One of the first things to do when starting a company is to hire employees to help you with your operations. From the first day they join, it is your responsibility to follow all legal regulations related to their salaries, EPF, ETF, and taxes. However, most business owners do not know the correct process to follow and risk ending up with fines and penalties.
This article covers everything you need to know about payroll management, preparing monthly salaries, preparation of monthly payroll reports, making EPF and ETF payments, and the current regulations. This will help you avoid legal complications and penalties and make sure you keep your employees satisfied with how their salaries are managed.
What are the types of payments and deductions found in salary slips?
In Sri Lanka, companies use different structures when calculating the salaries of employees. Some use a simple salary structure with the total amount of earnings counting as the basic salary. While others use a tiered structure with elements such as a basic salary, benefits, allowances, overtime, and other incentives being part of a standard salary of an employee.
Basic salary – This is the main part of an employee’s salary. Usually, this amount is a set amount that does not change over time unless there is a promotion or salary increase.
Allowances – A form of payments paid at the discretion of the company or to contribute towards the expenses of an employee. It is typically negotiated into the employment contract. Some common types of allowances include vehicle allowances, housing allowances, or travel allowances.
Overtime pay – In Sri Lanka, overtime pay is governed by the law which sets the overtime pay rate at 1.5 times the amount of hourly wage.
For example, if you have an employee who earns 300 LKR hourly, for every hour they work overtime, you will have to pay them 450 LKR. Some companies have set limits on how many hours an employee could work overtime for a month.
Salary advances – This allows employees to request a portion of their next month’s salary from the employer. It is up to the company to provide such advances with many companies having strict policies around these types of payments.
Commissions and reimbursements – Commissions are incentives given to employees to reward and motivate them. This could be in the form of payment when a certain threshold is met, or it can be a percentage for every customer an employee brings in. For example, in job roles such as sales, commissions could make up a large portion of the salary.
Reimbursements are paid by companies when employees have to bear expenses when carrying out company duties. For example, if an employee has to bear travel costs to attend a meeting, companies would provide reimbursements for them.
Other deductibles and taxes – There are several deductibles every employee will be subject to in Sri Lanka. These include EPF, ETF deduction, and taxes such as Advanced Personal Income Tax or PAYE taxes where applicable.
Deduction for no-pay leave – Employees can request to take non-paid leave when they do not have remaining leave or due to unique circumstances. Normally, the company will deduct the daily salary for the total number of days of no-pay leave taken by the employee.
What does a payslip look like?
An employee salary slip consists of several pieces of information. This includes:
The name of the company
The full name of the employee
Employee number (This is also the EPF number)
NIC number of the employee (optional)
A complete breakdown of the salary including basic salary, any allowances, any deduction, and taxes (no pay, salary advances, EPF deductions, PAYE/APIT)
The net salary
EPF and ETF contributions made by the employee and the employer
Signature of the employee certifying the payment
The below format can be used as a standard payslip for your company.
Sample Payslip and Summary of EPF ETF
How to calculate the salary of an employee and no-pay deductions?
To calculate the monthly salary, you need to firstly add in all types of payments an employee is due for a month. After calculating the total amount that is due, you can then subtract any deductions such as PAYE, EPF, ETF, salary advances, and no-pay leaves.
When calculating no-pay leaves, you need to keep in mind that every employee has an allocated number of leaves including sick or casual leaves, annual leaves, paid holidays, or even maternity leave. An employee may request for no-pay leave when it is a special circumstance or they no longer have leaves left for the month. For example, if an employee wants to visit a relative who is sick, and they’ve already taken all the possible casual leaves, he or she can apply for a no-pay leave from the company. When no-pay leave is requested by an employee it is up to the company to either approve or reject it.
The amount that you can deduct as no-pay leave depends on how you calculate the salary in your company. In Sri Lanka, most companies tend to calculate the amount of salary based on the number of working days in a month, often set at 22. While some companies calculate based on a 30 day time period. Let’s look at two examples to understand the difference.
Sarath is an employee of company A with a total salary of LKR 30,000, and he has taken four days of no-pay leave.
His company uses a 30 day salary period, and as such his daily wage would be LKR 1,000. (LKR 30,000/30).
When paying the salary, the company would deduct the payment for the two days he has not worked (LKR 1,000 X 4 = 4000) and pay a total amount of LKR 26,000.
