What is Payroll? A Comprehensive Guide for Kenyan Businesses

Payroll is one of those business functions that, if you are not an accounting professional or an HR specialist, you’ll most likely not have the time or bandwidth to get it right. That’s especially true when you are the business owner with a million other things on your plate.

However, like any aspect of your business, it’s beneficial to understand the components of payroll. This way, even if you bring on experts, you’ll have a general idea of whether payroll runs as it should.

In today’s guide, we answer what payroll means for Kenyan businesses, the components that make up a payroll system, and the common mistakes that can derail it.

Payroll Defined

Payroll is a process by which businesses calculate and distribute employee wages and salaries. However, payroll involves much more than just calculating salaries.

It also includes tracking work hours, deducting taxes, calculating employee benefits, and ensuring compliance with Kenyan labour laws.

Effective payroll management is vital because it directly influences three pillars of your business: financial health, legal compliance, and team morale.

Payroll Terminology to Know for Kenyan Businesses

Term	Definition
Gross pay	Total earnings before any deductions. Includes basic salary, overtime, bonuses, and allowances.
Net pay	The take-home amount an employee receives after all deductions have been made.
Statutory deductions	Mandatory contributions required by Kenyan law, including PAYE, NSSF, SHIF, and the Affordable Housing Levy.
Taxable income	The portion of an employee’s gross pay that is subject to income tax (PAYE) after all allowable deductions are made.
Personal relief	A tax credit provided by the Kenyan government to all resident individuals, which directly reduces the amount of PAYE an employee has to pay.
iTax	KRA’s online portal used for filing tax returns, including PAYE.
P9 form	An annual certificate issued by an employer to an employee, summarizing the employee’s total earnings and taxes paid for the year.

Why is Payroll Important?

Payroll, contrary to popular perception, is more than a routine administrative task. It is an important function that keeps your business financially sound, legally compliant, and your team motivated.

Here are a few ways in which it affects your business.

Employee satisfaction: When employees are paid correctly and on time, it shows respect for their work and strengthens overall morale.
Legal compliance: Payroll ensures your business meets all requirements from the Kenya Revenue Authority (KRA) and other regulators.
Financial stability: Payroll is one of the largest recurring expenses in most businesses. Managing it well provides visibility into labor costs, helps you plan your cash flow, and supports smarter budgeting decisions.
Business reputation: A business known for consistent, transparent payroll earns credibility not only with employees but also with partners, investors, and potential hires.

What Does a Business Need to Process Payroll?

Processing payroll is very much like a recipe. You can follow the steps perfectly, but if your ingredients are off and you have, say, outdated employee details, wrong tax rates, or incomplete hours, the end result will be unpleasant and inaccurate.

Before you process a single payment, you need three data sets nailed down.

1. Employee Information

This is a one-time data input unless the information changes. Here, we’re interested in the basic identification of an employee, such as their name, age, contact information, KRA, NSSF, and SHIF PINs, among other details.

2. Compensation and Benefits Data

Next, you need to record data related to an employee’s compensation. For example, what is the contractual base salary, overtime rate, and benefits or allowances they’re entitled to? You must include even seemingly inconsequential perks such as meal and transport allowances.

3. Working Hours and Paid Time Off Information

Finally, you need a record of hours worked, overtime, leave taken (including annual, sick, maternity/paternity leave), and any absences. This information directly impacts gross pay calculations and guarantees you’re applying the correct overtime rates and leave deductions.

Check out this guide on working hours in Kenyan labour law to ensure you’re compliant.

With that information at hand, you’re ready to process payroll. However, before we get to that, let’s look at all the elements that go into payroll processing.

Components of Payroll in Kenya

Payroll is not just salary minus tax. There are at least eight elements that affect what an employee takes home and what you owe the government.

If you miss or miscalculate an element, you’ll be looking at penalties, dissatisfied employees, or both. Here’s what makes up payroll.

1. Basic Salary

This is the fixed monthly amount you agreed to pay an employee when you hired them. It’s the number in their contract before anything else gets added or taken away. Everything else in payroll, including allowances, overtime, taxes, and deductions, gets calculated from this base figure.

2. Allowances

Allowances are additional payments provided to employees to cover specific needs or expenses. Common examples include:

House allowance
Transport allowance
Medical allowance
Airtime or communication allowance
Hardship or travel allowance for employees working in remote areas

3. Overtime Pay

Employees who work beyond their regular hours are entitled to overtime pay.

The rate is typically higher than the standard hourly rate and must align with both the Employment Act and the company’s internal policy.

In Kenya, the standard workweek is 52 hours for day workers and 60 hours for night workers. Any hours beyond those limits are considered overtime.

When employees work extra hours, they’re entitled to higher compensation rates as outlined below:

Weekday overtime: Paid at 1.5 times the employee’s normal hourly rate.
Rest days or public holidays: Paid at 2 times the normal hourly rate.

4. Bonuses and Commissions

These are cash incentives or performance-related payments. They are considered part of taxable income under PAYE and must be included in payroll calculations.

