Key takeaways
- There are several options for paying employees: cash, checks, direct deposit, and payroll cards.
- Each method has its own benefits and drawbacks.
- The best payment method depends on your business’s compliance requirements, your employees’ preferences, and the tools you use to run payroll.
- Jan. 16, 2025: Robie Ann Ferrer updated the article with current data and statistics, added links to relevant sources, and made revisions to the copy for conciseness. She also placed jump links to specific sections for easy browsing. Kara Sherrer wrote the original version of this article, which was published on August 26, 2023.
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Top methods for paying employees
There are four primary payment options when it’s time to run payroll:
Direct deposit payroll
Direct deposit is the most common wage payment method in the US, especially for salaried employees. More than 95% of employees earn their pay this way, according to the 2023 Getting Paid in America survey by National Payroll Week.
How does direct deposit work?
With this payment method, a direct deposit provider automatically transfers money from your business bank account to each employee’s bank account at the end of each pay period. You might be able to set up direct deposit through your bank, but most payroll software providers support direct deposit as well.
When choosing a direct deposit provider, be sure to identify any fees associated with running payroll this way. Some charge a fee for each transaction, whereas others only charge an expedited fee when you need same-day or next-day turnaround. If you’re considering a full-service payroll provider, these fees will likely be baked into the total cost for using the software.
Also, be prepared with at least one alternative payroll method as a backup. Most employees will prefer direct deposit, but you may run into a situation where an employee doesn’t have a bank account or their bank rejects the deposit for some reason.
Pros
- Convenience: Everything is handled electronically, so HR and accounting staff can spend their time doing more important things than running payroll manually, and employees get access to their money quickly and easily.
- Flexibility: Direct deposit also offers a lot of flexibility while maintaining compliance with important payroll laws.
Cons
- Eligibility restrictions: Direct deposit won’t work for employees who don’t have bank accounts.
- Cost: There are per-transaction fees to use direct deposit as well as initial setup costs, depending on the provider.
Direct deposit payroll in action
One of my favorite payroll platforms, ADP’s Workforce Now allows you to have up to four direct deposit accounts and makes it easy to pay your workers — whether they are exempt, nonexempt, or international employees — via direct deposit. All transactions are recorded automatically, and any discrepancies can be addressed quickly and efficiently.
Cash payroll
Cash payroll is less common today and is often associated with paying workers without a paper trail. However, it is legal to pay workers in cash if you follow employment laws.
How does cash payroll work?
Though cash is perhaps the most straightforward option since it doesn’t require any waiting period or bank involvement, it takes the most manual effort of all the payment methods. Some accounting platforms and other resources offer free calculators that can simplify the math involved in calculating how much to pay each employee.
1. Calculate gross pay
The first step is to calculate gross pay, or how much you owe each employee before deductions. This requires an accurate record of each employee’s working time, with careful attention to any hours that may be considered overtime.
There are many other factors that may affect how much you owe one employee versus another, though overtime is the only one mandated by law. Depending on your employment contract, you may also need to account for unpaid time off, holiday pay, hazard pay, salaried versus hourly wages, and different pay rates among other factors.
Other factors to consider may include paid and unpaid time off, holiday pay, hazard pay, salaried versus hourly wages, and any other differences in pay rates from one employee to another.
If you choose this payment method, you must be very familiar with payroll laws and how they apply to each of your employees. Even small errors with tax calculations or time tracking can have significant financial and legal implications.
2. Calculate net pay
Once the gross pay amount has been calculated for each employee, you must calculate the necessary taxes and other deductions. Tax withholdings include federal income tax, Medicare tax, Social Security tax, and state and local income taxes, if applicable. The exact tax rate depends on each employee’s W-4 filing as well as your business’s location.
Other deductions include insurance premiums, retirement contributions, wage garnishments, and union dues. Some of these deductions must be taken before taxes, but others should be included in the employees’ taxable income.
Any reimbursements owed for work-related expenses are considered nontaxable income and should therefore be added to the post-tax payment amount.
3. Distribute and document payment
Once you’ve calculated how much to pay each employee and organized the cash amounts, it’s essential to have each employee acknowledge when they’ve received their pay. This may look like a ledger that includes the payment amount, date, pay period, and a spot for each employee’s signature. Documentation like this may be important if an employee ever claims they weren’t paid for their work or disputes the amount.
If you are ever audited, you will need to provide all employee pay records with clearly documented payments toward taxes and other deductions. Depending on your state, you may be required to provide your employees with paystubs, so they can see their net pay, gross pay, and deductions. Check payments, direct deposits, and payroll cards offer a more streamlined way to keep track of these records and produce copies if needed.
Pros
- Straightforward: Many businesses may choose to pay employees in cash because it’s more direct, especially for those that only accept cash payments from customers.
- Low-tech: Cash-only businesses don’t have to worry about learning new software or working with a bank to cut checks or process direct deposits.
