Payroll Blog

Payroll Training, Tips, and News

Types of Payment Options

4 Types of Payment You Might Consider for Employees

Small business owners have the freedom to decide the payment methods to offer their employees. When it comes to running payroll, you have a number of methods to choose from. You can pay employees with written or printed checks, direct deposit, payroll cards, or cash. But, certain types of payment might be better for your business than others.

Types of payment

Take a look at the different types of payment methods to see which one makes the most sense for your small business. Pay attention to costs associated with the different modes of payment, as well as your responsibilities for each.

4 Types of Payment Options You Might Consider

Paycheck

You might consider paying your employees by either writing or printing payroll checks. With paychecks, employees do not need to have bank accounts. Employees can use a check cashing service (for a fee) to receive their wages.

Some employees prefer to receive their wages via paychecks because they like having an actual check delivered to them. However, paychecks could get lost or stolen.

Time and cost of this payment option

With a written paycheck, you need to handwrite a paycheck for each employee. Writing out the checks each pay period takes time. For handwritten checks, you will need to purchase blank checks.

If you decide to print your employees’ paychecks, you can save considerable time from writing them all out. However, you will pay more in supplies to print the paychecks. For printing paychecks, you need check stock, ink, and a printer. You might even need a special MICR printer with magnetic ink to read, process, and print bank account and routing numbers on the checks.

Get the latest payroll training, tips, and news sent directly to your inbox.

Subscribe to Patriot’s Payroll Blog!

Direct deposit

Direct deposit is the most common payment method used. Eighty-two percent of U.S. workers receive their wages via direct deposit. One of the biggest benefits of direct deposit is the convenience it offers for both you and your employees.

With direct deposit, you receive your employees’ banking information when you hire them and deposit their wages each pay period. Your employees do not need to be physically present at your business to receive payment each period. For example, if an employee is on vacation, they will still receive their wages on time.

Time and cost of this payment option

With direct deposit, you do not need to worry about filling out and distributing checks each period. If you have online payroll software, direct deposit might be incorporated at no added cost. Simply review your payroll before submitting it to be deposited in your employees’ bank accounts.

If you do not have payroll software, you will be responsible for paying direct deposit fees. You might need to pay set-up fees, monthly fees, and a small fee per pay period for each direct deposit. Set-up fees could range from $50-$150, and transaction fees might be $1.50 per transaction.

Payroll cards

A pay card is another electronic funds alternative to direct deposit. Pay cards are still relatively new payment options, but they are growing in popularity.

You can pay employees via payroll cards if they do not have a banking account. A pay card lets you put an employee’s wages directly onto a prepaid card. The employees can either use their pay cards directly to make purchases, or they can withdraw cash at ATMs.

Time and cost of this payment option

With payroll cards, you are required to pay fees. There are setup costs similar to direct deposit set-up costs.

There are many pay card laws by state that ban employees from paying any sort of fee associated with pay cards. If your employees cannot incur fees, you are responsible for paying things like replacement fees.

Paying employees via payroll cards can save you significant time as opposed to providing paychecks. Payroll cards let you load money on an employee’s card each pay period, which saves you the time of writing each paycheck. And, payroll cards can save you the cost of supplies.

Cash

Paying employees cash is another type of payment you have at your disposal. 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. There is less organization to paying employees with cash as opposed to direct deposit and pay cards. Instead of having bank records, you must write out each payment.

Time and cost of this payment option

Paying employees in cash will not incur immediate fees like with direct deposit, payroll cards, and paychecks. However, paying in cash puts you at a higher risk for an IRS audit, which costs significant time and money, even if they find you are compliant with IRS laws.

If you pay employees in cash, you are still required to take out taxes and keep records of each payment, which can take up more time than other payments. Forgetting to take out the appropriate deductions also requires further time and money later on.

Providing a pay stub

Regardless of the type of payment you use, it is advisable to provide your employees with a pay stub each pay period. Consult your state department to see if you are required by law to provide pay stubs.

A pay stub shows your employee their gross pay, deductions, and net pay. It shows the employee how much is taken out of their wages which is especially useful if there is a mistake.

Different taxes, like FICA tax (Social Security and Medicare), and federal, state, and local income taxes are shown on the pay stub. And, a pay stub lists the amount taken out for benefits like health insurance and retirement plans.

Payroll Recordkeeping

For each of the different types of payment, keeping accurate payroll records is required. Detail information like the date, amount, and pay period for all employees. And, you must record gross wages, deductions, and net pay.

Can you make a certain type of payment mandatory?

As an employer, you can select the payroll payment methods you want to offer your employees. But, can an employer require direct deposit, pay cards, cash, or paychecks? 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.

Avoid the hassles of managing payroll records, direct deposit fees, and incorrect payroll. Patriot’s online payroll software lets you easily print checks or use free direct deposit, and all payroll calculations are 100% guaranteed for accuracy. Try it for free today!

This is not intended as legal advice; for more information, please click here.

Comments are closed.