Automating Payroll Contributions for Compliance: A Practical Guide

Payroll contributions can be tricky for employers to manage, especially if they have employees in multiple states — or countries. Regulations vary by location and require strict payroll compliance, or the employer could face fines or other penalties. 

Rather than rely on internal expertise, employers rely on their payroll system to handle proper calculations of employer contributions. If the employer offers any benefits — such as 401(k) — it adds a layer of complexity to the calculations.

Automated payroll contributions substantially reduce the risk of error, which is why employers often expect their other applications — from benefits administration to tax compliance platforms — to seamlessly integrate with their payroll platform and its automated functions. Not only does automation ensure they remain compliant, but it also streamlines the payroll process. 

Why payroll compliance is critical for businesses

Payroll compliance broadly refers to the laws that employers have to follow regarding employee compensation, payroll taxes, benefits, and recordkeeping. To maintain compliance, employers have to ensure employees are paid correctly and on time and follow any federal, state, and local labor laws.

On top of that, employers have to remit any employee withholdings and employer contributions to the appropriate agencies by the required deadlines. If this doesn’t happen, employers face penalties such as fines and can open themselves up to legal action from employees.

Technology has certainly become a critical part of any payroll department, automatically calculating both deductions (like income tax) and employer contributions (like Social Security tax payments). Employers need to maintain accurate employee records, such as the number of hours worked or the employee’s salary, but the payroll provider typically takes on the burden of maintaining payroll compliance.

Challenges of ensuring payroll contribution compliance

While payroll systems handle calculations, HR teams can still struggle with the impact of employer-sponsored benefits on employee pay. For example, pre-tax benefits, such as 401(k) contributions, ultimately impact the employee’s net pay and the employer’s contributions to various tax agencies. If those calculations aren’t automatically factored into an employee’s paycheck, the employer risks not being compliant. Mistakes are bound to happen when employee deductions have to be entered manually and have a cascading impact on employer contributions, reporting, and even employee pay.

Related: How to Streamline 401(k) Compliance Testing with Payroll Integrations

Not only do errors cause operational disruptions, but they put the employer at risk. Outside of immediate penalties and fines for late or inaccurate employer contributions, non-compliance could trigger audits from regulatory agencies — creating an even larger headache for the employer. Not to mention, the employee’s net pay might be incorrect. 

Employers may want to offer more benefits to their employees, but when their systems are fragmented and unable to communicate, they can run into trouble. As employers roll out new benefits, their pre- and post-tax calculations become increasingly complex — and if the platforms they use to administer these benefits aren’t compatible with their payroll automation, they may be stuck calculating the impact to their payroll contributions manually. 

Employers have to be assured that their employer contributions are correct based on the employee’s pay for that period, less any pre-tax benefits — and they’ll want to be able to rely on their providers for this peace of mind.

How payroll automation simplifies compliance

Complete payroll automation calculates an employee's salary or wages, tax withholdings, and employer contributions based on all pre- and post-tax benefits. This doesn’t require any manual intervention, and all calculations are compliant by default. Some payroll systems also automate the process of filing important tax documents and completing the direct deposit of any employer contributions and withholdings. 

Let’s use the 401(k) example again. An employee can change their deferral percentage at any time, which impacts the net pay, taxes, and employer’s contributions to both taxes and any 401(k) match. If employee contributions have to be manually updated in the payroll system, they have to be completed in a timely manner to ensure accurate calculations for the next payroll. This is challenging for any employer to manage, but even more so for companies with limited HR staff. Even benefits that only allow changes during a specific period, such as FSA accounts, face the potential for human error if the contributions are updated manually. 

When these processes are automated, the employee can make the change in a third-party application (the 401(k) recordkeeping system), and the data is seamlessly transferred to the payroll system. By doing this, employer contributions remain in compliance for subsequent payroll runs. 

APIs: The key to automating payroll contributions

As we just mentioned, payroll automation happens when external applications are connected to an employer’s payroll system. When the two products “talk” to each other, updates impacting the employee’s payroll are sent to the payroll system via a data transfer. 

While that transfer can happen in several ways, APIs enable data transfers in a standardized, efficient, and secure way. API integrations facilitate real-time data transfer and can check for errors (whereas traditional secure file transfer protocols — SFTPs — are prone to errors). Payroll APIs ensure that the employee’s pay is always up-to-date based on information in an external system, thereby keeping all payroll calculations and employer contributions in compliance. 

APIs are also more secure than other transfer methods, improving the data handling of sensitive employee information. 

The benefits of a unified API

From an employer’s perspective, any benefits solution needs to be compatible with their chosen payroll system. From a product perspective, that means building APIs with multiple payroll systems to capture the largest market share. 

In the U.S., there are more than 600 payroll software systems, and the top 10 only account for about 60% of all U.S. employers. To integrate with any payroll provider your customers may use, you’d need to build hundreds of payroll integrations — a costly and resource-intensive task.

Fortunately, there’s a better way: integration platforms like Finch unlock access to hundreds of HRIS and payroll systems through a single integration. When employees make changes in your product that impact payroll, the data is transmitted via Finch’s unified API and updates the employer’s payroll system automatically.

Examples of payroll contribution compliance in action

Human Interest is a full-service 401(k) provider for small and medium-sized businesses. Prior to using Finch, the company routinely ran into problems with their third-party connection to certain payroll providers, which forced their Operations team to manually validate the data used to calculate contributions — a process that wasn’t sustainable or scalable. 

Now, Human Interest uses Finch’s Deductions product to create and update employee benefits within the payroll system. Companies can define the amount and frequency of employer contributions and employee deductions for each payroll. With 360° integrations, payroll contributions and deductions are automatically updated in Human Interest’s customers’ payroll systems, guaranteeing compliance.

Preparing payroll systems for 2025 compliance changes

Employers rely on payroll automation not only for accurate calculations, but also to keep up with any regulatory changes. States may implement changes to income tax rates, or federal tax bracket updates may impact employee withholding.

The IRS also regularly changes limits for pre-tax contributions, such as the increase to $23,500 for 401(k) contributions in 2025 (up from $23,000 in 2024). Some employees may quickly update their contributions to match, impacting the company’s payroll processing. 

Not only will APIs capture this data, but APIs can also reflect compliance changes. Payroll integrations should reflect the new limits, keep calculations current, as well as prevent employees from making contributions in excess of any limits.  

Final thoughts: The future of payroll compliance with automation

For many payroll teams, automation isn’t a nice to have; it’s a necessity. They rely on automation for payroll compliance, ranging from tax calculations to employee deductions to employer contributions. 

You can build your own integrations to achieve payroll automation, but you may find your team bogged down by the maintenance and limited to a few integrations. With Finch’s unified API, you can connect to hundreds of payroll systems. You don’t have to manage individual integrations and worry that one isn’t working as expected and that your customer is out of compliance as a result. 

Your customers can’t risk non-compliance, and you can’t risk losing customers due to a lack of seamless integration. To learn more about Finch’s payroll API, you can sign up or schedule a call today.