Unlocking Salary Slip Formats: Your In-Depth Guide

When you start a company, one of the first things you do is hire people to help run it smoothly. Once they join, it’s your job to follow the rules about their pay, savings (EPF), investment (ETF), and taxes. But many business owners don’t know the right steps to take, and that can lead to fines.

This article covers everything you need to know about managing pay, calculating monthly salaries, creating reports, saving for your employees’ future, and following the rules. It’s like a guide to help you avoid legal problems and make sure your employees are happy with how you handle their pay. This guide was made possible thanks to the contributions made by our HR team 

Types of Payments & Deductions found in Salary

In Sri Lanka, companies utilize different structures to compute employee salaries. A simple salary structure, where the basic salary encompasses the total earnings, is employed by some. Others adopt a tiered structure, incorporating components such as basic salary, benefits, allowances, overtime, and other incentives as part of the standard employee salary.

Let’s delve into the crucial aspects:

  1. Basic Salary: The central component of an employee’s compensation, often remaining consistent unless a promotion or raise occurs.

  2. Salary Advances: Employees can request a portion of their upcoming month’s pay in advance. Policies around such advances vary among companies.

  3. Deduction for No-Pay Leave: When employees need unpaid leave, the company may deduct their daily salary for the days taken. This might occur when regular leave is exhausted or due to unique circumstances.

  4. Other Deductibles and Taxes: In Sri Lanka, several deductibles apply to every employee, including EPF, ETF deductions, and relevant taxes like Advanced Personal Income Tax or PAYE taxes.

  5. Overtime Pay: Governed by law in Sri Lanka, overtime pay equals 1.5 times the hourly wage. For instance, an employee earning 300 LKR per hour would receive 450 LKR for every overtime hour. Certain companies restrict monthly overtime hours.

  6. Commissions and Reimbursements: Commissions, provided to motivate and reward employees, are often linked to achieving specific targets. Reimbursements address expenses incurred during company-related duties. Sales roles, for instance, might involve substantial commission portions.

  7. Allowances: These payments can be discretionary or intended to cover employee expenses. They’re typically negotiated within the employment contract. Common allowances include vehicle, housing, and travel allowances.

Understanding these aspects ensures equitable and precise management of employee salaries.

What is a Payslip?

In Sri Lanka, a payslip serves as a comprehensive document that outlines the financial details of an employee’s compensation for a specific period. It provides a breakdown of various components, including basic salary, allowances, deductions, and taxes withheld. This document is crucial for both employees and employers as it transparently showcases the financial transactions related to the individual’s employment. It also aids in ensuring accurate compensation and compliance with relevant labor and taxation regulations in Sri Lanka.

  1. Employee’s full name
  2. Employee number (Also the EPF number)
  3. Designation of the employee
  4. NIC number of the employee (optional)
  5. Complete salary breakdown, including basic salary, allowances, deductions, and taxes (excluding pay advances, salary deductions, EPF deductions, PAYE/APIT)
  6. Net salary
  7. EPF and ETF contributions from both employee and employer
  8. The name of the company
  9. Signature of the employee certifying the payment

How to calculate the Salary & No Pay Deductions?

To illustrate the process of calculating a monthly salary in Sri Lanka, let’s consider the scenario of Kavisha, who earns a gross salary of LKR 50,000 per month. We will also factor in a one-day unpaid leave deduction and incorporate the latest Employee Provident Fund (EPF), Employee Trust Fund (ETF), and Pay As You Earn (PAYE) tax considerations.

Step 1: Determining Daily Wage

We begin by calculating Kavisha’s daily wage by dividing the monthly gross salary by the number of working days in a month (assuming a 30-day work cycle).

Daily Wage = LKR 50,000 / 30 days = LKR 1,666.67

Step 2: Unpaid Leave Deduction

Since Kavisha took one day of unpaid leave, we need to deduct the corresponding daily wage from the gross salary.

Leave Deduction = LKR 1,666.67 x 1 day = LKR 1,666.67

Step 3: EPF & ETF Contributions (Current Rates)

We now factor in the mandatory EPF and ETF contributions for both employer and employee based on the latest rates (as of March 26, 2024):

  • Employer EPF Contribution: 12% of Salary = LKR 6,000 (LKR 50,000 x 12%)
  • Employer ETF Contribution: 3% of Salary = LKR 1,500 (LKR 50,000 x 3%)
  • Employee EPF Contribution: 8% of Salary = LKR 4,000 (LKR 50,000 x 8%)

Step 4: PAYE Tax Estimation (Consult Inland Revenue Department for Accuracy)

For illustrative purposes, let’s assume a flat 18% PAYE tax rate. However, it is crucial to note that the actual PAYE amount may vary depending on Kavisha’s tax bracket and deductions claimed. We recommend consulting the Sri Lankan Inland Revenue Department for a more precise calculation.

  • Taxable Income = Gross Salary – Employee EPF = LKR 46,000 (LKR 50,000 – LKR 4,000)
  • Estimated PAYE = Taxable Income x Tax Rate (18%) = LKR 8,280 (rounded)

Step 5: Calculating Net Salary

Finally, we can determine Kavisha’s net salary by subtracting all deductions from the gross salary.

