What Are the Best Methods for Paying Employees?

When it comes to processing payroll, you can’t just set up your Employer Identification Number and run with it. It’s important to think deliberately about which payment method will work best for your business.

Employers have several options for paying employees: cash, checks, direct deposit, and payroll cards. It can be difficult to choose which to use since each payment method comes with its own benefits and drawbacks.

Direct Deposit

Direct deposit is the most common wage payment method in the U.S., especially for salaried employees. In fact, more than 93% of employees earn their pay this way, according to the Getting Paid in America survey. Because direct deposit is so popular, most payroll platforms include direct deposit features.

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.

Pros of paying employees via direct deposit

Perhaps the biggest benefit of direct deposit is the convenience it offers both you and your employees. Everything is handled electronically, so there’s no paper to worry about. 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.

Direct deposit also offers a lot of flexibility while maintaining compliance with important payroll laws. For example, 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.

Cons of paying employees via direct deposit

On the downside, direct deposit won’t work for employees who don’t have bank accounts. You will need to provide another payment option for these employees, so it’s important to be prepared with at least one alternative method as a backup.

Cost is another factor to consider. There are per-transaction fees to use direct deposit as well as initial setup costs, depending on the provider. And if you need to speed up a transaction, you might have to pay a higher fee. In some cases, a payroll services provider might cover the fees, though there may be other expenses to consider with these providers.

Also read:  How to Choose the Right Small Business Payroll Software

Cash

Cash payroll is less common today than it was in the past, and it is often associated with paying workers without a paper trail. However, it is legal to pay workers a salary in cash if you follow the proper 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.

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.

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.

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.

Pros of paying employees via cash

Many businesses may choose to pay employees in cash because it’s more direct, especially for those that only accept cash payments from customers. Cash-only businesses don’t have to worry about learning new software or working with a bank to cut checks or process direct deposits. Cash payroll also avoids any fees associated with processing payments through a bank.

The straightforward approach to paying employees may be particularly appealing for businesses that are just starting out. 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 of paying employees via cash

The biggest drawback with paying employees in cash is the 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. 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.

Additionally, cash payments can make maintaining accurate records a bigger headache compared to other payroll methods. 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.

Also read: Is Doing Payroll By Hand Cheaper Than Using Software?

Check

Printed checks were the most common payroll method before digital banking gave rise to direct deposit. Although some financial experts disagree about whether paper checks will become totally obsolete in the near future, 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 of paying employees via check

Many businesses that still pay employees via paper checks do so because it’s familiar to them. They have a solution that gets the job done, and moving to a digital payroll method isn’t worth the hassle of learning a new process. As direct deposit becomes more accessible and affordable, however, it may become difficult to justify the extra expense.

Some businesses prefer to pay their employees with paper checks because employees don’t need a bank account to get their money from a check. They can use a check cashing service for a small fee that’s typically less than the cost of opening and maintaining a checking account.

Similarly, 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 of paying employees via check

Paper checks are losing popularity among employers because they take more manual effort and time to process than electronic payroll methods. 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.

Additionally, it’s possible that employee checks might become lost or get stolen. If this happens, you will have to void the check and issue a new check to the employee. This incurs an additional expense and requires more administrative work to correct payment records.

Also read: 5 Costly Payroll Mistakes Small- and Medium-Sized Businesses Should Avoid

Payroll Cards

Also known as paycards, payroll cards are prepaid cards that are directly managed by your payroll software provider. They offer

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 of paying employees via payroll cards

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.

What’s more, some payroll card providers like Gusto offer unique tools not found with traditional checking accounts. For example, 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.

Cons of paying employees via payroll cards

Payroll cards have become more popular in recent years as an alternative to direct deposit, and they’ve become more heavily regulated as a result. This may make payroll cards more difficult to use than they are worth.

Because payroll cards aren’t managed by banks, it may take longer to replace them if they are lost or stolen. Debit cardholders can withdraw cash from their bank accounts at any time by visiting a local branch if their card is stolen, but payroll cardholders may not have any way to access their funds without their physical card in hand.

Additionally, you and your employees might face fees with payroll cards. You might have to pay setup fees and recurring maintenance fees, and your workers might have to pay fees to get their money off the cards.

Understanding Payment Laws

Before choosing a payroll method, you should consult your state laws on the payment type and familiarize yourself with relevant federal laws such as the Fair Labor Standards Act. Many states have paycard laws that dictate how the cards can work, and employers can’t make direct deposit mandatory for their employees in every state. It’s best to take time to review the laws to prevent any mistakes and penalties.

Because payroll software has been developed in compliance with state and federal laws, having a payroll solution in place can give you peace of mind when it comes to paying your 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 foreign employees in local currency, there’s a payroll software that can help with it. Check out our Product Selection Tool to speak with an advisor who can help you find the right payroll software for your needs.

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