How to automate payroll — and save hours every pay cycle

As a small business owner or founder, paying employees might sound like a simple job at first. But it actually involves calculating many factors, like wages, deductions, benefits, vacation pay, overtime, bonuses, and tax withholdings — both accurately and on time. If you don’t have the bandwidth to constantly update spreadsheets, verify hours, and prepare payments manually, it’s probably time to move to payroll automation.

Using an automated payroll system can help reduce manual repetitive work and, in turn, free you up to focus more on building your business. And you can pull payroll reports more quickly and keep tabs on cash flow and labor costs in real-time, which can help you make better-informed financial decisions for the future of your company.

In this article, we look at what automated payroll is and how it works. Plus, we provide a succinct framework designed to help you implement a payroll automation process in your business — so you can save hours every pay cycle and avoid payroll headaches.

Payroll automation is the process of using software to streamline and manage manual payroll tasks, including calculating pay, deductions, benefits, filings, and taxes, in addition to distributing direct deposits and generating reports. Payroll automation software speeds up time-consuming and tedious tasks while increasing accuracy and minimizing manual errors.

With the automation of payroll, founders and small business owners free up time to focus on other areas of the business, instead of getting bogged down with tasks like calculating wages and filing payroll taxes. Setting up payroll automation won’t completely remove the human element from the process. It can replace much of the manual load, but you’ll still want to have your team members review and confirm the automated outputs.

If your business currently relies on a manual payroll process, but you’re curious about other options, review the chart below to see how manual payroll vs. automated payroll stack up.

The automated payroll process can differ slightly depending on the systems you use. However, the overall process will follow the same basic workflow. 

Here’s how to do payroll with an automated system. 

1. Collect employee data

Setting up employee records is a one-time process that you can refer to for all payroll runs. To do so, you’ll need to collect each employee’s information, such as their:

• Personal contact information
• Employment status (such as full-time, part-time, or contractor)
• Salary or hourly pay rates
• Tax forms and withholding information
• Bank account details (for direct deposit)
• Benefits and retirement plan enrolment (if relevant)
• Paid time off (PTO) and vacation balances

2. Connect time-tracking tools

Automated software can integrate directly with time-tracking systems to import key data, such as hours worked, overtime worked, paid time off, sick leave, and holiday hours. By connecting time-tracking tools to your payroll system, you won’t need to manually calculate each timesheet, and you’ll minimize payroll errors.

3. Calculate gross pay

Automated payroll software can calculate each employee’s gross pay, taking into account their regular wages, overtime pay, bonuses, commissions, holiday pay, expense reimbursements, and more.

4. Apply deductions and taxes

Tax rates and payroll deduction rules are typically built into automated payroll software, so it can instantly calculate the appropriate take-home pay. The system can deduct income tax withholdings, payroll taxes, pension contributions, health insurance premiums, and more. That way, there’s no need for founders to manually calculate employer payroll tax rates.

5. Run approvals

Small business owners need to review and approve payroll-related activities, such as employee hours, payroll totals, exceptions or unusual payments, employee changes, bonus payments, and more. Typically, automated payroll platforms will flag anomalies, which makes it easier to catch any potential issues.

6. Pay employees

Once you’ve approved payroll, automated payroll services can initiate payments through direct deposit, payroll cards, or even printed checks. Employees will also automatically receive digital pay stubs that contain all the necessary details.

7. File taxes and generate reports

After employees have been paid, there’s still work left to do. You can use automated payroll tools to calculate your employer tax obligations, prepare payroll tax filings, schedule tax remittances, generate year-end tax forms, and more.

These tools can also produce payroll reports that provide real-time visibility into labor costs and payroll expenses.

As a busy founder or small business owner with bright ideas and visions for growing your company, you probably don’t want to sink a ton of time into managing payroll. An automated payroll solution can completely alter your day-to-day tasks each payroll period.

