The first few hires turn payroll from a simple transfer into a compliance function. You become responsible for deducting and depositing tax, registering for and contributing to social-security schemes, issuing the right documents, and keeping records that survive scrutiny. Getting payroll right protects both your employees and the business. Here's what running it well involves for a startup or growing SME.
Reviewed by CA Harika Chebolu, FCA · Last updated 2026-06-15
Quick answer
Paying people is more than transferring salaries — it involves TDS, provident fund, ESI, professional tax and proper records. Here's how to run payroll cleanly as you grow.
Payroll starts before the first payslip — at how you define the salary structure. A clear breakdown into basic pay and allowances affects how much tax is deducted, what counts for provident fund, and what employees can claim. Components such as house rent allowance carry conditions, and the choice of tax regime affects which exemptions apply. Design a structure that is compliant and easy to administer rather than one stitched together hire by hire, and document it so each employee understands their package.
As an employer you must deduct tax at source from salaries based on each employee's estimated annual income and chosen regime, deposit it with the government on time, and report it. At year-end you issue each employee a salary TDS certificate summarising what was paid and deducted, which they use to file their returns. Late deduction or late deposit attracts interest, so build payroll TDS into a fixed monthly routine and collect employees' investment declarations early so the deduction is accurate through the year.
Once you cross the relevant employee thresholds, social-security and state levies kick in. Provident fund and Employees' State Insurance involve both employer and employee contributions, registration, and monthly filings, while professional tax is a state levy you deduct from salaries and deposit — and the rules differ by state, including in Telangana and Andhra Pradesh. Track headcount and wage levels so you register at the right time, because these obligations can apply once you grow past the thresholds, and late registration creates back-dated liabilities.
Good payroll leaves a clean paper trail. Issue payslips, maintain a register of wages and deductions, keep employee declarations and proofs, and retain proof of every deposit you make. These records feed your bookkeeping and your audit, and they are exactly what the tax and labour authorities ask for if they review you. They also protect you in any dispute with an employee. Treat payroll documentation as part of the process, not an afterthought, and store it where it can be retrieved quickly.
As a small team you can run payroll yourself with the right software, but the volume of moving parts — TDS, provident fund, ESI, professional tax, payslips and filings — grows with headcount. Many startups handle the monthly mechanics internally and bring in a professional to set up the structure, handle registrations and returns, and review periodically. Whatever you choose, make payroll a disciplined, scheduled process: pay on time, deduct correctly, deposit promptly, and file when due.
You must deduct TDS once an employee's estimated annual income is taxable, then deposit and report it on time. Collect each employee's regime choice and investment declarations early so the monthly deduction is accurate and you avoid interest on shortfalls.
They apply once you cross the relevant employee and wage thresholds, after which both involve registration, contributions and monthly filings. Track your headcount and wages so you register at the right time, since late registration can create back-dated liabilities.
Yes, with suitable software you can handle the monthly mechanics in-house. Many small businesses still bring in a professional to design the salary structure, complete registrations and returns, and review periodically, because the compliance pieces multiply as you grow.
Hiring your first employees and want payroll set up correctly? Write to the firm and we'll structure salaries, handle the registrations and keep your payroll compliant.