5. Non-Cash Benefits

Any benefits or advantages given to employees that are not paid in cash but have monetary value. These are taxable if they exceed KSh 5,000 per month or KSh 60,000 per year. Examples include:

Company-provided car (car benefit)
Company housing (housing benefit)
Low-interest or interest-free loans
Meal benefits beyond the non-taxable limit
Club memberships or subscriptions paid by the employer
Employer pension contributions exceeding KSh 30,000 per month or KSh 360,000 per year

6. Statutory Deductions

These are mandatory deductions employers must calculate, withhold, and remit to the relevant authorities.

Pay As You Earn (PAYE)

This is a tax deducted from employees’ salaries based on the progressive tax bands below.

Employers must remit and file PAYE via iTax by the 9th of the following month.

National Social Security Fund (NSSF)

NSSF is a retirement savings scheme for all employees in Kenya working under a contract of service. All NSSF contributions must be remitted by the 9th day of the following month.

Full compliance with NSSF requires both the employer and the employee to contribute 6% each of the employee’s pensionable earnings.

NSSF operates under a two-tier contribution structure:

Tier I

Applies to the first KSh 8,000 of an employee’s monthly pensionable earnings.
Both employer and employee contribute 6% of this amount.

These Tier 1 contributions must be remitted directly to NSSF.

Tier II

Applies to earnings above KSh 8,000 and up to the Upper Earnings Limit (UEL) of KSh 72,000.
The employer and employee each contribute 6% of this portion.

Employers may choose to remit Tier II contributions to NSSF or to a registered private pension scheme, provided the alternative scheme is approved by the Retirement Benefits Authority (RBA).

Social Health Insurance Fund (SHIF)

SHIF is Kenya’s new national health coverage scheme, established to replace the former National Hospital Insurance Fund (NHIF).

Employers must deduct 2.75% of each employee’s gross monthly salary and remit it to the Authority. There’s a minimum contribution of KSh 300, and no upper limit on how much an employee can contribute.

Employers don’t add a top-up, but they are fully responsible for deducting, filing, and paying the correct amount.

Employers must submit SHIF contributions by the 9th of the following month to stay compliant.

Affordable Housing Levy (AHL)

Both the employer and the employee are required to contribute 1.5% of the employee’s gross monthly salary each month. Like most statutory deductions, employers must file and remit AHL within nine working days after the end of the month.

We provide more detailed information about statutory deductions in our payroll compliance guide for Kenyan businesses.

7. Other Statutory Deductions and Allowable Reductions

In addition to the four statutory deductions we have just covered, there are other deductions that, while not mandatory for all employees, can affect taxable income. They include:

Registered pension or provident fund contributions: Employees can contribute up to KSh 30,000 per month, which is tax-deductible.
Mortgage interest relief: Up to KSh 30,000 per month for loans used to buy or improve a home occupied by the taxpayer.
Post-retirement medical fund contributions: Deductible up to KSh 15,000 per month.

8. Voluntary Deductions

These are optional deductions agreed upon by the employee, such as:

Sacco contributions
Staff loans or advances
Pension schemes beyond NSSF
Insurance premiums

8. Net Pay

This is the amount the employee receives after all applicable deductions have been made. It represents their take-home pay and must be indicated on the payslip.

9. Recordkeeping and Reporting

Employers must maintain accurate payroll records, including:

Payslips showing gross pay, deductions, and net pay
Monthly PAYE, NSSF, SHIF, and Housing Levy returns
Supporting documentation for benefits, overtime, and allowances

These records must be retained for a minimum of 36 months for compliance and audit purposes.

The Payroll Process in 6 Steps

Managing payroll involves multiple steps, and accuracy is crucial at each stage. Here’s a step-by-step overview:

1. Collect Employee Information

Gather and verify all essential employee data before payroll processing. This includes:

Full name, address, and KRA PIN
Employment terms (salary, benefits, job status, contract type)
Bank account details for salary deposits
Statutory registration details (NSSF and SHIF numbers)

2. Calculate Gross Pay

Determine each employee’s total earnings before deductions. Gross pay covers:

Basic salary or wages
Overtime pay
Bonuses, commissions, or gratuities
Allowances such as housing, transport, or medical

3. Apply Deductions and Contributions

Deduct all mandatory contributions, such as PAYE, NSSF, and SHIF, as well as any voluntary deductions.

4. Process Net Pay and Disburse Salaries

After all deductions, calculate the net pay and disburse salaries through approved channels, such as bank transfers or M-Pesa bulk payments.

Verify that payment dates match the company’s payroll schedule and employment contracts.

5. Record Payroll Data

Document every payroll transaction, including gross pay, deductions, and net pay for each employee.

6. File and Remit Statutory Returns

Submit all monthly returns and payments to the relevant bodies such as KRA (PAYE and Housing Levy), NSSF, and Social Health Authority (SHIF). All filings and remittances must be completed by the 9th day of the following month.

Payroll Management: In-House, Outsourcing, or Software?

