How do you pay your employees? With checks? Direct deposit? Other? There are a number of ways to pay employees, especially as money continues moving into the digital sphere. If you want to know how to pay employees, take a look at your options.
And boy, do you have options. You can cut employees a check, deposit money directly into an account, or hand them an envelope filled with cash.
So, which options are the best ones for your business? Read on to compare the payment methods for employees.
How to pay employees
Knowing which employee payment method to use is just part of the fun. Before you get to the distributing wages step of the payroll process, you need to calculate employees’ gross wages and withhold taxes and other deductions.
However, this article won’t get into the nitty-gritty details of the payroll process. Instead, it’ll focus on different ways to pay employees, including check, direct deposit, pay cards, cash, and mobile wallet.
Find out how to pay your employees by looking at the different types of methods and seeing which one makes the most sense for your business. Pay attention to costs and your employer responsibilities, too.
Paycheck
Paying employees with paychecks is one of the most popular payment methods. You may consider paying your employees by either writing or printing payroll checks.
Unlike payment methods involving electronic funds transfers (e.g., direct deposit), employees do not need to have bank accounts to receive their wages via check. Instead, employees can use a check-cashing service (for a fee) to receive their wages.
Before deciding to offer this payment method, consider the pros and cons. For example, some employees may prefer the privacy of receiving paychecks because they don’t need to share banking information. But, paychecks can get lost or stolen.
Time and cost of using paychecks
Handwriting a paycheck can be time-consuming for employers. Writing out checks each pay period takes time, especially if you have a number of employees.
If you decide to print your employees’ paychecks, you can save considerable time from writing them all out. But if something goes wrong with your printer (or if you run out of ink), you may have to resort to handwriting checks.
Plan to spend money on blank checks if you handwrite checks. And if you print paychecks, you need check stock, ink, and a printer. You might even need a special MICR printer with magnetic ink.
Direct deposit
Direct deposit is the most common payment method, with 82% of U.S. workers using it. One of the biggest benefits of direct deposit is convenience.
With direct deposit, there’s no need to physically hand an employee their wages. So, if you or an employee is on vacation, direct deposit recipients will still receive their wages on time.
Once you receive an employee’s banking information, you can directly deposit their wages each pay period through an electronic funds transfer (EFT).
Before deciding to use direct deposit, understand the time frame for processing. If you do not run payroll by a certain day, your employees won’t receive their wages when expected unless you expedite the process or use another payment method.
Time and cost of direct deposit
Direct deposit is a relatively quick process, unless you miss your time frame for processing. Generally, the most time-consuming part is setting up direct deposit.
Keep in mind that direct deposit comes with some fees you need to know about. You may need to pay set-up fees, monthly fees, and a small fee per pay period. Set-up fees could range from $50-$149, and transaction fees might be $1.50 per transaction.
However, you may not be responsible for footing the direct deposit bill. If you have online payroll software, direct deposit might be incorporated at no added cost. Check to see if your payroll software provider offers direct deposit at no additional cost.
Payroll cards
A pay card (or payroll card) is a prepaid card that employers can use to pay employees. Each payday, the card is loaded with the employee’s wages for that pay period.
Employees can use the pay card like a debit card, or they can withdraw wages through an ATM or bank cashier. Unlike direct deposit, employees do not need a bank account to receive their wages.
Time and cost of pay cards
Although using pay cards can save you time, there are a number of fees associated with this method.
In addition to set-up costs, employees may incur fees. Depending on your state, you may be required to pay these fees for your employees.
Cash
Paying employees cash is another type of payment you have at your disposal. But if you decide to pay employees in cash, you must be extra careful when it comes to keeping records.
Cash payments to employees might make the IRS suspicious that you aren’t taking out the correct tax amounts.
Paying employees in cash makes it more difficult for you to keep track of payroll records. Unlike other payment methods, there isn’t an automatic audit trail (e.g., bank records) when you pay in cash.
Time and cost of paying cash
Paying employees in cash does not require immediate fees like with direct deposit, payroll cards, and paychecks.
But, paying in cash puts you at a higher risk for an IRS audit, which costs significant time and money.
Mobile wallet
Another payment option increasing in popularity is the use of mobile wallets (e.g., Venmo or Apple Pay).
Mobile wallets for payroll require you to deposit employee wages into their phone’s electronic accounts. Employees with mobile wallets can use the funds in their accounts to directly make purchases.
Time and cost of mobile wallets
Depositing money into an employee’s mobile wallet is a relatively streamlined process for both employees and employers.
But before choosing mobile wallets as your payment method of choice, think about the associated fees. Fortunately, the fees for person-to-person transfers are either nonexistent or small when paying with a bank account.
However, employees may have to pay a fee when withdrawing money from their mobile wallet.
Providing a pay stub
Depending on your business location, you may be required to provide a pay stub to your employees—regardless of their payment method. Pay attention to pay stub requirements by state to stay compliant.
So, what is a pay stub? Pay stubs show employees their gross pay, deductions, and net pay. Think of a pay stub like a receipt that shows employees you’ve paid them.
Payroll recordkeeping
Regardless of the payment methods for employees, you need to keep accurate records for at least three years.
Detail information like the date, amount, and pay period for all employees. And, record gross wages, deductions, and net pay.
How to pay your employees: What not to do
Can an employer require direct deposit, pay cards, cash, paychecks, or mobile wallets?
Most states have laws that regulate when you can make certain types of payment mandatory, like direct deposit and pay cards. Typically, you will need to offer more than one payment method to your employees.
For example, you can offer employees the option to receive their wages via direct deposit or through paper checks. That way, employees without bank accounts can receive their wages.
When choosing how to pay employees, don’t violate state laws. Work with your employees to ensure the payment method works for them.
| Download our FREE guide, Compare Different Methods of Paying Employees, to learn more about various payment options! |
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This article has been updated from its original publication date of March 22, 2017.
This is not intended as legal advice; for more information, please click here.