How To Set Up a Payroll System

Payroll is the system where employers work out their employees’ salaries to make correct deductions from their pay. But it’s not as simple as writing a check every two weeks. Employers must be up to date and comply with the laws and rulings regarding employee compensation to avoid disputes and penalties.

How to set it up?

1. Get an employer identification or registration number. You have to register with the Bureau of Internal Revenue (BIR), the Social Security System (SSS), the Philippine Health Insurance Corp. (PHIC), and the Housing Development and Mutual Fund (HDMF) to get your number.

These numbers will serve as reference and identification in the remittance and filing of all information pertaining to the company and the employees. For SSS, PHIC and HDMF, both employee and employer give contributions.

2. Adopt payroll policies. Establish payroll policies on work hours, overtime, sick and vacation leaves, and other benefits. All these must be in keeping with Labor provisions.

3. Build and maintain an employee database. The law requires that you keep certain employee records, which can also be used for payroll calculation. Employees are asked to fill out a record sheet containing their name, address, gender, SSS, PHIC, and HDMF numbers, and TIN, birth date, tax status (single, head of the family, or married), and qualified dependents, if any. Records must also be updated when an employee gets married, changes his or her address, or has additional dependents.

Employers must report new employees to the SSS, PHIC and BIR, and help first time employees obtain their personal registration numbers from the BIR, PHIC, HDMF, and SSS.

As the payroll is being processed, employers should organize all records of net salaries, deductions, and other items. File these reports at the end of each month, and update payroll data yearly as required by law.

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4. Decide on the payment method. Employees may be paid in cash, check, or via electronic transfer made directly to their bank account. Few employers choose cash because of the security risks it involves. Checks are preferable, but employees would find it burdensome to line up at the bank every payday to cash it or wait for several days for the check to clear.

The quickest and most secure payment method is by electronic transfer. Nevertheless, employers who choose this method need to maintain a certain amount in deposit depending on the number of employees in their payroll.

5. Figure out what payroll processing involves. An efficient payroll system is essential to ensure that employees are paid on time and correctly. Paying on time means establishing payroll pay periods or payroll cut-offs, which can be weekly, semi-monthly, or monthly. The most common payroll cut-off is the semi-monthly payroll.

Because they are on top of the company payroll, employers must be well informed of the various tax laws, Labor and Employment rulings, and other statutory requirements; must know how to compute withholding taxes on compensation; and how to use the contribution tables for SSS, PHIC, and HDMF.

The payroll master, for his part, must keep abreast of tax rates, contribution schedules, overtime and holiday premiums, and the rules governing the computations of these items. Employers are likewise required to issue pay slips to employees with a detailed list of the payroll items and the net pay.

The employees’ withheld contributions must be remitted monthly to the agencies concerned, while care must be taken that, in applicable cases, both employee and employer portions are included in the remittance. Payment is normally made with the banks.

For the BIR, reporting is done annually using BIR Form 1604-CF. For SSS, reporting is usually done monthly. For companies with few employees to report, quarterly submission of the Contribution Collection List (SSS Form No R3) is required. Quarterly reporting is also required for PHIC using the Employer Quarterly Remittance Report (PHIC Form No. RF1). For HDMF, reporting is no longer required because the payment form already lists the name of each employee.

The following are the various methods of calculating the employee payroll:

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Manual Payroll

Using Microsoft Excel, an employer can prepare a payroll worksheet and input the necessary formulae for calculation. Pay slips can also be generated using formats and links. The manual payroll, however, may be tedious and would require more work when the time comes for the year-end annual reporting and issuance of creditable tax certificates to employees.

Payroll Software

Payroll software programs can make the task easier and faster because they can generate pay slips and calculate taxes and other deductions in no time. Payroll software, however, require upgrades and getting a licensed program can be expensive.

Outsourcing Payroll

Generally, the cost of outsourcing payroll is half of what it would if done in-house. Payroll firms keep a stable of highly qualified payroll masters who can do the job efficiently for their clients. They usually have all the automatic links with the bank, the BIR and all statutory agencies. They also take care of any new statutory obligations without having to process manual system updates, and generate pay slips and other comprehensive reports.

Bear in mind, however, that even if somebody else is running the payroll function for you, it’s still your legal responsibility as employer to apply the company’s payroll policy and maintain employee records.

HENRY ONG, CMC®


Henry Ong is an entrepreneur, investor, researcher and business columnist for more than 15 years. He holds double degree in accountancy and applied economics, a Registered Financial Planner (RFP) and Certified Management Consultant (CMC). Follow him on twitter @henryong888