- No bank fees: Cash payroll avoids any fees associated with processing payments through a bank.
- Universal: Cash is the only payment method that any employee can accept, so you can run payroll without worrying about whether it will work for everyone.
Cons
- Risk of miscalculations: Though payroll calculators can help with the math involved, the manual nature of cash payroll means there’s a larger margin of error.
- Record-keeping: Cash payments can make maintaining accurate records a bigger headache compared to other payroll methods.
Payroll checks
Before digital banking gave rise to direct deposits, printed checks were the most common payroll method. It’s a reliable payroll method that balances flexibility and efficiency.
How do payroll checks work?
Payroll checks work similarly to cash payments, except each check gets routed through your business bank account. This means checks are generally easier to prepare than cash payments, too. Rather than counting out the exact amount of dollars and cents you owe to each employee, you can write or print checks that they can then cash or deposit.
Handwriting checks takes time, but it can be a good option for a small business with few employees. Printing checks is a faster option, but it requires special equipment and supplies that can get expensive. You can use check stock that is pre-printed with your banking information or you can use blank check stock and a MICR printer that uses magnetic ink.
Some payroll software providers like QuickBooks support paper checks, which means you can get the convenience of automatic payroll calculations while still maintaining control over how you distribute payments to employees. Alternatively, some payroll software integrates with check printing services like Printech.
Pros
- Familiarity: Many businesses still pay employees via paper checks do so because it gets the job done, and moving to a digital payroll method isn’t worth the hassle of learning a new process.
- Flexibility: Some businesses prefer to pay their employees with paper checks because it works for most employees — many banks now support same-day electronic check deposits, and those who don’t have a bank account can use a check cashing service for a small fee.
- Privacy: Payroll checks are a compelling choice for employers that want to maintain a privacy boundary with their employees. Whereas direct deposit requires employees to provide their bank account and routing numbers, paying with paper checks allows employees to remain in control of their personal information.
Cons
- Manual processing: Not only does it take longer to print and distribute checks than it does to process a direct deposit, but check deposits also take longer to clear. This means employees could be waiting several days to get access to their available funds, especially if payday falls on a bank holiday or weekend.
- Security risks: If an employee’s paycheck is stolen or lost, you will have to void the check, pay an additional fee to issue a new one, and update your payroll records to reflect the correct paycheck number.
Payroll cards
Also known as paycards, payroll cards are prepaid cards that are directly managed by a payroll software provider. Some providers also use payroll cards to offer on-demand payments, which allows employees to access earned wages at any time.
How do payroll cards work?
Payroll cards function similarly to debit cards, except instead of a bank, the account is managed by a payroll software provider or a payment processor such as Visa or Mastercard.
The employee can use their paycard to make purchases, pay bills, and withdraw money from an ATM, just like they would use a debit card. Because it’s not a true bank account, though, an employee can access their funds immediately without waiting for the deposit to clear.
Pros
- Convenience: Payroll cards are a convenient solution for employees that don’t have a bank account. They offer all of the flexibility and speed of paying employees in cash, but with the convenience and accuracy of digital payroll processing.
- Employee financial wellness: Some payroll card providers offer unique tools that support financial wellness and help employees with budgeting, saving, investing, and other goals.
Cons
- More compliance hoops: As payroll cards have become more popular, they’ve also become more heavily regulated. In some cases, this makes payroll cards more of a headache than they’re worth.
- Harder to replace: Since payroll card service providers don’t have local branches like banks do, payroll cardholders may be temporarily cut off their funds if their card is lost or stolen.
- Fees: With paycards, you might have to pay setup fees and recurring maintenance fees, and your workers might have to pay transfer or transaction fees to move their money into different accounts.
Pay cards in action
Gusto, one of our top payroll providers, offers a separate mobile app to help employees manage their payroll cards and earnings. The Gusto Wallet app includes embedded features for time tracking that make it easy to verify an employee is being paid accurately for the time they worked.
Understanding payroll compliance and payment laws
Before choosing a payroll method, review your state laws and relevant federal laws for regulations that dictate how employees should be paid. For example, if you plan to make electronic payments mandatory, some states like Michigan have specific conditions or requirements, such as a written consent from the employee to receive salaries only through direct deposits (or paycards).
It’s also a good idea to offer two payment options—even if the state only mandates one. This provides more flexibility and helps avoid potential discrimination issues in case some employees prefer to remain “unbanked” due to cultural, moral, or personal reasons.
Fortunately, most payroll systems have built-in compliance with state and federal laws, so the right software can give you peace of mind when it comes to paying employees. Whether you need to track hours worked and holiday pay for an hourly employee, log paid time off and employee benefits for a salaried employee, or pay international employees in their local currency, there’s a payroll app that can help.
Check out our Payroll Software Guide to find the right solution for your business, or explore our other payroll resources:
