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How to set up a payroll system

Avoid disputes and penalties by running an updated payroll system for your company.
By Henry Ong |
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.


•    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.

•    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.

•    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.

•    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.

•    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.


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