ERPNext’s 5 Step Payroll

Save tons of time with modern, open-source software that relieves you from the pains of processing payroll.

January 11, 2020


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Processing payroll of employees can be cumbersome and a time-consuming activity taking into account the financial and legal implications. Changes in tax, employee regulations, and legal compliances can make payroll processing a painfully complex task. Being one of the most important tasks carried out in an organisation, it is significant to ensure that there are no challenges in the process.

Challenges of Processing Payroll

As your organization grows and employees start to step in and out of your team, HR management can become difficult. Some common challenges of processing payroll are
  • Compliance
  • Accuracy
  • Tax Regulations
  • Employee Data management
  • Security
  • Managing changes based on evolving conditions (for example, the amount of Professional Tax to be deducted for February is 300 INR, while it is 200 INR for other months)
A comprehensive and configurable payroll software can help manage these challenges. Incorporating payroll software has fewer possibilities for man-made errors. Here’s where ERPNext comes into the picture.

ERPNext — Open Source Payroll Software


A modern solution, largely associated with small and medium businesses, ERPNext is raging across the industry as a no non-sense, value-for-money ERP software. Being fully open-source, ERPNext comes with no license fee.

Payroll is the administration of financial records of employees' salaries, wages, bonuses, net pay, and deductions. ERPNext offers cloud-based payroll management system that helps you maintain a polished process and perform all payroll related operations painlessly. It has proven competent for more than 1000 businesses posing as a pain-free payroll processing software.

ERPNext’s 5 Step Payroll

Step 1: Define Payroll Period

The period for which payroll entries have to be made is defined as Payroll Period. Additionally, if you want the system to calculate taxable amounts automatically, then you must define the taxable salary slabs. You can also declare the maximum tax exemption amount applicable in this period. This step can be skipped if you don’t intend to use tax slabs or flexible benefits.

1.1 Payroll Period

You can also add conditions that are applicable to the tax slabs. For example, a 5.2% rate of tax must be deducted for all employees having salary lesser than 5 lacs.
1.2 Condition in Tax Slab


Step 2: Create a Salary Structure

Salary Structure represents how salaries are created in ERPNext based on earnings and deductions. In simple words, it is the breakup of the salary offered to your employees. Creation of salary structures in ERPNext requires you to first create Salary Components.

2.1 Salary Structure

So what is a Salary Component?

The salaries that are offered to employees involve various components ranging from basic, House Rent Allowance (HRA), Professional Tax (PT), and so on. A salary component either be an ‘Earning’ or a ‘Deduction’ based on how it is defined. You can add the amount directly or it can be an amount calculated on the basis of base salary or a particular rate or based on a formula involving the other components as well.

Consider below — we have defined HRA, an earning component as a direct amount:

2.2 Salary Component “House Rent Allowance” based on the direct amount

Below is an example of a taxable salary component for deduction defined using formula. As stated above, based on this formula, the system will deduct INR 300 if the month is February and INR 200 for other months.

2.3 Salary Component “Professional Tax” based on a formula

As seen, we can define countless configurable salary structures and components to fulfil the needs of compliances, tax regulations and ensure that accurate payslip is created from the system. You can also manage workwise payroll using timesheets. We have already solved three major challenges of payroll enlisted above in two steps.

Step 3: Assign Salary Structure to Employees

Next, assign salary structures to a group of employees or an individual. Consider the following screenshot which shows the assignment of salary structure to an employee, Evelyn using Salary Structure Assignment:

3.1 Salary Structure Assignment of the employee, Evelyn Samuels

Step 4: Generate Multiple Salary Slips in one-go with Payroll Entry

In ERPNext, Payroll Entry enables bulk processing of payroll for employees. In other words, processing salary slips of all employees in one go. The bulk processing can be company-wide or based on various categories such as Branch, Department, or Designation.

4.1 Draft Payroll Entry

The above screenshot shows a draft of a payroll entry. The option to validate attendance and create salary slip against timesheet is enabled. This means that employee attendance records will be verified while the generation of salary slips in order to deduct salary components. The salary slips are created and stored in the Draft state when the payroll entry is created. You can manually verify the salary slips. (if needed)

4.2 Draft Salary Slip

Upon submission of the payroll entry, salary slips are automatically submitted in one-go. The below screenshot shows payslip after submission:

4.3 Submitted Salary Slip

After submission of salary slips, the system also creates an accrual journal entry to book the salary payable amount against the expense account. (default is Payroll Payable)

4.4 Accrual Journal Entry created upon submission of Payroll Entry


Step 5: Book the payroll in Accounts

The final step is to book the payroll amount in your statement of accounts. ERPNext provides the option for creating the journal entry which will credit the Cash or Bank account and debit the expense account, Payroll Payable.

5.1 Bank Entry for Payroll

Thus, we have completed the process of payroll in 5 steps. Now that you know how to process payroll, let’s take a look at some other features of ERPNext Payroll:

  • Employee Repository: Maintaining information about your employees can be an annoying job considering there are so many documents. With attachments, you can add multiple multi-media files in the Employee record.
  • Employee Tax Exemptions: Considering your employees might seek exemptions of taxable income, you can define categories of exemption ranging from LIC, Stocks, PF and then get your employees to submit proof as well. All in one!
  • Leave Without Pay: Leave Without Pay (LWP) occurs in case an employee runs out of allocated leaves or takes leave without approval. You can configure payroll entry to deduct these amounts directly at the time of salary slip creation.
  • Variable Pay: Be it a performance bonus or deputation allowance, you might need to amend the salary structure of employees. Additional Salary helps you manage variable pay effortlessly in ERPNext.
  • Personalization of Payslips: The configurable print formats lets you personalize your payslips as per your brand. Classy or professional, pick your take and create print formats easily.
  • Validation against Attendance: As mentioned earlier, you can verify employee attendance records at the time of payroll entry to make the required deductions in salary amount as per declared in salary structure.
  • Validation against Timesheet: When enabled, this option allows you to process salary based on hours of work done, and this is captured through Timesheets. This amount is added to a separate earning component, for example, “Hours Worked”. This component, as well as hourly rate, is defined in the payroll entry.
  • Encrypted Salary Slips: Keeping salaries confidential is a no-brainer. With encrypted salary slips, you can guarantee security through a simple configuration. Your employees will receive password-protected salary slips to ensure there is no infringement to confidentiality.

Kickstart a pain-free payroll process here. To learn more about the features of ERPNext's HRMS, click here
Jai Chavan
Jai Chavan
"You know who I am"
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