As evermore business needs go digital, payroll follows suit: Paper checks and manual payroll tabulation are largely on the way out in favor of paperless payroll. Below, learn everything you should know as you consider making the switch.
What is paperless payroll?
Paperless payroll is any entirely electronic payroll system. It typically includes fully electronic tools for delivering pay stubs and tax forms, tracking employee time, creating payroll reports, and paying employees. Typically, one payroll software platform is all you need to implement all these functions. That said, no two paperless payroll platforms look quite the same, but the best payroll software has all these features.
How does paperless payroll typically work?
Paperless payroll typically works through the following steps:
1. Install paperless payroll software.
Paperless payroll begins with the installation of payroll software or HR software that includes payroll. Initially installing these platforms is typically easy, but implementing them and training your team in them can present some challenges. (We'll address these obstacles and their solutions later.)
2. Have your employees sign up for the payroll software.
Once you install your paperless payroll solution, your employees must create accounts within the program. From their accounts, they can receive pay stubs, tax forms and, most importantly, paychecks. For the latter purpose, your employees will need to add certain information.
3. Have your employees input banking information.
To enable direct deposit, your employees must add their banking information to your payroll software. Once employees add their bank account and routing numbers, all should be in place for direct deposit.
4. Integrate payroll software with your time-tracking system.
A key function of payroll software is to link your employees' time worked with the amount of pay they should receive for that period. Many payroll platforms achieve this task more deftly when integrated with a scheduling or time-tracking tool. This integration means you and your employees don't have to manually enter hours worked into two platforms. It also minimizes errors that could lead to overpayment or underpayment.
5. Train your employees on the system and seek consent.
Some training will likely be necessary to get your employees up to speed on the new payroll platform, and it's on you to provide this training. Sometimes, your payroll provider will include guided training and onboarding, relieving you of this burden. If not, you should gather your team for a debrief on how to get started.
In some states, you may need employees' consent to pay them electronically. Learn and follow your state's laws on the matter before onboarding employees to your paperless payroll system. In all states, you must obtain your employees' consent to provide their W-2 forms electronically. Employees who decline must receive paper forms.
6. Generate tax forms and payroll reports.
When it comes time to pay your yearly or quarterly taxes, you'll need tax forms to do so compliantly. Paperless payroll software generates these forms for you and can send copies to your employees as needed. It can also generate payroll reports that further detail your tax liabilities. These reports also come in handy for other needs, such as verifying employee vacation time.
Types of paperless payroll solutions
Most paperless payroll platforms fall into one of three categories: electronic payroll records, employee self-service or electronic funds transfer.
- Electronic payroll records: This is the most basic type of paperless payroll platform. It has only rudimentary electronic payroll tracking and calculation functions, which is all that some businesses need.
- Employee self-service: Through ESS software, you can couple your electronic payroll records with tools for other HR needs, such as benefits and employee handbooks. ESS platforms also automate employee clock-in and clock-out and thus your calculations of hours worked.
- Electronic funds transfer: This category encompasses electronic payroll records with direct deposit tools. EFT platforms both eliminate the paper clutter associated with payroll and set up rapid payments. However, as mentioned earlier, you may need employees' consent to set up EFT in certain states.
9 benefits of paperless payroll
These are some reasons you might choose to incorporate paperless payroll:
- Cost savings: According to research from the Electronic Payments Association and the American Payroll Association, direct deposit saves several dollars per payroll run. Additionally, sending your pay stubs online instead of through the mail saves, on average, $1.20 per payroll run. Paperless payroll also eliminates the chances of checks getting lost in the mail and thus the expense of reprinting and remailing them.
- Streamlined tax payments: Many paperless payroll systems proactively notify you when it's time to create your tax forms and file your taxes, or even create your forms automatically. You can often use your platform to file your payroll taxes too, and it will alert you when it's time to do so. In all cases, you'll get more accurate forms that you'll know to file on time. The result is a lower chance of tax penalties.
- Time savings: Cutting paper checks – and then signing and mailing them – often takes quite a while. None of these processes are part of paperless payroll, and this saved time can be invaluable. You'll also save the time of addressing checks that get lost in the mail.
- Consistent employee payments: Mailing checks means that post office closures for federal holidays can delay employee payments. Yes, your employees could come into the office to pick up their checks instead, but rare is the employee who will be happy about this inconvenience. Paperless payroll solves both problems, as automated payments mean your employees always get paid exactly when they should.
- Data and records security: It's increasingly common practice to store sensitive information digitally instead of physically. Digital storage typically includes more safeguards, as electronic encryption is often much harder to breach than physical locks. Digital storage also requires no onsite physical storage facilities, so if a fire or natural disaster damages your property, your records remain intact.
- Ample storage: All types of physical storage have inherent limits. Digital storage is theoretically boundless. Yes, your payroll provider may cap the amount of data you can store, but you can always ask for more, and chances are it'll be a long time before you hit your cap anyway.
- Eco-friendliness: To produce 100,000 sheets of paper, manufacturers must eliminate eight trees from the earth. These trees, if alive, would absorb excess carbon dioxide and help combat climate change. Worse yet, the 2,000 kilowatt-hours per 100,000 sheets of paper leads to substantial carbon emissions. In other words, if you're aiming to reduce your company's carbon footprint, paperless payroll is a good start.
- Accessibility: Employees can easily access their online payroll data or tax forms via mobile devices or web browsers. Paper payroll lacks this convenience – your employees would have to access and go through your paper records in person. You'd also need to unlock your files for your employees, which is an annoying extra step for both you and your employees.
- Integrations: If you have automated your business accounting but are still running payroll manually, you lose tons of time entering your payroll records into your accounting platform. Paperless payroll systems integrate with your accounting platform, so numbers entered in one program instantly appear in the other. These integrations save incalculable time and minimize errors.
4 drawbacks of paperless payroll
The power of paperless payroll systems is clear, but like any business technology, these platforms have some inherent drawbacks.
- Expenses: Payroll software costs money to use and takes time to implement and understand. If your business is barely in the black, you might need to stick with paper to keep your costs reasonable. If you need help doing your own budgeting, consider these small business budget templates to get started.
- Business internet concerns: If your business lacks computers or reliable internet access, paperless payroll may cause more problems than it solves. Yes, the convenience and security are supremely important, but it's all for naught if you can't access your payroll in the first place.
- Personal internet concerns: Not all employees can easily access computers or high-speed internet. In fact, in some parts of the country, 1 in 4 people lack internet access. Across the entire population, this number drops to 6%, but still, you can't assume all your employees have reliable internet access. Employees lacking this access will struggle with paperless payroll.
- Bank account requirement: Just as 6% of people lack reliable internet access, 6% of Americans don't have bank accounts. The lack of a bank account makes direct deposit entirely infeasible. You could counter this problem by storing your payroll records electronically and continuing to pay by nonelectronic methods, but your nonelectronic options must adhere to state law.
As you can see, unless your employees lack internet access or bank accounts, paperless payroll is often the way to go. To make the choice between paper and electronic paychecks, assess your team's access, then figure out what would work based on that.