Here are the key benefits of an automated payroll system:

• Faster payroll runs: When you automate repetitive calculations and payment workflows, you can complete payroll in minutes, instead of hours.
• Fewer manual errors: When you use efficient tools to automatically calculate wages, overtime, deductions, and taxes, you’ll minimize the need to make payroll corrections and see few payment issues.
• Stronger record keeping: Automated systems store payroll records, pay stubs, and tax documents in an organized manner, so you can quickly access historical information for audits and reports.
• Better compliance: Automated payroll systems are designed to apply current tax rates and payroll rules correctly, which will help you stay on top of tax deadlines — and lower the risk of penalties incurred by missed filings or calculation errors. 
• Smoother employee self-service: Employees can access their pay stubs, tax forms, and payroll history from a secure portal, which can reduce administrative requests and the number of payroll-related questions you’ll need to answer.
• Cleaner reporting: You can automatically generate payroll, labor- cost and tax reports for full visibility into your payroll expenses and cash flow.
• Reduced payroll costs: Payroll software can free up founders to work on higher-value tasks (instead of repetitive admin work). Plus, smooth-running automations can help you avoid costly payroll errors and compliance mistakes, which also saves money. 

Wondering how to automate payroll so it runs faster and more effectively? Here’s a framework for how to set up an effective system. 

Know when it’s time to automate

Spreadsheets are inexpensive and familiar, but they can’t scale with your business as it grows. If you have more than a few employees, process payroll more than once a month, and spend several hours on payroll every pay period, it’s probably a good time to automate your workflows. Automation can also be the right choice if you’ve made payroll or tax filing mistakes in the past or need to easily generate payroll reports for budgeting and financial planning purposes.

Prioritize the right payroll features

There are plenty of automated payroll platforms out there. Choose one that eliminates manual work and increases accuracy. Look for features like:

• Automatic payroll calculations
• Direct deposit
• Payroll tax calculations and filing support (more on this below.)
• PTO and leave management
• Payroll reporting and analytics
• An employee self-service portal
• Mobile access

Put extra emphasis on getting taxes right

Taxes are the biggest source of compliance risk for many growing businesses, so it’s important to automate them correctly from the start. Opt for software that can automatically calculate tax withholdings and employer payroll tax obligations, schedule tax deposits and remittances, and generate year-end forms and payroll reports.

Connect payroll with your other business systems

Payroll isn’t an island, so the data from your automated payroll system needs to flow smoothly in and out of other systems in your tech stack. Your automated payroll system should integrate with your time tracking tools, HR systems, benefits providers, accounting software, and banking tools.

Carefully evaluate the automated payroll software

Consider how the platform fits into your business and existing workflows — and whether it’ll scale with your business as it grows. You’ll also want to look into how easy it is to migrate existing payroll data from your manual systems.

Follow a structured rollout

If moving from a manual payroll process to an automated workflow seems overwhelming, consider taking it one step at a time. 

To get started, follow this checklist: 

• Document your current payroll workflow.
• Identify manual repetitive tasks that could be automated with the right solution.
• Choose payroll software that fits your company’s current needs and could also scale to meet your future needs.
• Clean up employee records and verify that their payroll information is correct.
• Confirm tax settings, deductions, and pay schedules.
• Connect payroll with time-tracking software, accounting, HR, banking systems, and other tools in your stack.
• Run a test payroll before you run your first live payroll cycle with your automated system.
• Review payroll reports after each pay period to verify accuracy.
• Identify opportunities for further automation.

When you’re automating payroll, you’re doing more than replacing your spreadsheet with software. You’re creating a powerful, new payroll workflow that connects to your employee data, time-tracking tools, accounting software, and bank accounts. In addition to completing payroll faster and more accurately, you’re freeing up administrative time to focus on growing your business.

Mercury can help you build a streamlined finance tech stack that supports all your business goals. Plus, we recently acquired Central payroll software that uses AI agents and human experts to handle payroll, benefits, PTO, HR, state compliance, and more. See how easy it is to set up payroll with Mercury.