Payroll Management and Compliance in Kenya

Payroll is the function responsible for compensating employees for services rendered within a specified period of time. This is a critical function since for many organizations, salaries and wages form the largest expense and thus is requires working Internal Controls to prevent errors and fraud. Payroll also attracts numerous Tax Audits and Verification exercises as KRA Officials seek to confirm employers’ compliance with relevant statutory obligations. Payroll information is also quite confidential and requires proper management to avoid data leaks or unauthorized access.  

Payroll management involves the following:

  • calculating employee earnings
  • calculating statutory and other deductions
  • paying employees
  • filing necessary statutory returns
  • remitting statutory deductions to various agencies
  • payroll reporting and analysis
  • maintaining relevant payroll documents
  • providing information during external audits, internal reviews and tax audits

Payroll Records and Documents to be maintained in Kenya

In payroll management, employers need to maintain documents relevant to the employees’ earnings and deductions. These include:

  • Employment letters
  • Salary adjustment letters
  • Resignation letters
  • Approved overtime forms
  • Loan deduction forms
  • Mortgage interest and insurance policy certificates
  • Valid Tax Exemption Certificates for Persons with Disabilities

Payroll Processing

This is the task of computing employee earnings, deductions, and net amount payable.

Due to the bulk nature of payroll information, it is important for organizations to automate payroll processing and utilize payroll systems to enhance accuracy in the process. There are various payroll systems within the Kenyan market, both desktop and web based, that employers can utilize to automate their payroll processing.

For SMEs with few employees, payroll processing can be done on excel with the necessary internal controls being put in place to avoid data loss or unauthorized access.  

Employee Payroll Earnings

This is total compensation earned by an employee which is paid by the employer for services rendered during a specified period.

Employee earnings include:

  • Basic Salary
  • Wages
  • Overtime pay
  • Commissions
  • Bonus

Payroll Statutory Deductions in Kenya

Statutory deductions are deductions that employers are mandated by law to deduct from employees’ paychecks. Deductions of these statutory deductions and emitting to the relevant government agencies is mandatory, not optional.

These are:

  1. Pay As You Earn (PAYE) – Income Tax
  2. National Social Security Fund (NSSF) – Retirement Fund
  3. National Hospital Insurance Fund (NHIF) – Hospital Insurance
  4. Higher Education Loans Board (HELB) – Student Loans
  5. National Industrial Training Authority (NITA) – Training Levy*

*NITA Training Levy is not deductible from the employee but is paid by the employer at the rate of Kes 50 per employee per month.

Statutory Deductions Deadlines in Kenya

Employers are expected to remit statutory deductions and file returns by the dates below:

  • PAYE – By 9th of the following month
  • NHIF – By 9th of the following month
  • NSSF – By 9th of the following month
  • HELB – By 15th of the following month
  • NITA – By 5th of the following month

Late filing, late payment, or failure to deduct and remit statutory deductions is deemed an offense in Kenya and employers are held responsible and subjected to hefty fines. All Kenyan employers should be aware that any statutory deductions not deducted from employee paychecks are recoverable from the employers with penalties and interest.  

Employee Payslips

A payslip is a document issued by an employer to an employee indicating the earnings, deductions and net amount payable for a given period. Below is a Sample Payslip with Kenyan Employment Taxes and Statutory Deductions.

Bookkeeping

Bookkeeping is the process of recording all financial transactions in an organization; it’s part of the accounting process in an institution. The various transactions include; purchases, sales, receipts and payments by an organization. Bookkeeping responsibilities fall upon a bookkeeper whose duty is recoding the multiple financial business transactions of an organization. Bookkeeping involves writing of the daybooks and documentation of each financial transactions. For example, if a company borrows Ksh500,000 from its bank the following records are written;

  • An increase of Ksh500,000 must be recorded in the company’s Cash Account
  • An increase of Ksh500,000 must be recorded in the company’s loans account

It’s in every organization’s interest to ensure that there is an effective bookkeeping method. This is to allow the active tracing of every transaction that occurs in an institution. Bookkeeping also acts as a point of reference incases of any controversy in the accounts. Additionally, a company can review its various transactions and get guidelines on their transaction and verify if they are on the right objective.

