How to Build an Automated Payroll Deduction System

As technology evolves and budgets shrink, employers are demanding more from their vendors: more integrated experiences, more automation, and more work taken off their plates. 

Retirement plan administrators and benefits providers are well aware of the inefficiencies that plague their industries — long chains of manual processes are required to manage benefits like 401(k)s, HSAs, and FSAs. Most employers are unaware of just how much manual effort goes into these benefits, but they still demand that their provider handle the lion’s share of the work — including deductions management.

Automated payroll deduction systems are one way that retirement and benefits providers can take some of the administrative burden off their customers without overwhelming their own internal teams. Powered by API integrations, automated payroll deduction systems allow recordkeepers, TPAs, and benefits providers to write changes back to the employer’s payroll system, eliminating a manual step that often falls on the employer.

Payroll integrations make payroll deduction changes manageable, scaleable, and compliant for both employers and for your company, the provider.

Understanding Payroll Deduction Systems

Internally, an HR team may rely on a payroll deduction system to ensure payroll processing is accurate. Most employees have many deductions from their gross pay, from mandatory taxes or garnishments to voluntary deductions like retirement benefits or cafeteria plans. 

Not only do HR teams need to manage the mandatory and voluntary payroll deductions, but they need to distinguish between pre-tax and post-tax deductions to ensure the employee’s net pay is accurate. 

Related: A Deep Dive Into Payroll Deduction Types: Definitions, Examples, and How to Use Them

Payroll deduction adjustments need to be made in a timely manner, but this doesn’t always happen with manual processes. Say, for example, an employee requests a change to their retirement contribution. If the process in place is manual, an HR rep has to make the change before the next payroll runs. Small teams may struggle with bandwidth, and large teams face a large volume of requests, which makes it difficult to keep up with manual adjustments. 

Alternatively, automated payroll deduction systems will make the payroll deduction adjustments without human intervention. In this case, once the employee has updated their retirement contribution amount, the deduction is automatically updated in the payroll system, ensuring that the next payroll is accurate. 

Benefits of Automated Payroll Deduction Systems 

Automated payroll deductions create a seamless experience between a benefits provider and a payroll system. Employees can self-serve changes to their benefits or voluntary deductions, and the change will automatically be reflected in the payroll system. This takes the burden of updating deductions off the employer, and allows the provider to verify that deductions are accurately reflected in the employee’s paycheck. Automated systems can also put the right guardrails in place, ensuring changes aren’t made outside of specific enrollment periods and that deductions are in compliance with federal regulations.

Automated payroll deductions also reduce the risk of inaccurate data and delays. Since voluntary deductions impact an employee’s net pay — whether pre-tax or post-tax — timing is critical. If adjustments to payroll deductions aren’t made promptly, they can cause issues that need to be corrected and are sometimes tricky to fix.

As a result, manual payroll systems are incredibly inefficient, time-consuming, and error-prone. Automated payroll deduction is increasingly becoming a baseline expectation of employers. They can’t risk inaccurate payroll deductions and the potential local and federal compliance ramifications if timely updates aren’t made.

Then there’s the employee impact. If employees make a change to a voluntary benefit, they expect it to be accurately reflected on their next paycheck. If the benefit is not added or removed appropriately, it impacts the employee’s net pay, which can cause frustration and stress. 

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Building a payroll deduction system using APIs

There are several ways to build automated payroll deduction systems, but the most robust is through API-based payroll integrations. Payroll integrations sync data between your system and the employer’s payroll system, enabling deductions to be automatically calculated and applied to the employee’s paycheck based on the data in your system. 

Related: Everything You Need to Know About 401(k) Payroll Integrations in 2024

What APIs bring to payroll deduction management

There are several advantages to using API integrations to power automated payroll deductions.

Seamless data flow between systems

API integrations connect two systems seamlessly. They often have built-in data validation to ensure that the data received is formatted correctly, even if the data fields differ between the two platforms. 

Self-service employee portals are often powered by APIs, so employees can manage their own deductions and have that data written back to their employer’s payroll system. APIs can also enhance the employee experience by pulling information back from the payroll system and displaying it in your product.

Additionally, APIs have advanced security controls to protect data as it’s transmitted between two systems. 

Timely updates to payroll deductions

It’s critical that deduction information is up-to-date across all platforms. Payroll integrations facilitate near-real-time exchange of data between your product and the employer’s payroll system, ensuring that employee’s net pay is properly calculated during the next pay cycle. 

