Payroll is an incredibly detail-oriented function in any business. It requires payroll professionals to correctly enter every timesheet number, keep on top of the latest regulations, and stick to a tight schedule with a quick turnaround time.
That’s why more and more payroll teams and small business owners are exploring how artificial intelligence can support their work. AI isn’t advanced enough to outmode payroll professionals, so there’s no worry about being replaced, but it can help automate a lot of the routine tasks that bog down their workday. LLMs like ChatGPT are changing how payroll teams complete their work, though it’s imperative to understand the limitations of these sorts of applications.
Here, we’ll discuss how to use artificial intelligence in payroll and what businesses should expect when they automate payroll processes using AI.
What Is Payroll Automation?
Payroll automation refers to the use of technology to handle payroll tasks that people usually have to do by hand—think duties like data entry or generating reports. Instead of spending hours on repetitive and sometimes tedious work, payroll software helps streamline the process.
Almost all companies already use at least some level of payroll automation through their payroll software, and using a platform has distinct advantages for small businesses. These programs are designed to calculate wages, withhold taxes, process direct deposits, and generate pay stubs.
Artificial intelligence takes payroll automation a step further. It can’t replace the expertise and experience of payroll staff, but it can complement their knowledge and make their jobs a little bit easier.
How Can AI Help Payroll Teams?
For many payroll teams, the hardest part of the job isn’t processing payroll; it’s all of the other tasks involved in making sure employees are paid correctly. AI reduces some of the administrative burden that payroll professionals face and even catches issues before they snowball.
These are some of the most common examples of AI automating payroll tasks:
Faster Payroll Processing
The majority of the payroll process is an unending loop of the same tasks. AI automates a lot of these tasks, reducing the manual labor involved and saving payroll professionals valuable time. As a result, they can invest that saved time in other areas, like supporting employees or resolving exceptions.
Better Error Detection
When someone is dealing with so many sets of data and various calculations, it’s easy for a mistake to slip through the cracks. AI can review payroll data much faster than a human and catch unusual activity that might signal that a mistake was made somewhere along the way.
Improved Compliance and Accuracy
Keeping up with payroll regulations is no easy feat, especially if your business is in multiple states or jurisdictions. In fact, 88% of small businesses say that tax laws make it too complicated to manage their own payroll taxes. AI in payroll can keep payroll teams and business owners informed about changing laws and compliance obligations, and then ensure every single regulation is being applied.
Automated Employee Support
One of the most overlooked payroll challenges AI can solve has nothing to do with the payroll process itself. Employees tend to have a lot of questions about how and when they’ll get paid, and rightly so. Payroll professionals end up spending a good chunk of time answering routine questions about paychecks, tax forms, direct deposit, and deductions.
AI-powered chatbots and employee self-service tools are designed to answer the questions people ask over and over again. This way, payroll professionals are only needed for more complex or individual situations, and employees never feel like a nuisance when they don’t understand something about the payroll process.
How to Use AI in Payroll: 4 Practical Applications
Managing small business payroll is often a tedious task for small business owners. For larger organizations, payroll professionals can get so focused on payroll runs and tax filings that they don’t have the time to evaluate how those processes could be improved.
Using AI in even a handful of payroll processes allows teams to work more strategically and reduce administrative bottlenecks.
Here are four practical ways that a business can use AI in payroll:
Automate Payroll Calculations
Payroll calculations involve more than multiplying hours worked by an hourly rate. Payroll teams need to account for wages, overtime, shift differentials, bonuses, commissions, PTO, garnishments, deductions, tax requirements, and more. Managing all of these variables by hand takes a long time and increases the risk of mistakes.
Modern payroll software can use AI to apply most of these calculations automatically. This is especially helpful when different calculations apply to different employees, or when your business is in multiple jurisdictions, each with its own set of payroll regulations.
Detect Errors Before Payroll Runs
A major strength of AI is being able to analyze large datasets almost instantly. Before payroll is finalized, AI may catch mistakes like duplicate payments, missing timesheets, or an extraordinarily high number of overtime hours. It’s always easier to correct issues before payroll is processed than once employees have been paid.
Streamline Tax and Compliance Work
Payroll compliance is complicated and always changing, but keeping up with all the applicable regulations is nonnegotiable. AI-powered systems watch for updates and catch transactions that may not comply with the current laws. A human still needs to verify compliance decisions, but AI can support the research and admin work it takes to stay compliant.
Generate Reports and Forecast Labor Costs
Payroll data contains valuable insights about labor expenses and staffing needs, but it’s hard (for a human) to consolidate all of the data in one place and comb through it for that knowledge. This is one area where AI excels. It can analyze historical payroll information and generate reports that would otherwise take hours to compile manually. Organizations are able to then use that data to forecast future labor costs and make stronger decisions about the size of their staff.
Outcomes From Using AI in Payroll Effectively
When it’s used thoughtfully, AI helps small business owners and payroll teams simplify their role in the payroll process and focus their efforts where their human expertise is truly needed.
These are the most frequent outcomes from using AI in payroll:
Reduces Manual Data Entry
Manual data entry is probably the most time-consuming part of running payroll. Importing timesheets, updating employee records, and checking data across multiple systems eats up hours and hours of time every payroll period. Research estimates that a single data entry from an HR employee costs an average of $4.86. Multiply that by hundreds of entries every week, and the majority of their salary may be going to these menial tasks.
Using AI to complete manual data entry allows payroll professionals to devote more time to tasks that require creativity, problem solving, and human relations.
Lowers Payroll Costs
Artificial intelligence is no match for human intelligence, so it’s not going to replace an entire payroll department.
According to Max Emma, a Chief Bookkeeping Officer for an accounting firm, AI can be used effectively for simple, repetitive tasks, though there it can’t always detect various exceptions.
“I’m seeing it work well for repetitive tasks like timesheet approvals and PTO calculations, but it falls apart on exceptions,” Emma said. “AI can’t interpret why someone’s hours spiked because they covered a sick coworker, or understand that a salary employee’s ‘overtime’ was actually a quarterly bonus.”
However, since it automates many of the routine tasks that eat up so much time, AI can improve the department’s productivity without the need for additional staff.
Avoids Payroll Errors Through Automation
Up to 64% of employees have experienced financial stress because of paycheck errors or delays. It just takes one set of transposed numbers to miscalculate a person’s entire period of wages, and although an error happens in an instant, it sometimes takes weeks to correct. Fifty-three percent of workers would leave a company if they experienced consistent payroll problems.
Improves Payroll Visibility
Payroll data is often spread across multiple platforms, including payroll systems, time-tracking software, HR tools, and benefits providers. AI helps consolidate and analyze this data, giving payroll professionals real-time visibility into their operations. They can monitor metrics related to payroll and identify recurring challenges that need to be addressed.
In-Summary: AI in Payroll
Implementing AI in any business function requires leaders and owners to understand where the automation will be helpful and where a human touch is still required. For example, AI can help recruiters source candidates, but it can’t complete interviews.
Payroll is a people-centered task, and it will always require human oversight and expertise. However, AI can help payroll professionals spend less time on the admin side of things and more time supporting employees.
Understanding the best tasks to assign to AI will help improve payroll accuracy, reduce costs, and provide a better payroll experience for employees.