Automation in Deductions Management with Payroll APIs

For most employers, deductions management is complicated at best and a nightmare at worst. While payroll software will calculate required deductions like taxes, voluntary deductions often have to be updated manually. This gets especially complicated when the deductions change frequently, such as with retirement plan contributions or other tax-advantaged savings accounts. 

Luckily, payroll APIs offer a solution. With a bidirectional payroll integration, benefits platforms can automatically update the payroll system to reflect deductions changes, taking the pressure off of employers and ensuring employees paychecks are accurate. Automation in deductions management is a win-win for both benefits providers and the employers they serve.

What is a payroll deduction API?

Payroll deduction APIs enable the creation and management of various deductions between an employer’s payroll system and benefits software. Also referred to as payroll APIs or payroll integrations, they allow the two systems to share data so information updated in one system is reflected in the other, streamlining payroll deductions management. 

For example, if you offer employers insurance, retirement, or other employee benefits, there are a lot of factors that could impact the payroll deduction amount from one pay period to the next. Even if you offer a benefit with a specific annual enrollment period, the employer still has to manage updates for newly hired or recently departed employees. With a payroll deduction API, employers don’t have to manage changes in the deduction amount manually. 

Benefits of Automating Deductions Management

Automated deductions management benefits both your customers and you as the provider. Employers can trust that employees’ deductions are accurate without much administrative effort on their part, and your company can operate much more efficiently and unlock scale.

Efficiency

Teams can process payroll faster if they don’t have to manually calculate deductions or add manual entries to a payroll system. Automated benefits management saves time and frees up resources for more high-value work. 

Accuracy

Manual data entry always carries a risk, whether it’s an inaccurate calculation or an overlooked change to an employee’s benefit. Payroll deduction APIs automate deduction changes, minimizing errors and providing consistent data synchronization. 

Compliance

Payroll deduction APIs can enforce tax and legal requirements, such as defined enrollment periods or contribution limits on tax-advantaged savings accounts. With manual processing, the payroll team may need to confirm eligibility or be familiar with specific laws and benefit program requirements.

APIs can also help ensure that changes in taxes or laws are reflected in the deductions so the employer always stays in compliance. 

Scalability 

Manual payroll deductions processing is impossible to scale. As your organization grows or introduces new products (or both), more time is needed to manage payroll deductions manually on behalf of your clients. By contrast, APIs can process additional volume without any changes.

Related: Unlocking Scale in Employer-Sponsored Workplace Benefits

Considerations when using payroll deduction APIs

Since managing deductions can quickly become overwhelming, most employers will want some type of automation with their existing payroll system.

As a benefits provider, if you want to leverage payroll APIs to streamline deductions management, there are a few things to keep in mind.

Integration

Employers already have a payroll system in place, so your system needs to integrate with their provider of choice. The U.S. has hundreds of payroll software systems on the market. While you may opt to integrate with only the top payroll providers, this inevitably limits your market potential. The more payroll systems you can integrate with, the better for your business.

Related: In our Guide to the U.S. Payroll Landscape, we break down the top payroll providers by market share to help inform your integration strategy. 

Security 

Since payroll systems contain highly sensitive employee data, it’s critical that your integrations have robust payroll security. A well-developed API integration will implement strong access controls and use multi-layered encryption to keep personally identifiable information (PII) secure.

Costs  

You’ll want to balance the upfront investment cost of building payroll integrations with the long-term savings you’ll see from reducing operational costs through automation.

When it comes to building payroll integrations, you have two options: build all your connections in house, or outsource to an external vendor, like a unified API provider. 

To develop payroll APIs internally, you’ll need to allocate the appropriate resources, both for the upfront development and ongoing maintenance. Our research found that a single payroll integration can cost upwards of $187,500 — and that’s excluding the ongoing maintenance costs or required partnership resources. 

Alternatively, you can work with a solution like Finch to unlock access to hundreds of systems through a single integration. Finch supports 220+ HRIS and payroll systems and manages the ongoing maintenance of these API connections so you don’t have to. 

Vendor coverage and reliability

If you choose to outsource your integration work, you’ll want to carefully vet the vendor’s coverage and reliability.

When it comes to payroll deduction APIs, coverage is more than just the providers the vendor can integrate with. You’ll also need to ask about the level of data granularity the vendor can support, since automating deductions management requires accessing individual employees’ pay data — something not all payroll APIs can support. 

You’ll also want to be sure that the integrations are bidirectional, meaning data can flow in both directions. To automate deductions management, your applications will need to be able to both read data from the payroll system and write changes back. 

Lastly, be sure to investigate how reliable the vendor is. Payroll integrations require regular maintenance and quick action when there is a change to the underlying payroll API. Be sure the vendor you choose has the ability to keep their integrations running smoothly.

Real-world applications and examples

The use cases for payroll deduction automation are wide-ranging. Whether you provide a pre-tax or post-tax benefit, payroll deduction APIs make sure that the correct deduction amount is applied to the employer's payroll, therefore accurately calculating net pay in the payroll system.

Retirement

Benefits like 401(k) contributions can change at any time, making them a particularly challenging benefit to manage. Payroll deduction APIs automatically update the payroll system any time an employee makes a change to their contribution amount. 

Here’s how it works: An employee logs in to your application and changes their contribution amount. Your system then automatically changes the deduction amount in the payroll system to match during the next sync, ensuring the appropriate dollar amount is deducted from the employee’s paycheck during the next pay period. 

Related: Everything You Need to Know About 401(k) Payroll Integrations

Health benefits

Traditional health insurance premiums only change once, during open enrollment; but new benefits like Individual Coverage Health Reimbursement Arrangements (ICHRAs) are more dynamic, and the deduction amount can change from pay period to pay period. With a payroll deduction API, your benefits platform can calculate the appropriate deduction based on the qualified expenses an employee incurred during the pay period and automatically change the deduction amount in the payroll system to match.

‍Related: Powering ICHRA Administration with Payroll Integrations

Even health benefits that only change annually need ongoing access to a company’s payroll system. New employees need to be offered the benefit within a defined enrollment period, and that data can be synced to your platform through the API. You’ll have access to the employee information, such as start date and social security number, that’s needed for enrollment. Once the employee enrolls, the payroll deduction amount is written back to the payroll system. 

Other benefits

Payroll deduction APIs also streamline annual changes to deductions like insurance or contributions to an account like an HSA. Annual updates could be time-consuming for a payroll team, but with an API, the changes are synced automatically. 

Financial benefits platform TempoPay provides employees with healthcare financing. The benefit is an after-tax deduction that would typically fall on an HR administrator — either by making manual entries to the employee’s payroll or processing manual files. “Employers don’t want to jump through hoops to figure out how to deliver benefits to their employees,” said Hattie Ninteau, TempoPay’s Marketing Manager. “They want simple, set-it-and-forget-it solutions.” 

TempoPay turned to Finch to provide an API that could connect to its customers’ payroll systems. It takes TempoPay customers about 30 seconds to onboard through Finch Connect. As a result, TempoPay can write payroll deductions 4x faster.

Employers expect automatic payroll deductions management

For many employers, manual deductions management is simply out of the question or too much of a risk. To bring on a new benefits provider, employers expect automation in deductions management. 

Finch’s network of payroll providers covers 80% of all U.S. employers. Through a single integration to Finch’s unified API, your application can unlock access to all of our supported providers, including Gusto, ADP Run, and Paychex. 

To explore how Finch can help your customers with payroll deduction automation, you can sign up for a free trial or request a demo.