Use case examples

Many providers would benefit from payroll integrations, including:

• 401(k) and retirement products
• Fringe benefits, such as commuter benefits or student loan repayment
• HSAs, FSAs, and other tax advantaged savings accounts
• Insurance products
• Financial wellness products, such as earned wage access

Some products have specific enrollment periods and requirements that rely on accurate employee data (such as hiring a new employee). Others allow employees to make changes whenever they’d like. A bi-directional or 360° integration will ensure that your product and the employer’s payroll system stay up-to-date.

Related: How to Simplify Employee Benefits Management with Payroll Integrations

Steps to implement an automated payroll deduction system

If you’re looking to connect to your customers’ payroll systems to automate deductions, there are a few things you need to consider as you get started.

1) Assess deduction types and business needs

Depending on the benefits you offer, you may need a one-way connection (where your product writes updated deduction data to the employer’s payroll system) or a bi-directional system (where your product also receives data from the employer’s payroll system). Most use cases require bi-directional integrations.  

For example, if your product only allows enrollment within 30 days of an employee’s start date, you may need to receive new employee data in order to properly enforce the enrollment period.

You’ll also want to consider how many payroll systems exist on the market and how many you want to connect to. The U.S. has a fragmented payroll market, with thousands of payroll systems. There are large players like Quickbooks, but also smaller products that have captured a share of the market. The more payroll systems you can connect to, the larger your potential customer base. 

2) Select or build an API solution

“Build versus buy” is a common question for any technology company. You can build your own API integrations in house, but depending on how many payroll systems you want to integrate with, this could require significant development resources on your end to develop solutions for each unique payroll system.

An alternative is a unified API, like Finch. With Finch, you build a single integration that unlocks access to all of the 200+ HRIS and payroll systems Finch supports.

3) Test your API solution

Whether you use a platform like Finch or build your own integrations, you’ll test connections to ensure they’re accurately transmitting data according to regulatory compliance standards. 

If you build your own integrations to multiple payroll systems, you’ll need to test each one individually. 

Ensuring compliance in payroll deduction management

Whenever you offer benefits that involve payroll deductions, you need to make sure that your product complies with any relevant regulations. You don’t want the employer to be out of compliance as a result of offering your product to employees. 

Key legal and regulatory considerations

It’s crucial to obtain and maintain proper documentation for voluntary deductions. Many states require employee consent for certain types of deductions, and employers will rely on you as the benefit provider to ensure they maintain compliance.

By automating the deduction process, you can ensure compliance with tax laws and regulations and accurate calculations. You should also maintain an audit trail of enrollments, un-enrollments, and any changes made by employees that impact their payroll deductions. Payroll integrations make it easy to pull both current and historical data, which makes end-of-year reporting much simpler.

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

How automation simplifies compliance

Since employers are also required to maintain accurate payroll records, automation creates the necessary deductions on the correct pay period in the event of an audit. Automation can enforce pre-configured logic for any benefits limitations or other rules.

Best practices for optimizing your payroll deduction automation

When you integrate with a company’s payroll system, you want to ensure that you’re not only eliminating manual data entry, but also creating a process that doesn’t add any additional burden to the internal HR team. 

This means you’ll need to regularly update and test your integrations for any changes that occur within the payroll provider’s system. Payroll providers may build new functionality or make changes to comply with new tax laws or regulations. If you’ve built your own, you’ll need to keep tabs on each provider’s API. With Finch, these updates are monitored and addressed for you.

You’ll also want to work closely with your customers to ensure the payroll automation is meeting their needs. Is it easy for them to connect to your product? Have they run into any issues with the data transfer? Finch allows employers to securely connect your product to their payroll system though a built-in onboarding tool called Finch Connect.

Your payroll deduction automation should also regularly refresh so your customers don’t even have to think about updates. By default, Finch requests new data from each connection on a daily or weekly basis. 

Simplify your customers’ payroll deductions with APIs

Automated payroll deduction is table stakes. If your potential customers are debating between your product and a competitor’s, they could be swayed by automation versus a manual process. You can’t assume that your product is compelling enough to justify a manual burden on the employer’s HR team.

From there, you should offer automation that is easy to use and manage, and the clear winner is the modern functionality and seamless integration offered by API integrations.

By using Finch, you can connect to more payroll systems and reduce the resource requirements on your end by developing a single API integration. You can also use Finch’s flat file product, which delivers data as a file via SFTP server, rather than building to the Finch Unified API. Flat file is a great solution for teams with limited technical resources.

To learn more, you can sign up to try Finch, or schedule a call today.