The Complete Guide To Payroll Automation: Benefits, Strategies, And Use Cases

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Guide To Payroll Automation

Smooth and error-free payroll processing is one of the crucial building blocks for employee retention. 

A survey by the Workforce Institute at Kronos Incorporated indicates that 49% of professionals will start hunting for a new job after experiencing just two errors in their salary payouts. 

That is why enterprises of all sizes are increasingly automating their payroll processing.

What is Payroll Automation?

It includes automating payroll-related processes and workflows using digital media and specialized software. It includes collecting, organizing, and storing all data required for salary calculations in a centralized database. It also covers the auto-generation of electronic compliance reports and running payroll analytics.

According to the Alight 2021 Global payroll complexity index report, 40% of companies still use spreadsheets, and 18% use manual paper-based activities as part of payroll processing.

Automation transforms conventional processes by eliminating the need for handling paper documents and minimizing the use of ad-hoc spreadsheets and emails.

How Do You Automate A Payroll Process?

Before implementing automation software, enterprises should chalk out the use cases that are most valuable for automation in alignment with their strategic objectives. 

The payroll managers must identify process bottlenecks and components that use paper documents. The IT team also needs to identify the data sources that should be integrated for payroll calculation and reporting. 

After securing buy-in from the top management, enterprises can choose a cloud-based HR payroll automation app to automate the payroll function and payroll automation in excel.

It can be a standalone app, automating a part of the payroll process. It can also be an enterprise-wide platform, managing the entire payroll cycle from policy to payout and offering other HR automation modules.

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Payroll Automation Processes

Payroll Automation Processes
The Complete Guide To Payroll Automation: Benefits, Strategies, And Use Cases 1

Several sub-processes must execute consistently pre-payout, during payout, and post-payout as part of the payroll function. 

All the sub-processes can be digitized using payroll automation to enable a seamless employee experience.

  • Formulate Payroll Policies

Salary calculations depend on organization-specific HR policies governing attendance, leaves, overtime, and reimbursements. They also depend on regulations like the provident fund, pension scheme, and income tax rules. 

You can easily configure these rules using the payroll automation software backend. Fully automated workflows must be in place to request and approve any modifications to these policies. 

  • Collect and Validate Employee Data

Besides the business rules, the automation software needs employee-specific data for salary calculations. This includes the employee’s designation, attendance data, hours worked, salary structure, and investment declarations. 

It also requires employee performance and appraisal data to calculate variable components of the payouts. Any special allowances, benefits, overtime, and leave encashments must be incorporated. 

Your existing enterprise systems can easily integrate with payroll software using secure APIs. 

Tip: It is prudent to replace disparate legacy HR systems with a unified HR Management system (HRMS) offering end-to-end functionalities for HR automation.

It will ensure seamless data flow between the different functional modules such as payroll, performance management, attendance monitoring, and leave management.

  • Payroll Calculations

The software calculates various components of the CTC like basic salary, house rent allowance, travel allowance, and others per the preconfigured salary structure assigned to each employee. 

It also handles deductions such as the EPF amount, ESI amount, professional tax, and TDS (tax deducted at source) per regulatory requirements.

Tip: An HRMS offering expense management along with payroll allows employees to upload invoices for reimbursements on the go, using their mobile devices.

It initiates an automated workflow assigned to the HR team to validate and approve the expense claims within preset timelines per company policy.

  • Payout

Payroll automation ensures that the net salary payouts are credited to employee bank accounts on time. It also generates payslips indicating the breakup of payout components automatically. Employees can access their payslips through easy-to-use self-service portals. 

  • Statutory Compliance

Payroll applications auto-generate challans for statutory deductions such as EPF, pension amounts, professional tax, and TDS per preset deadlines. 

The accounting team can complete these payments online through government portals and upload the receipts of these payments in the payroll system for compliance purposes. Year-end compliance, such as the generation of TDS certificates and tax forms (Form 16) for employees, is also automated in payroll solutions.

  • Management Reporting

Automation applications generate industry-standard reports and visualizations for the management to track salary costs and business expenses. These also provide insights into hiring costs and CTC trends over time. 

Tip: Using an integrated HRMS, you can unlock the full potential of your HR data with advanced AI algorithms that help predict attrition, optimize bonuses and determine salary hikes.

Why Move Away from A Manual Payroll System?

Manual Payroll System
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A manual payroll function depends on HR team members collecting data from disparate systems and entering it manually into spreadsheets. This data forms the basis of salary calculation, payslip creation, and compliance reporting. 

Also, employees have limited visibility into the process and lack access to pre-defined escalation protocols. It results in several disadvantages compared to automated payroll processing. 

Disadvantages of Manual Payroll Systems

  • Prone to Errors

Since it relies on manual data entry, it is prone to human errors. Errors could be related to incorrect classification of employees, miscalculation of wages, wrong tax rates, or other reasons. 

Data from disparate systems such as leave management, attendance management, and accounting may be using different data formats, currencies, or units. Spreadsheet software may not offer enough validations to ensure that the data entered from these systems is accurate.

