Employers have several options for paying employees — cash, check, direct deposit, and payroll card. It can be difficult to choose which to use. Some payment methods might work better for your business and employees than other methods.
This guide will help you consider how each can benefit your business and employees as well as the downsides to each.
Cash is a simple option because you don’t need to deal with paper, printers, or electronic devices. But cash payroll is often avoided because of its associated with paying a worker under the table. However, it is legal to pay employees in cash if you follow employment laws. You must withhold taxes and other deductions from employees’ wages. And you need to contribute and pay your share of employment taxes.
If you pay employees with cash, you should be diligent in keeping thorough records. While accurate records are important no matter how you pay, your decision to go the cash route might be scrutinized. If you are ever audited, you need records of all employee pay, tax payments, and payments toward other deductions and benefits.
Keep all your payroll records and reports updated by using payroll software. Also make sure your employees have access to pay stubs so they can see their net pay, gross pay, and deductions. Many states also require you to give employees access to those pay stubs.
You can handwrite or print paper checks to give your employees. 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 does require specific equipment. You can use check stock that is pre-printed with your banking information or you can use blank check stock and an MICR printer that uses magnetic ink. Your banking information must be printed with electronic ink because most computers used to process checks use a magnetic reader.
Employees don’t need a bank account to get their money from a check. They can use a check cashing service, although employees who use this will pay a fee.
Some employees prefer having a physical check. It’s traditional and familiar. They don’t have to learn anything new to get their money.
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. You must make sure this is recorded in your payroll records so you accurately report employee wages and pay taxes correctly.
Direct deposit is the most common payment method in the U.S, with 82 percent of workers earning their pay this way.
With direct deposit, money is transferred from your bank and goes into an employee’s bank account. There’s no paper to worry about.
Because your employees need bank accounts to receive their pay, direct deposit doesn’t work for the unbanked. You will need to provide another payment option for these employees.
For this payment type to work, you need a direct deposit provider. You might be able to set up direct deposit through your business’s bank or your payroll software provider might offer these services.
There are per transaction fees to use direct deposit as well as initial setup fees. And if you need to speed up a transaction, you might have to pay an increased fee. In some cases, your payroll services provider might cover the fees, making it free to use.
A payroll card is a type of prepaid card that you load employee wages onto. Employees can use it like a debit card to buy things online or in store and withdraw money from an ATM.
Employees don’t need a bank account to use a payroll card. Money is transferred from your business bank account and automatically loaded onto the cards. Employees don’t have to return their cards or get a new card to get their paycheck. They can keep their designated card payroll after payroll.
You and your employees might face fees with payroll cards. You might have to pay setup fees and recurring maintenance fees. Your employees might have to pay fees to get their money off the cards. Make sure you research the costs associated with the pay card you choose.
Before you choose a payroll method, you should consult your state laws on the payment type. 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.
Kaylee Riley is a content writer for Patriot Software Company, the parent company of Patriot Software, LLC and Top Echelon, LLC. Kaylee writes about payroll, accounting, software for recruiters, and other small business topics.