What Is Payroll Automation? How to Automate & Benefits

Payroll is among the most complex and data-intensive processes at any company. Payroll errors can distress employees, result in fines and tax penalties, and draw the unwanted attention of regulators. For those reasons and more, payroll is an ideal process to automate. Automation not only greatly improves accuracy and compliance, it also makes payroll processing much more efficient and transparent. No wonder that payroll is often where companies begin their digital transformations.

What Is Payroll Automation?

Payroll automation involves the use of software to speed the payroll process by reducing the direct involvement of staff and eliminating some manual workflows entirely. It targets the most time-consuming, tedious, and error-susceptible portions of payroll. The result is a payroll process that’s more efficient, more accurate, and typically more transparent to employees.

Key Takeaways

• The complexity of payroll calculations and the consequences of getting them wrong make it ideally suited for automation.
• Some facets of payroll, such as reviewing and approving exceptions, still require human intervention.
• As with anything, automation comes with challenges and limitations that companies must consider when evaluating a new solution.
• Automating payroll demands a well-designed and executed process to identify goals, set milestones, track progress, and measure success.

Payroll Automation Explained

A basic way to understand payroll automation is to look at an example of a task performed without it, such as calculating net pay. Without automation, a payroll administrator or someone in the accounting or finance department must first determine how many hours an employee worked for the payroll period, factoring in overtime (when applicable), vacation, sick leave, paid personal time, and other compensable time. After calculating gross pay, other deductions—such as taxes, insurance, and retirement plan contributions—must be subtracted to arrive at net pay. Deductions are typically different for each employee, so as head count grows, so do the payroll headaches.

Automation eliminates much of this manual work, though some tasks—such as approving payroll exceptions or funding the payroll account—typically require management involvement.

Which Payroll Processes Can Be Automated?

Many components of payroll can be partially or substantially automated.

• Data input: Payroll relies on a wealth of data—including employees’ personal and financial information, time and attendance, deductions and withholdings (taxes, healthcare premiums, 401(k), etc.), and additional sources of compensation (commissions and bonuses). Without automation, this information must be manually entered—and often duplicated—into potentially separate systems, such as human resources (HR), accounting, and time-keeping software.
• Payroll calculation: Even the most basic check requires several calculations involving base pay and tax withholdings. But most checks are more complicated, requiring additional calculations that may include overtime, use of paid time off, contributions to insurance or retirement plans, bonuses, commissions, expense reimbursements, and more.
• Payroll validation: Before payroll is processed, someone must validate that the information and calculations are accurate, compliant with local, state, and federal regulations, and align with allocated budgets. This can be almost as time-consuming as calculating payroll in the first place when handled manually.
• Direct deposit processing: Direct deposits demand exact banking information and precise payment calculations, especially when deposits are divided among multiple accounts. All of this information must be formatted to banking system specifications.
• Pay slip creation: Most employees want a record of their payroll transactions, typically in the form of a digital document.
• Reporting: Customizing, generating, and distributing reports for various stakeholders, including management and government agencies, is easily accomplished with automation. For example, management can run labor cost reports to gain insight into total staffing costs by specific departments or locations.
• Employee self-service: To request time off, update banking information, or question the amount of a paycheck, employees appreciate having a self-service option to make simple changes or find answers to payroll-related questions without seeking intervention from the payroll team.

Payroll Automation Benefits

An automated payroll system inherently increases how quickly work can be accomplished compared with a manual system dependent on stacks of paper. But that is just one of the many benefits employers can expect.

• Improves accuracy:

  Manual payroll processing creates multiple chances for errors, particularly when staff must enter the same data into several systems. Each manual entry increases the risk of mistakes, which compound when calculations build on previous results. For example, an incorrect overtime calculation will affect tax withholdings, which then impacts deductions and net pay. By using precise algorithms to determine accurate withholding, deductions, and other paycheck elements, automation substantially reduces the odds of payroll issues arising.