Net Salary = Gross Salary – Leave Deduction – Employee EPF – Employer EPF – Employer ETF – Estimated PAYE

Net Salary = LKR 50,000 – LKR 1,666.67 – LKR 4,000 – LKR 6,000 – LKR 1,500 – LKR 8,280 = LKR 34,553.33 (rounded)

Conclusion

In this example, Kavisha’s estimated net salary after considering the unpaid leave deduction and incorporating the latest EPF, ETF, and PAYE is approximately LKR 34,553.33. Please remember that the PAYE calculation might require further adjustments based on individual circumstances.

Preparation of Payroll Reports

The payroll report is a formal document containing comprehensive payroll information for all employees within a company. Adherence to government guidelines necessitates the accurate upkeep of these reports by the company, with provisions for potential audits or inquiries by governmental entities. During the creation of payroll reports, it is imperative to maintain consistency with the salary presentation as articulated in individual payslips. If the remuneration structure distinguishes between basic salary and allowances in payslips, this delineation should be mirrored in the corresponding payroll reports. Any deviation in the representation of these financial aspects, if brought to the attention of relevant authorities, could potentially result in the imposition of penalties, fines, or legal repercussions.

EPF & ETF Obligations

In the context of the Employee Provident Fund (EPF), employers are obligated to contribute 12% of an employee’s total earnings, while employees contribute 8%. Additionally, for the Employee Trust Fund (ETF), employers are required by law to contribute 3% of an employee’s earnings monthly (as of March 26, 2024).

The following types of payments are considered when calculating EPF and ETF contributions:

  • Salary, wages, or fees
  • Cost of living allowance
  • Holiday payments
  • Food allowance and similar allowances
  • The cash value of provided food
  • Payments for work during special hours

It’s important to note that overtime payments should not be included in these calculations. Employers must remit both EPF and ETF contributions to the Central Bank by the last working day of the subsequent month. All employees, whether permanent, temporary, or on a contract basis, are eligible for membership in the Employee Trust Fund and Employee Provident Fund from their first day of employment. Ensuring employee registration lies with the employer.

Further details on registration and payment deadlines can be found in the “EPF and ETF – What you need to know guide.”

Disadvantages of In-House Payroll Management for Companies in Sri Lanka

In the context of the Sri Lankan business landscape, it is not uncommon for companies to utilize in-house teams for managing their payroll. However, this approach can present several drawbacks that warrant careful consideration.

  • High Costs Associated with Specialized Talent: Opting for in-house payroll management requires a significant investment in either training existing employees or recruiting qualified professionals. The expenses incurred in training or hiring individuals proficient in up-to-date payroll regulations and practices cannot be underestimated. This financial burden may impede the company’s overall financial efficiency and divert resources from other critical areas of operation.

     

  • Increased Margin of Error Due to Lack of Specialization: Handling payroll in-house can lead to errors stemming from a lack of specialized knowledge and experience. Assigning payroll tasks to employees who may not possess relevant expertise could result in inaccurate calculations of salaries, improper deductions of mandatory contributions such as EPF and ETF, and even errors in tax payments. The consequences of these inaccuracies could include financial penalties and diminished employee satisfaction due to repeated mistakes in their compensation.

     

  • Neglect or Delay in Payroll Management: In-house employees tasked with payroll management may find themselves juggling multiple responsibilities. This scenario can lead to instances where payroll duties are deprioritized or delayed, jeopardizing the timely processing of payments. Such delays can result in missed payment deadlines, subsequently attracting penalties and fines that impact the company’s financial stability.

     

  • Risk of Losing Specialized Payroll Talent: The demand for skilled payroll professionals is high, and this talent is often sought after by competing companies. If your organization’s payroll experts are enticed by career opportunities elsewhere, it not only leaves a gap in expertise but also poses a risk of sensitive company information being shared. Furthermore, the departure of skilled professionals may leave your company without a suitable successor, leading to operational disruptions.

Conclusion: In conclusion, while in-house payroll management is a prevalent practice among Sri Lankan companies, its potential disadvantages are worth considering. The financial burden of training or hiring specialized talent, the heightened risk of errors, potential neglect of payroll duties, and the possibility of losing key talent all underscore the importance of evaluating alternative payroll management strategies. To ensure financial accuracy, compliance with regulations, and overall operational effectiveness, companies must weigh the benefits of in-house management against these compelling drawbacks.

How can we help?

This article encompasses comprehensive information essential for effectively overseeing your company’s payroll. By adhering to the provided guidelines, you will possess the capability to independently manage your company’s entire payroll. Should you require assistance in the setup process, we stand ready to provide support. Opting to outsource payroll management to Acmi Group offers a range of advantageous outcomes.

  • Streamlined Process – Our experts have designed transparent processes and reporting frameworks to enhance your operational efficiency and save valuable time.
  • Cost-Efficiency – Utilizing our services will result in decreased payroll management expenses. No longer will you need a multitude of employees dedicated to payroll, nor will specialized expertise need to be retained.
  • Expert Commitment – Each member of our payroll management team boasts extensive training, experience, and up-to-date familiarity with pertinent regulations and protocols.
  • Data Security – We treat all your confidential information with the utmost security, assuring continuous protection of your data.

Contact one of our specialists today to explore how we can contribute to your payroll management needs.

Free up more time to focus on what matters

Get in touch with us to take care of your HR and payroll processes.

Reach out now
Share this post

Related Posts