Core Integra Consulting Services Pvt Ltd

The Changing Rules of Payroll Compliance for Employees and Independent Contractors

When it comes to payroll, rules and regulations can keep changing according to the times. There have been several changes in the past few years due to the COVID-19 scenario and various issues related to that. Payroll compliance means adhering to federal, state, and local regulations that would govern the payment of employees. Employers who violate any of these laws can face penalties. These can drastically decrease your bottom line and even put you out of business! By learning how to navigate your payroll compliance issues, you’ll avoid tax troubles, keep office morale high, and fulfil your obligations to your employees which include ensuring they receive their payments on time.

What Do Payroll Compliances Require You to Do?

The payroll compliances require you to pay certain amounts with or without deducting them from salaries. They require you to file certain periodically. You’ll also have to maintain and display certain registers and forms to ensure you’re compliant on multiple levels. If you don’t follow these, you’ll be liable for legal hassles that you’d much rather avoid. Inconsistencies in following payroll compliances are usually due to a lack of proper knowledge. So, instead of facing penalties due to ignorance, ensure you’re up to date in all the areas that you need to be.

Learn about different payroll compliances that affect both employees and independent contractors, check what compliances you need to follow, and take the necessary action.

Payroll Compliance for Employees


  • Reduced take home salary:

    One of the biggest impacts of the new labour laws will be the reduction in take-home salaries. The government intends to increase company contributions towards the employee provident fund, and other post- retirement schemes. This will force companies to modify their employee compensations. According to the Wages Code 2019, wages paid to an employee will include the basic pay plus dearness allowance and retention payment. Other remuneration, such as PF contributions, pension, bonuses, HRA, overtime, gratuity, etc, will not be covered under the definition of wages.
  • Basic Pay to be 50% of CTC:

    The new wages code will make it essential for organisations to ensure 50% of their employees’ CTC is basic pay. The other 50% will comprise of other employee allowances. That can include house rent, overtime, etc. If the company pays additional exemptions or allowances that exceed 50% of the CTC, then the same must be treated as remuneration. That will be added to the wages.
  • Gratuity costs of companies will increase:

    Under the new code, gratuity will be calculated on a larger salary base. That will include basic pay and allowance, such as a special allowance on wages. These will increase the gratuity cost of companies. Increasing social security components on wages will mean that the new laws are going to decrease the take-home salary of the employees.
  • Overtime payment:

    There will be a rule that stipulates for any 15 minutes of work, companies will be liable to pay their employee’s overtime.
  • 48 hours work week:

    The government has made a rule that 48 hours is the maximum limit for a one-week work capacity. Employers can choose the timings and make it available throughout a 4-, 5-, or 6-day week structure.
  • Labour codes on wages:

    There are four broad labour codes on wages now. The government is set to subsume 44 central labour codes into 4 broad codes. There are four broad codes on wages, industrial relations, social securities, occupational safety, and health and working conditions (OSH). The government has mulled a high limit on allowances at 75%-80% of the wages of an employee in the first year of the roll-out of the labour code on wages. That could be brought down to 50% over the next few years. Another major change is the restoration of the threshold on the number of employees in an organisation to 100 from the proposed 300 under the industrial relations code.


Payroll Compliance for Independent Contractors

For independent contractors, there is a liability to pay income tax if their annual total income exceeds INR 2.5 lakh. They can claim deductions for any of the expenses incurred towards work. That includes business entities that run offices. There’s also presumptive taxation, which allows freelancers to calculate taxes on an estimated income or profit. Companies will also have to comply with TDS. Freelancers must also file for ITR and pay taxes as per provisions of the Income Tax Act.

Freelancers must also pay GST if their income is over INR 20 lakhs in most states and INR 10 lakh in the case of special category states. You can charge 18% from companies and claim the eligible Input Tax Credit on those invoices.

The Main Difference

The main point of confusion could lie in the complexities of different wages across states. Different states have their limits on minimum hours, wages, and other factors. That means there’s a whole lot of paperwork, complex issues, and more that need to be dealt with. That’s why it’s so important for you to get an expert to handle all these issues. Doing so yourself could mean wasting valuable hours on unnecessary work. It could also mean horrendous errors that could disappoint your employees and set you back financially and in terms of morale.

If you need someone to help you with your payroll compliance, reach out to us. We’ll ensure we sail through these issues smoothly together to make sure your employees get what they deserve.