happy and motivated because staff rely on this money to support their families. When payroll runs smoothly, employees trust your company more because you’re showing them that you value their rights and well-being.

On the other hand, payroll errors can lead to a lot of frustration. Mistakes like underpayment and delayed payslips can cast doubts over your company’s reliability and reputation. Over time, these issues can erode employee morale, leading to lower productivity and higher staff turnover.

Financial stability

Maintaining payroll compliance helps you avoid unexpected costs, such as fines and penalties, which can be particularly damaging for small businesses. Similarly, payroll compliance prevents potential issues with tax authorities and helps you keep a clear picture of your company’s finances.

Compliance can actually save you money in the long run because you’re less likely to face costly legal disputes or audits. In addition, if you pay your employees the right amounts at the right time, they’re more likely to stay with your company, reducing the costs associated with higher turnover.

How to avoid payroll compliance mistakes

Investing in the right tools is essential to avoiding payroll compliance mistakes. That’s why 67% of Indian companies are now using payroll software² to manage their payroll. It not only automates key tasks like tax calculations but also keeps businesses up to date with any changes in payroll laws.

In simple terms, payroll software makes it easy to process payroll accurately, maintain compliance with payroll taxes and adapt to changing payroll legislation. The right payroll solution ultimately helps you stay compliant, avoid penalties and ensure your employees are paid correctly and on time.

1 The Economic Times, India – The government is estimated to have earned up to Rs 627 crore from late ITR filing fees till August 22, 2024
2 Deloitte India Human Capital Trends Report 2024