Nimal is an employee working at company B, with a total salary of LKR 30,000. He has been absent from work for four days during the month.
Company B uses a 22 day salary period, and as such his daily salary is LKR 1,363.63 (LKR 30,000/22).
Therefore, company B will be able to deduct LKR 5,454.52 (1363.63×4) from the salary of Nimal for this month and pay him LKR 24,545.24.
Compared to Company A, which can only deduct LKR 4,000, company B can deduct LKR 5,454.52 from the salary of their employee as a result of using the 22 day period.
Although the difference is not much when you consider a single employee, the amount can add up when you have multiple employees. This allows the company to save more when employees are taking no pay leaves. This also discourages employees from applying for many no pay leaves, as the financial impact on the employee would be higher when it is calculated using this method.
How to prepare payroll reports?
The payroll report is a document that has the payroll information of all the employees in a company. Government rules and regulations require these payroll reports to be maintained properly by the company and be available for audits or requests by government agencies.
When making payroll reports, the salaries of employees should be reported the same way as they were described in the individual payslips. If you have divided the salary into basic and allowances in the payslips, they need to be displayed the same way in the payroll reports. If you have represented these numbers or payment types differently and they are discovered by the relevant authorities, you may risk attracting penalties, fines, or even other legal action being taken against you.
For EPF, an employer is required to remit an amount equal to 20% of the employee’s total earnings to the employee Provident Fund. The employee contributes 8% while the employer has to contribute 12% of the total amount.
For ETF, employers are required by law to remit 3% of the total earnings of the employee on a monthly basis.
The below types of payments are included for total earnings when calculating EPF and ETF payments.
Salary, wages, or fees
Cost of living allowance
Food allowance and other similar allowances
The cash value of food provided by the employer
The payment for working during regular working hours on weekly holidays, Poya days, or public holidays
You should not include any overtime payments when calculating the total earnings for EPF and ETF.
Employers must pay both EPF and ETF before the last working day of the following month to the relevant departments of the Central Bank.
All employees (permanent, temporary, or contract basis) are eligible for membership of Employee Trust Fund and Employee Provident Fund from the first day of their employment. It is the responsibility of the employer to make sure all employees are registered.
What are the common problems faced by companies managing payroll in-house?
Many companies in Sri Lanka use an in-house team to manage payroll. However, this can lead to many disadvantages for the company.
The cost of hiring specialized talent or training talent internally will be high – You may be able to invest in training the existing employees you have or choose to hire people who are qualified, experienced, and up to date with the payroll regulations and practices. However, both these options will come at a cost either in training and time or paying a premium for specialized talent.
Lack of specialized talent leads to more errors when handling payroll – When managing payroll in-house, it can be challenging to assign tasks to employees with relevant experience. Due to this, they learn on the job while completing their existing duties.
This may lead to an increase in errors such as inaccurate calculation of employee salaries and deductions of EPF and ETF, paying the wrong amount of taxes or deductions to government agencies. This will result in fines or penalties which will significantly impact your company. You may also see your employees being dissatisfied due to constant errors being made on their salaries.
Payroll management may be neglected or delayed due to other duties – Employees who are assigned to the role may also be prioritizing other duties and there might be situations where payroll management duties are delayed or neglected. This can result in deadlines for payments being missed and as a result, attract penalties and fines.
Increased risk of payroll talent leaving the company – There’s always a great demand for people with specialized skills in payroll management. If the trained or specialized employees of your organization who handle payroll join other companies with clear career progression in the field, it may result in your information being exposed.
Additionally, when they leave you might not have someone with the required knowledge ready to take over the process putting you in a difficult position.
How can Simplebooks help?
This article covers all the things you need to know when managing the payroll of your company. By following the instructions and the formats provided, you will be able to manage the entire payroll of your company on your own.
If you need help setting up the process, we are here to help. Outsourcing payroll management to Simplebooks comes with many benefits.
Simplified process – Clear processes and reporting structures by our experts will help you streamline your operations and save time.
Cost-effective – With Simplebooks, your cost of payroll management will decrease. You don’t need to have multiple employees working on payroll management or retain any specialized talent.
Dedicated experts – All members of our payroll management team are highly trained, experienced and up to date with all relevant regulations and processes.
Information security – All your confidential information is treated with the highest security making sure your data is always protected.
Get in touch with one of our experts today to see how we can help you manage your payroll.
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