• Increases efficiency:

  The automation of payroll tasks increases efficiency by streamlining workflows and reducing the amount of time HR and accounting staff spend on complex calculations, data processing, and moving tasks from one stage in the process to the next. This cuts bottlenecks, human errors, and the need for rework, while ensuring that employees receive accurate paychecks on time. It also allows personnel to focus on more strategic work, such as improving employee experiences. Integrating payroll data with other systems also allows accountants, benefit plan administrators, executives, and other stakeholders to have access to accurate data in real time whenever they need it.

• Reduces costs:

  The efficiencies gained by automating payroll save money by reducing the time and labor required for processing. Companies can scale their workforce without proportionally increasing payroll staff and minimize expenses associated with calculation errors and payment corrections. Automated tax updates and compliance monitoring help avoid costly penalties and ensure accurate, timely tax remittance. The shift to digital processing also reduces operational costs by eliminating paper-based processes and cutting bank fees through batch processing. In addition, automation provides real-time visibility into payroll data that can detect areas where businesses may be overspending, such as excessive overtime.

• Improves compliance:

  Payroll compliance extends beyond meeting local, state, federal, and international laws to include internal policies and labor agreements. Falling short can result in fines and penalties, employee dissatisfaction, and, potentially, lawsuits. Automated systems maintain accurate tax calculations across multiple jurisdictions, automatically updating as regulations change. These systems can simultaneously manage different withholding requirements, enforce the specific terms of union contracts and company policies, and automatically generate required compliance reports for various regulatory bodies, streamlining the reporting process while preserving accuracy and completeness.

  Automation can help employers navigate audits, too. Jurisdictions typically require companies to retain payroll records for three to seven years. Automation removes the need to organize and store those records manually and makes it easy to generate the necessary reports if a company is audited.

• Empowers teams:

  HR, payroll, accounting, and finance teams all have a role in the payroll process. In a manual payroll process, tasks are completed sequentially, which can create bottlenecks. An automated system, however, lets teams engage in the process as needed and complete tasks simultaneously, fostering a culture of transparency and trust. This flexibility also empowers them to take the initiative in identifying and addressing issues proactively, rather than waiting for hand-offs. Employees also have more time to contribute their efforts more strategically and innovatively.

• Bolsters security:

  Payroll software protects employee and employer data through encryption, both at the time when data is stored and during its transmission to banks and other institutions. Different methods of authentication, such as two-factor authentication, and role-based access control, which restricts the ability to view or modify payroll information to authorized personnel only, further safeguard sensitive information. The system maintains detailed audit trails of all user interactions, and automated backups ensure that payroll data can be quickly recovered in case of a system failure or a breach.

• Enhances scalability:

  Automated payroll systems adapt seamlessly to organizational growth without requiring proportional increases in payroll staff. These systems handle complex scenarios that often accompany growth, such as managing multiple pay schedules, different employee classifications, and varying state tax requirements. Of note, cloud-based payroll solutions allow businesses to easily increase capacity without additional infrastructure investments. The software also adapts quickly to seasonal fluctuations and organizational restructuring.

• Enables digital transformation:

  Digital transformation embraces technology—such as cloud computing, artificial intelligence, and robotic process automation—to create better, faster ways of running a business. Because payroll is so integral to operations, its automation is often foundational to transforming other parts of the organization. Automation also pushes employees to adopt new ways of working, encouraging innovation and continual learning. These shifts can give organizations a competitive advantage.

Payroll Automation Challenges and Limitations

An automated payroll is still a process grounded in the real world. In other words, it carries challenges and limitations that should be contemplated during the solution selection process. These include:

