Payroll processing is a crucial task for any organization – be it big or small. Year-end payroll processing is a procedure of calculating salaries, taxes, deductions for the year for each employee to ensure compliance with all the statutory requirements. It requires collaboration between the human resources team and the accounting team to share employee data while the latter performs all the necessary calculations.
The accounting departments and HR departments of an entity conduct the year-end payroll processing at the end of the financial year. For some countries, the financial year ends in March, some follow June-end, for some, it is September-end, while some follow the same financial year as the calendar year. The basics of year-end payroll processing do not differ much from one country to another, except compliance with some specific procedures and rules. These are the times when the accounting teams and HR teams are busy completing and processing payroll successfully.
We understand it is a stressful time for all the businesses since they try to finalize one last deal for the year, get at least one more customer on board, create one last marketing strategy, finish all the accounting, and make one last effort increasing sales. However, payroll preparation is also a part of this list, which requires you to put in a little extra effort to avoid troubles in the next year.
There are some best practices for you to adopt to comply with the year-end payroll processing requirements accurately, completely, and quickly. If these are followed sincerely, the possibilities of payroll mistakes reduce, thereby ensuring full compliance. If not followed, it may lead to mistakes that result in resentful employees, additional work for accounting teams, and penalties for non-compliance. Therefore, have a payroll checklist ready for the year-end payroll procedures.
Here are the best practices to enable you to ensure accurate year-end processed payroll:
Start the year-end payroll processing in the last quarter of the financial year
You must prepare for completing all the steps of payroll processing successfully. For this, you must create a payroll checklist and allocate some deadlines for each point. This gives you a goal for each day or each week so that each task is completed on time, and no delay happens in the overall payroll processing.
Pre-preparation for payroll processing also requires you to ensure that your employees have submitted the investment declarations to help them save money from taxes. You must collect the proofs of each employee’s investment declarations to match and validate with your employee records of declared investments.
Update the employee records to avoid any errors in payroll processing
organization regarding any changes. Review, make or edit the changes in the relevant records in the employer-generated system or government website.
Employers must be very sure of updating all the employees’ records in your payroll processing software – be it freelancers, independent contractors, part-time employees, temporary employees, or any other arrangement. If you miss any of these, it may affect your tax calculations, leading to non-compliance with payroll processing requirements and penalties.
To ensure that your employee database is accurate and updated, one best practice that you can adopt is to integrate your HR and payroll systems. This will ensure no duplicate data entries, reduces the possibilities of human errors, the information remains updated, and payroll processing is completed on time.
Verify your organizational information in government records as a part of payroll procedures
The organization must verify the organizational records with the country’s government website or relevant income tax departments. You must verify your business registration numbers, tax identification numbers, and other relevant numbers that verify your status as an employer in that country. For each country, these identification documents vary and are different in number.
Keep yourself updated about any latest changes in tax rates, contribution amounts, or any other factor that may affect payroll processing
There are many topics to take care of while managing the year-end payroll processing of employees. Employers must be sure of the actual limits, rates, or amounts for each of these topics, as they may change every year. For example, employers must be updated regarding the minimum wages, different tax rates for different ranges of salaries, employer and employee contribution amounts for employee benefit plans, professional tax range, and other details that affect the calculation of final payroll. Whenever the government announces a change along with the effective date, employers must make the changes immediately to avoid any errors.
Balance and reconcile the payroll processing accounts for final payroll preparation
Check for all the benefits accrued to the employees in your organization. For example, if you provide a health insurance plan to your employees as part of your employment, you must add new employees to the plan and remove the plan’s ex-employees. Review the monthly or yearly deductions from their salaries or any other adjustments required from your end.
You must check for outstanding payroll entries in the form of manual cheques or deposits, or cash payments made in the current calendar year. Also, you must review any cancelled paycheques or cancelled payroll journals for this year. Furthermore, ensure to include the outstanding payroll entries and exclude the cancelled transactions from the tax calculations.
Review the sick leaves or personal leaves of employees to account for them in the payroll processing software. Check for any carry-over, resetting, or accrual of official holidays as per the organization’s policies. Besides, also review the overtime of employees and account for the overtime calculations. These calculations must be accounted for in the last processed payroll.
Another factor that needs an assessment in payroll processing is contributions or premiums that employers pay and/or deduct from employees’ accounts for any government-specific benefits. You must review these contributions to identify any discrepancies and make the necessary corrections to adjust the final payment correctly.
One last step is to check if the employee is eligible for any extra monetary benefits that are to be accounted for in his/her payroll processing. These benefits may include using a company vehicle, company-provided transportation expenses or parking expenses, reimbursements for moving expenses, allowances or expense reimbursements for business travel, employer-sponsored education fees, and any bonus payments, and others. You must be sure to check if these benefits are taxable or non-taxable, depending on the country’s tax laws. All these points must be kept in mind to balance and reconcile the payroll processing accounts accurately without any errors.
Process the final payroll for the year
Since you have balanced and reconciled all the accounts, submit the finalized payrolls before the deadline date. Verify all the important information such as names, contact details, salaries, deductions, bonus amounts, and other data for the last payroll of the year to avoid any penalties or interest charges. Ensure that the related tax payments are made on time so that the year’s payroll processing is completed entirely.
Prepare the annual report to be submitted to the income tax authority and any other authority
manage and administer the employee benefits for your organization. For example, the insurance company that manages your employees’ insurance benefits may require annual reporting from you to be aware of the insurance-related premiums collected and claims paid. Furthermore, add these payroll expenses to the annual financial statements, which are mandatory submissions to the government. Make the required adjustments and prepare the final report.
Distribute the year-end tax certificates to employees
The employers must prepare and submit the year-end tax certificates to the employees to ensure the filing of IT returns on time. Along with the year-end tax certificates, employers must submit the salary slips to employees every month for their record so that they are aware of the deductions, taxes, and contributions.
Archive the old payroll processing records in the payroll software and start the new year payroll processing in it
Once the payroll processing for the current year is complete, and there are no notices from the government authority regarding any non-compliance, it means your processed payroll is complete and accurate. Now, you can archive these records in the currently-used payroll software so that you can check them when required. You can also start the new year in the payroll processing software.
Finally, evaluate your process to identify the best practices of payroll processing
Once the year-end payroll processing is complete, employers must evaluate the process they followed to complete it on time with no errors. They must explore what process steps went smoothly, which were not so smooth and can be improved further, and what new systems or solutions can be adopted to make the payroll processing more efficient and effective.
Companies must follow all the above-mentioned best practices to ensure a complete processed payroll at the end of the year. This leads to relief to employees as well as to the employers since the necessary compliance is achieved. If the payroll processing is not accurate or complete or submitted within deadlines, employers may be penalized or charged some fine amounts. Some of the cases in which employees can be subject to penalties are as follows:
- Employers fail to submit the tax returns before the deadlines
- Employers submit the inaccurate payroll details in their annual reports for the IT authority or any other authority
- Employers fail to update the correct details of employees in the employee records
- Employers fail to contribute to the insurance plan or other benefits that they offer to the employees as a part of employment
Therefore, it is good to make a payroll checklist before initiating the year-end payroll processing and abide by it sincerely to avoid any errors, inaccuracies, or missing of steps.