Salary And Payroll
Salary is a fixed amount of money or compensation paid to an employee by an employer in return for the work performed .
Payroll is the administration of financial records of employees' salaries, wages, bonuses, net pay, and deductions.
To process Payroll in ERPNext,
- Create Salary Structures for all Employees.
- Generate Salary Slips via Process Payroll.
- Book the Salary in your Accounts.
The Salary Structure represents how Salaries are calculated based on Earnings and Deductions.
Salary structures are used to help organizations: 1. Maintain pay levels that are competitive with the external labor market, 2. Maintain internal pay relationships among jobs, 3. Recognize and reward differences in the level of responsibility, skill, and performance, and manage pay expenditures.
The usual components of the salary structure (in India) include:
Basic Salary: It is the taxable base income and generally not more than 40% of CTC.
House Rent Allowance: The HRA constitutes 40 to 50% of the basic salary.
Special Allowances: Makes up for the remainder part of the salary, mostly smaller than the basic salary which is completely taxable.
Leave Travel Allowance: The non-taxable amount paid by the employer to the employee for vacation/trips with family within India.
Gratuity: It is basically a lump sum amount paid by the employer when the employee resigns from the organization or retires.
PF: Fund collected during emergency or old age. 12% of the basic salary is automatically deducted and goes to the employee provident fund.
Medical Allowance: The employer pays the employee for the medical expenditures incurred. It is tax-free up to Rs.15,000.
Bonus: Taxable part of the CTC, usually a once a year lump sum amount, given to the employee based on the individual’s as well as the organizational performance for the year.
Employee Stock Options: ESOPS are Free/discounted shares given by the company to the employees. This is done to primarily increase employee retention.
To create a new Salary Structure go to:
Human Resources > Setup > Salary Structure > New Salary Structure
Figure 1.1:Salary Structure
In the Salary Structure,
- Select the Employees and enter Base (which is base salary or CTC) and Variable (if applicable)
- Set the starting date from which this is valid (Note: There can only be one Salary Structure that can be “Active” for an Employee during any period)
Figure 1.2:Salary Structure for Salary Slip based on Timesheet
Salary Slip Based on Timesheet
Salary Slip based on Timesheet is applicable if you have timesheet based payroll system
- Check "Salary Slip Based on Timesheet"
- Select the salary component and enter Hour Rate (Note: This salary component gets added to earnings in Salary Slip)
Earnings and Deductions in Salary Structure
In the “Earnings” and “Deductions” tables, you can calculate the values of Salary Components based on,
- Condition and Formula
Figure 1.3:Condition and Formula
- Condition and Amount
Figure 1.4:Condition and Amount
- Only Formula
- Only Amount
Figure 1.5:Account Details
- Select Mode of Payment and Payment Account for the Salary Slips which will be generated using this Salary Structure
Save the Salary Structure.
In conditions and formulas,
- Use field "base" for using base salary of the Employee
- Use Salary Component abbreviations. For example: BS for Basic Salary
- Use field name for employee details. For example: Employment Type for employment_type
Leave Without Pay (LWP)
Leave Without Pay (LWP) happens when an Employee runs out of allocated leaves or takes a leave without an approval (via Leave Application). If you want ERPNext to automatically deduct salary in case of LWP, then you must check on the “Apply LWP” column in the Earning Type and Deduction Type masters. The amount of pay cut is the proportion of LWP days divided by the total working days for the month (based on the Holiday List).
If you don’t want ERPNext to manage LWP, just don’t click on LWP in any of the Earning Types and Deduction Types.
Creating Salary Slips
Once the Salary Structure is created, you can make a salary slip from the same form or you can process your payroll for the month using Process Payroll.
To create a new Salary Slip go to:
Human Resources > Setup > Salary Slip > New Salary Slip
Figure 2: Salary Slip
You can also create salary slip for multiple employees using Process Payroll:
Human Resources > Process Payroll
Figure 3: Process Payroll
In Process Payroll,
- Select the Company for which you want to create the Salary Slips.
- Check "Salary Slip based on Timesheet" if you want to process timesheet based Salary Slips.
- Select the From Date and To Date or Fiscal year and month for which you want to create the Salary Slips.
- Select the Payment Account.
- Click on “Create Salary Slips”. This will create Salary Slip records for each active Employee for the time period selected. If the Salary Slips are created, the system will not create any more Salary Slips. All updates will be shown in the “Activity Log” section.
- Once all Salary Slips are created, you can check if they are created correctly or edit it if you want to deduct Leave Without Pay (LWP).
- After checking, you can “Submit” them all together by clicking on “Submit Salary Slips”. 1. If you want them to be automatically emailed to the Employee, make sure to check the “Send Email” box.
Booking Salaries in Accounts
The final step is to book the Salaries in your Accounts.
Salaries in businesses are usually dealt with extreme privacy. In most cases, the companies issues a single payment to the bank combining all salaries and the bank distributes the salaries to each employee’s salary account. This way there is only one payment entry in the company’s books of accounts and anyone with access to the company’s accounts will not have access to the individual salaries.
The salary payment entry is a Journal Entry that debits the total of the earning type salary component and credits the total of deduction type salary component of all Employees to the default account set at Salary Component level for each component.
To generate your salary payment voucher from Process Payroll, click on “Make Bank Entry”. It will ask to enter the Bank Transaction Reference Number and date. Click on "Make" and a new Journal Entry with the total salary components will be created.
Figure 3.1: Make Bank Entry