• Investment: Implementing payroll automation can require significant up-front costs, including software licensing fees and training expenses. Organizations may also need to upgrade their IT infrastructure. These costs can mount and become prohibitive, especially for smaller companies. More cost-effective choices include cloud-based solutions and subscription models that offer flexible pricing plans so organizations can start small and scale up as needed. The investment typically yields returns through improved efficiency, fewer errors, and better compliance.
• Learning: Even the most eager, tech-savvy team members will need some time to learn an automated payroll system. Because the margin for error is somewhere between tiny and nonexistent, users must be proficient in the new system, not merely familiar with it. Getting to that level requires time-intensive training, with a possible initial drop in productivity as users adjust.
• Maintenance: No software version is forever. In payroll, some software updates follow changes in the law, while others mirror evolutions in technology. Either way, on-premises updates may incur costs depending on the company’s vendor contract and the extent of its internal IT resources. In addition, updates may result in new incompatibility with another system that interfaces with payroll. Cloud-based payroll solutions help mitigate these challenges by shifting the maintenance burden to the service provider.
• Security: All digital payroll systems face security challenges, but automated systems introduce additional considerations due to their interconnected nature and broader digital footprint. Companies that automate on their own must fend against expanded cybersecurity vulnerabilities and assume the responsibility of complying with data security regulations. For cloud-based payroll, providers are responsible for security measures, including advanced encryption, continuous monitoring, and regular security updates.
• Dependence: Tech failures are rare but not unheard of, and they can surpass the control of the software vendor or its customers. A hurricane that disrupts the power grid, for example, can temporarily cripple an automated system. Organizations should strive for business continuity plans that include backup processes for critical payroll operations, including alternative methods for processing and distributing pay if primary systems are unavailable.
• Exceptions: Atypical or error-driven exceptions in the standard processing will likely still require manual interventions, though automation can detect and flag them for follow-up. These usually arise from incorrect time reporting codes for a type of work or leave, unapproved overtime, and mistakes on punches or other timecard discrepancies.

How to Automate Payroll Processes

Automating payroll is a multistep process that requires companies to evaluate their needs and work with a vendor to ensure that those needs are met. Here are the steps.

1. Assess Payroll Needs

The process begins by thoroughly defining what the organization needs. Start by asking the payroll team and employees directly what is and isn’t working. Surveys and focus groups may also give rise to insights. Some questions to help frame this process include:

• How often do managers and executives ask for payroll data? What do they ask for?
• How much time does it currently take to process payroll? What does the process involve?
• How much of that time is spent correcting errors or making last-minute changes?
• Has the company paid compliance fines or penalties? If so, what errors resulted in fines?
• Do the company’s growth plans call for new benefits or work arrangements not currently in place?

2. Identify Software

Once the company has mapped out what it wants payroll automation to accomplish, the next step is finding the right software. Among the considerations:

• Does the software manage payroll only, or does it include HR, finance, project management, benefits administration, or other functions?
• Does the software integrate with programs already in use, such as accounting software?
• Does the software have all the necessary functionality, such as time-tracking, state and federal tax filings, time-off tracking, and reporting?
• How much time does it take the software to process payroll?
• Is the software intuitive to use?
• Can the software scale?
• How much does it cost?
• How does the system protect confidential data?

3. Input Payroll Information

The first step in using the new software is to enter the necessary data. Accuracy is imperative. It may be possible to import the data from an existing system, but automation typically initially requires at least some manual data entry. Different systems require different data, but payroll staff should be prepared to enter:

• Employee names and addresses
• Employee birthdates
• Employee Social Security numbers
• Employee bank account details
• Employee hourly pay rates and/or salaries

To streamline data entry, experts suggest:

• Collecting the necessary information, including salary records, tax codes, and historical payroll data.
• Reviewing the data to ensure accuracy and consistency. For example, dates are often written in different formats, but the format should be uniform in the new system.
• Organizing the data according to the new system’s requirements. This step also includes ensuring that all data fields are complete and that backups of the data are in place.

4. Plan the Transition Process

Careful planning can ensure a smooth transition that minimizes risks and optimizes efficiency, accuracy, and compliance. The elements of such a plan include:

• Setting clear goals: For example, stakeholders might set specific performance targets, such as reducing payroll processing time and/or the error rate by x%. These goals are central to helping companies understand how effective automation is.
• Defining roles: Assign a dedicated team to manage the process. Then, set the ground rules for how that team operates. Who is ultimately in charge and makes the final decisions? Determine which team members have the approval or veto power over each step of the process. For example, the company’s top financial officer might have the authority to sign off on the payroll system’s integration with accounting but not the training plan.
• Developing a timeline: Any transition plan should have a go-live date, with explicit milestones established along the way. For example, the company may determine that all the necessary data must be in the new system by a specific date for the go-live date to be possible.
• Testing the process: Before going live with the new system, run a simulated payroll with real data to ensure that everything processes correctly. Compare the automated test results with manual results. The test may indicate that one or more settings, such as taxation rates, needs to be adjusted.
• Launching in phases: To minimize any disruptions and work out glitches before they impact the whole process, consider transitioning a single department or location before the companywide launch.