  • Frequent Bottlenecks

Manual payroll management is time-consuming and cannot enforce turn-around times for each process because they are not digitized. 

They rely on manual email reminders or call follow-ups. The lack of automatic assignments and defined escalation matrices leads to approvals getting stuck for long periods.

  • Higher Costs

A manual payroll system may be cheaper in the short run for small enterprises. However, for an organization that is scaling up, the long-term overhead costs such as workstations, printers, calculators, paper, etc., rise rapidly. 

Also, since the productivity of payroll employees would be low because of the manual nature of their work, the HR costs would add up significantly in the long run. 

  • Compliance Risk

Payroll compliance requires accurate calculations, on-time reporting, and payments within strict deadlines. Manual processing can lead to errors and delays that cost the enterprise heavily in terms of statutory penalties and loss of credibility. 

  • Data Risk

Data stored in individual unsecured devices or paper documents remain at risk of theft or destruction. Also, since there is no central database containing all payroll data, inconsistent copies or versions of this data may exist on multiple devices.

All these drawbacks result in a weak employer value proposition (EVP) which, in turn, makes it tough to attract and retain top talent.

Benefits of Payroll Automation

According to the 2018 Bain HR decision maker survey, cost saving is the top-ranked benefit expected from payroll automation. It also offers a range of other benefits, resulting in a superior employee experience and positive employer branding. 

Following are some other crucial advantages of payroll automation,

  • Better Speed

The input data for salary calculation is automatically pulled in from different enterprise apps through integration. Employees save time as they do not have to enter data manually or recalculate. 

Automation also eliminates bottlenecks with auto-assignment of workflows and automated reminders. It ensures timely approvals and on-time payouts.

  • Higher Accuracy

According to the American Payroll Association’s research, organizations using payroll automation were 44% more likely to have a payroll error rate of less than 2%.

Payroll Automation Benefits
The Complete Guide To Payroll Automation: Benefits, Strategies, And Use Cases 3

Pre-defined industry-standard rules in the software ensure that the populated data is accurate and consistent. All components of the CTC are calculated automatically. It leaves no room for human errors. 

Compliance-related challans and reports are generated automatically per predesigned formats and preset deadlines.

  • Increased Productivity

The productivity of payroll team employees increases significantly as they do not need to spend much time on tedious data entry or continuous follow-ups. They can spend more time supporting employees in resolving their queries. 

Also, employees can access self-service portals on their PC and mobile devices to track their salary payouts, download payslips, get tax filing forms and raise queries. Supporting documents and invoices for expense reimbursements can be uploaded digitally, eliminating paper clutter. 

These features boost productivity for the employees as well as the payroll team.

  • Easy Scalability

Cloud-based payroll automation apps can rapidly scale up or ramp down as per business requirements. Enterprises only need to buy more user licenses or add functional modules. 

The software provider handles the addition of physical hardware infrastructure and network components at the backend.

  • Data Security

Payroll and employee data is sensitive and confidential. With automation apps, this data is encrypted and securely stored in a centralized database on the cloud. Enterprises can restrict access to this data by specifying role-based access rules and authentication mechanisms. 

Also, automation apps provide a time-stamped audit trail for every modification done to payroll data, thus enforcing accountability.

  • Deep Insights

With a centralized database, high-quality salary data, visual dashboards, and advanced analytics, payroll applications provide actionable insights for enterprises. They help predict future HR costs, determine increment amounts, and optimize variable payouts.

How to Choose an Automated Payroll System

Besides checking the functionalities and reports, the other chief factors to keep in mind while selecting an automated payroll software are,

  • Ease of Integration – Apps offering secure APIs can easily integrate with other enterprise systems that provide data necessary for payroll processing. 
  • Compliance with local regulations – The payroll app must comply with local payroll taxes and wage regulations. It should be preconfigured with these rules.
  • Ease of customization – The system should provide the right balance of industry-standard workflows and organization-specific customizations.
  • Upfront and ongoing costs – Cloud-based payroll apps can deploy without upfront costs. The monthly spending depends on the number of licenses purchased and the number of functionalities used. 
  • Ease of use – Intuitive interfaces and streamlined workflows drive user adoption. Adoption is the most critical factor for generating a good return on investment for automation technology.
  • Scalability – Cloud-based payroll apps are much easier to scale than on-premise software.

Final Words

Payroll automation is often the starting point for broader HR automation initiatives. KPMG research says payroll is well-suited to automation, as clearly outlined rules and policies govern the payroll function.

In this context, it makes sense for enterprises to select a full-fledged HR automation system and start by implementing its payroll module. Payroll automation ideas benefits can set the right tone for future HR automation endeavors.  

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Tarulika Jain

Hi.. I am Tarulika Jain. I work as a content writer in HROne. I am an Electrical Engineer by degree, and a pragmatic writer by profession. I bring you insights about Human Resource Management and how digitalisation can make your workplaces happier. When I’m not writing, researching and reading, I walk around the woods, sip my coffee and listen to Indie Music.

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