Module 1: Payroll Foundations

What a Payroll Process Involves

Payroll is the process of paying employees the right amount, at the right time, while deducting and paying over the correct amounts to the government and other parties. Employees judge an employer by whether pay arrives correctly and on time. The authorities expect deductions to be calculated, filed and remitted by set deadlines, and mistakes can lead to penalties, interest and unhappy staff. Running payroll well is therefore one of the most trusted jobs in any business.

The payroll cycle in Kenya, step by step

Most Kenyan employers pay monthly. Each month follows the same cycle:

1. Collect changes. New joiners, leavers, salary increases, allowances, overtime hours, unpaid leave, loan deductions and any other changes for the month.
2. Calculate gross pay. Basic pay plus allowances, overtime and other earnings for each employee.
3. Calculate statutory deductions. Typically PAYE (income tax), NSSF pension contributions, Social Health Insurance Fund (SHIF) contributions and the Affordable Housing Levy, according to the rules in force.
4. Calculate other deductions. Staff loans, salary advances, SACCO contributions, HELB loan repayments where applicable, and other authorised deductions.
5. Calculate net pay. Gross pay minus all deductions.
6. Review and approve. Someone other than the preparer checks the payroll and approves it.
7. Pay employees. By bank transfer or mobile money, on the agreed pay date.
8. Issue payslips. Each employee receives an itemised statement of pay and deductions.
9. File returns and remit deductions. Submit the returns and pay the amounts deducted, plus employer contributions, to each agency by its deadline.
10. Record and file. Post the payroll to the accounts and keep the records securely.

Who is involved

In a small business, one person may do several of these jobs. Even then, try to keep preparation and approval separate. You will learn why in the controls lesson.

Worked example: one month at a small business

Baraka Hardware in Machakos has six employees and pays on the last working day of each month. On the 20th, the owner sends the bookkeeper, Esther, the month's changes: one new shop assistant who started on the 10th, eight hours of overtime for the storekeeper, and a KES 5,000 salary advance (hypothetical amount) to be recovered from a cashier. Esther updates her payroll spreadsheet, calculates gross pay including a pro-rated salary for the new joiner, works out statutory deductions using the current rates she confirmed for the month, deducts the advance and produces a summary. On the 25th, the owner reviews and approves it. On the last working day, Esther uploads the bank payment file and sends payslips. Early the next month, she files the PAYE return on iTax and pays the deductions to each agency before the deadlines. Finally, she saves the approved payroll, payslips, returns and payment confirmations in that month's folder.

Payroll calendar

Create a calendar with fixed dates for each step: the cut-off for changes, the review date, the pay date and each filing deadline. Deadlines for statutory remittances generally fall early in the following month, but they differ between agencies and can change, so confirm each one and record it. A calendar turns payroll from a monthly rush into a routine.

Common mistakes to avoid

• Accepting changes after the cut-off without recording who approved them.
• Using last year's rates because "nothing has changed". Check every rate before each payroll, and especially after each Finance Act.
• Paying salaries but forgetting to remit the deductions. The employer is responsible for amounts deducted from staff.
• One person preparing, approving and paying with no review.
• Keeping records scattered across emails and phones.