5. Train Staff and Communicate the Changeover

Any system that includes timekeeping and/or employee self-service features requires training the whole company to use it. Many vendors provide training as part of the automation process, but companies may choose to augment that by purchasing additional training or tasking an internal training department with providing additional or ongoing training.

Any training plan should give users ample time to master the portions of the system they’ll use. It’s also wise to clearly and thoroughly explain the nature of the changes to employees, including:

• Why the company is automating.
• How the change will impact them.
• What’s expected of employees to facilitate the transition.
• The complete project timeline.
• Where employees should go to get questions answered, troubleshoot challenges, and report problems.

6. Monitor the Payroll Process After Automating It

Being proactive safeguards the payroll process against errors, data breaches, or system inefficiencies. This includes:

• Periodically comparing the details of automated payroll with historical manual calculations; moderate to large discrepancies may indicate a problem.
• Checking that payments are processed accurately and on time.
• Verifying that the system is maintaining records for as long as required and that those records are readily accessible.
• Tracking key metrics, such as time and cost savings. If these metrics fall short of targets, investigate why.
• Testing for vulnerabilities in data storage and access control, monitoring system access logs, and confirming that payroll data is backed up regularly and securely.
• Reviewing system integrations to verify that data is transferring accurately and completely.
• Evaluating whether the payroll automation vendor is responsive when asked to resolve issues or provide updates.

Payroll Automation Software and Technology

Automating payroll boosts efficiency, which saves money, even when payroll remains an isolated process. But the benefits of integration are magnified when payroll is effectively integrated with other functions. NetSuite’s SuitePeople Payroll is a full-service payroll solution in which automating calculations is just the beginning. The cloud-based solution handles all tax filings and deposits and makes it possible to prepare, print, and file W-2 and 1099 MISC forms at year’s end. It features employee self-service capabilities that can take many tasks off payroll’s plate. It also has a robust dashboard and reporting functionality, as well as more than 100 customizable standard reports and key performance indicators that allow leaders to monitor payroll trends and compare results to other periods. Authorized users can move down the funnel from summary-level financial information (such as trial balance reports) to detailed payroll transactions and always see real-time data. Detailed payroll data is available in other NetSuite applications as well, including accounting, professional services automation, planning and budgeting, and SuitePeople HR.

Payroll automation represents more than just a shift from manual to digital processes—it’s often a foundational step in an organization’s digital transformation. While implementation requires careful planning, the benefits extend beyond improved accuracy and efficiency to include enhanced security, better compliance, and increased scalability. As organizations grow and business environments become more complex, automated payroll systems will provide the adaptability needed to manage an evolving workforce.

Payroll Automation FAQs

What is the difference between manual payroll and automated payroll?

Manual payroll requires direct human engagement for every step of the process. Someone must enter all data by hand and then manually calculate wages, taxes, and deductions. Automation uses software to take care of the calculations. It also typically imports data from other sources, such as a time-clock program, and integrates with other programs, such as accounting.

Can payroll be fully automated?

No, not fully. Although key aspects of payroll processing, such as calculations and reporting, are well suited to automation, some aspects still require oversight, judgment, and interaction. These include:

• Configuring payroll systems to align with company-specific policies.
• Investigating and correcting discrepancies.
• Managing exceptions.
• Ensuring compliance with nuanced local or international labor laws that may not be fully codified in software.
• Answering employee queries, explaining deductions, or addressing disputes.

Which stakeholders should be involved in payroll automation implementation?

Effectively implementing payroll automation requires collaboration among a variety of stakeholders. They include the human resources, payroll, finance and accounting, information technology, and legal and compliance teams, as well as the software vendor or implementation partner.