Your payroll approach depends on your business size, budget, and how much compliance risk you’re willing to manage. These are the three main options:

In-House Payroll

For this system, you’ll handle everything internally with your own staff. This works if your payroll is simple and you have someone who understands Kenyan tax laws. It’s the cheapest option upfront, but it puts all the compliance risk on you.

Outsourced Payroll

In this option, an outsourced payroll provider like Bridge Talent Group manages your entire payroll process.

Most businesses outsource to reduce compliance risk and avoid the costs associated with building internal expertise. In fact, according to a Deloitte 2020 study, 73% of organizations outsource at least one payroll function. You’ll pay more than doing it in-house, but you transfer the legal burden and free up your time.

Check out this guide to learn more about the 5 Best Online Payroll Services for Stress-Free Payroll in Kenya.

Payroll Software

This option requires you to buy software that automates calculations and handles tax filings. Such software will reduce errors and save time compared to manual processing; however, you still need someone who understands payroll to operate it.

Feature	Manual (Excel)	Payroll Software	Outsourced
Accuracy	Low	High	Very high
Compliance	High risk	Automated updates	Managed by experts
Time cost	Very high	Low	Zero
Audit trail	Poor	Excellent	Excellent
Best for	1–2 employees with simple payroll	5–100+ employees	Businesses of any size that want to concentrate on growth and eliminate compliance risk.

The cost of processing a single payslip ranges from $2 (KSh 258) to $33 (KSh 4,257), according to the Deloitte Global Payroll Benchmarking Survey mentioned earlier.

Check our full breakdown of payroll service rates in Kenya to see what you should expect to pay.

Common Payroll Challenges

These are the four most common payroll challenges to keep in mind as a business in Kenya.

Compliance with changing regulations

Tax laws and statutory rates are subject to frequent changes, and staying current requires ongoing monitoring. Unfortunately, if you fall behind on these changes, you’ll face penalties that could have been avoided with proper tracking.

Data management issues

Payroll accuracy depends entirely on having correct employee information. Incorrect KRA PINs, outdated bank accounts, and missing documentation lead to processing delays and compliance gaps.

Manual processing errors

Spreadsheets and manual calculations introduce unnecessary risk into your payroll process. A misplaced formula, an outdated rate, or a skipped deduction can affect employee pay and your statutory filings. The larger your workforce, the more opportunities for errors to slip through.

Administrative overhead

Processing payroll takes a significant amount of time each cycle, and for businesses without dedicated payroll staff, this means diverting HR and other personnel from tasks that generate revenue or build your workplace culture.

If these challenges are affecting your operations, outsourcing can help. Get in touch with payroll experts at Bridge Talent Group to discuss how we can manage this for you.

Best Practices for Managing Payroll Effectively

Automate payroll. Manual payroll won’t let you scale, and it introduces too many error points. We recommend investing in reliable payroll software or outsourcing to a provider to reduce the risk of errors.
Treat compliance as an ongoing task, rather than a one-time setup. Set up a system to monitor KRA, NSSF, and SHIF updates monthly. Also, subscribe to official channels, work with advisors who track changes, or partner with a provider who handles this monitoring for you.
Document everything from day one. Keep complete records of every payroll cycle. It’s a legal requirement, but it will also protect you during internal disputes and audits.
Implement a verification step before processing. Always verify that statutory rates match current requirements, and have someone other than the person who prepared payroll review the numbers.
Make payroll information accessible to employees. Give your team direct access to their payroll information through an Employee Self-Service portal where they can view payslips, download P9 forms, and update personal details without going through HR.

Start Managing Your Payroll with Confidence

This guide shows just how much goes into payroll processing. It’s admin-heavy work that requires constant attention to changing regulations every single cycle. For most business owners, it will become an almost full-time job should you choose to handle it on top of everything else.

At Bridge Talent Group, we take over the entire payroll process for you. Our payroll outsourcing services ensure 100% compliance with current KRA, NSSF, and SHIF regulations.

With the help of our payroll specialists, you can avoid penalties, eliminate administrative burden, and redirect your resources to revenue-generating activities.

FAQs

What’s the difference between a P9 and a P10 form?

The P10 form is what the employer uses to file the monthly PAYE return on iTax. It lists the payroll details for all employees. The P9 form is an annual certificate that the employer gives to each employee, summarizing their earnings and taxes for the year. The employee uses the P9 form to file their individual annual tax return.

What is payroll in simple words?

Payroll is the process businesses use to calculate employee wages, deduct taxes and statutory contributions, and distribute net pay.

How do you calculate payroll?

Calculating payroll starts with the gross pay, which is the total of the basic salary, allowances, and any bonuses. From there, you subtract all mandatory statutory deductions like PAYE, NSSF, SHIF, and the Housing Levy. What’s left over is the net pay, which is the exact amount the employee takes home.

What’s the difference between salary and payroll?

Salary is the fixed amount an employee earns as stated in their contract. Payroll is the entire process of calculating that salary, applying deductions, and distributing payments to employees.