Methods of bookkeeping

Before beginning the bookkeeping process, an institution must take into consideration and decide on which bookkeeping method to be followed. When choosing the method, the organization must consider the volume of their daily transactions. With such knowledge in mind the following techniques can be applied;

  • Single-entry bookkeeping – this is quite a straightforward technique where a single entry is made for each transaction in the company’s books. These transactions are kept in a cash book to track the various incoming revenue and outgoing expenses. There is no formal training required for the single-entry bookkeeping system. This method will most likely suit small enterprises and sole proprietorship.
  • Double-entry bookkeeping – this is a more sophisticated method compared to the single-entry. It follows certain principles that every transaction affects two accounts, and they are recorded as debits and credits, which must be equal. Therefore, in the double-entry system, a transaction is recorded twice.

Factors to consider

After selecting the type of bookkeeping method, a business should consider how the entries are recorded. A company should consider the use of the following ways;

  • Cash register – this is an electronic machine used to calculate and register all transaction s and cash flows arithmetically.
  • Journals – these are also referred to as the original books of entry. It’s the platform where an institution can record its entries chronologically. Journals can be physical (book or diary) or digital (spreadsheets and accounting programs). A journal contains the data, account debited or credited and the specific amount for each transaction.
  • The Ledger – this is a book or a compilation of accounts. After recording transactions in a journal, they are transferred to a ledger/ book of the second entry.
  • Trial balance – produced from a complied summary of ledger entries.

Importance of Bookkeeping

  • Bookkeeping helps a business to budget – accounting involves the organization of the various revenues and expenses; thus, it is more comfortable to review financial resources and expenses. Therefore, it’s an excellent method that enables a business to create a fully functioning budget which in turn is used as a roadmap for the company. With the creation of the budget, a company can plan future expenses and anticipate that would cover the expenses.
  • Tax preparation – businesses must return taxes annually; most organizations scramble through their desks, looking for missing documents and paperwork. Thus, bookkeeping aids in making the tax process filling process. With bookkeeping, financial information is recorded and makes the institution ready for tax time. Instead of scrambling through papers and invoices, all data is organized in the central system.
  • Organization – Being organized is a skill all organizations should adopt. A business should be able to get the relevant information at any time with ease. Major parties are interested in the institution’s records they include; employees, customers, investors, and loaners. The provision of this information is vital to the various operators in the institutions. Well, the organization of the documents aids in the development of a positive relationship with investors and lenders. Thus, bookkeeping and financial organization of information aid in the proper financial records to be provided to the parties.
  • Analysis – Bookkeeping is an essential activity as it helps with business analysis. Bookkeeping will aid in the tracking of cash inflows and outflows. This type of analysis allows to focus on the company’s strengths and improves on the weaknesses.
  • Better decision-making – with bookkeeping comes there is the improvement of business analysis; thus, there is better decision-making. For the improvement of decisions, there is a need to access all available information and such information provided by the bookkeeping techniques.
  • Planning purposes – Bookkeeping is necessary as it presents the past financial information of an organization; thus, with such information, it becomes easier to prepare for the future of the institution.
  • Better financial malmanagement – bookkeeping is necessary as it aids in controlling the business’s finances. Bookkeeping aids in the representation of a clear picture of the institution’s money.
  • Tracking Profits and Growth – Bookkeeping is essential as it aids in the showing of the business profitability. Additionally, bookkeeping aids in the tracking of business growth. Due to the accumulation of years of data and analysis, there is a greater understanding of the company; thus, there is the tracking of the growth and profits.
  • Tracking of cash flows is improved – with bookkeeping; there is a better and more improved cash flow process. A business can track the various revenues, expenses, and liabilities. Additionally, consumer and vendor invoices are paid.
  • Provision, a general snapshot of the business – bookkeeping, provides financial information in the form of financial statements. These statements provide a general overview of your business, allowing you the ability to see how well the company is performing.

Tips of Bookkeeping

  • Separate business and personal finances
  • Always try to automate what you can
  • Perform regular financial checkups
  • Always keep records of business expenses