- Posted by: Matt Muriel
- Category: Culture & Retention, Payroll & Taxes
An important part of any business is paying your employees, and with the multitude of options out there, it’s up to you to choose the right one for your business. There is always the classic way of conducting employee payroll with checks, but that comes with its pros and cons.
Two of the other most popular paperless payroll methods are direct deposit and paycards. This week we want to discuss how each of the three payment methods work and what some of the pros and cons are for your business.
You’re already probably familiar with how checks work for your business, so we won’t go too much in describing them. For now, we’ll start with the basics for direct deposit and paycards.
What is Direct Deposit?
Direct deposit is quite simple to understand. An electronic transfer payment is made directly from your business’s bank account and sent to the employee’s savings or checking account for net wages earned. Direct deposit payments are governed by the National Automated Clearing House Association, a non-profit that manages the ACH network and other electronic payments.
What are Paycards?
Paycards are prepaid cards that are offered by your business to your employees to pay an employee for their net wages. Paycards work like debit cards, with you submitting wages via a routing number and account number. Employees can make balance inquires and withdraw cash just like a regular debit card, although these requests can incur fees if done too frequently or not frequently enough.
Pros and Cons of all Three
Each of these payment methods have their pros and cons depending on how your business is structured. For example, direct deposit and checks require your employees have a savings or checking account, whereas a paycard is simply a prepaid card that requires no bank account. Conversely, direct deposit gives employees more control over their money than paycards allow them, such as categorizing money into separate accounts.
- Efficiency- Because direct deposit is an electronic transfer, funds deposited to employees’ accounts are available almost immediately. Direct deposit also saves time and enhances productivity on both ends. Employees don’t have to interrupt their workday to deposit a check in their bank.
- Paperless- direct deposit is a paperless payroll method, allowing you to transfer funds whether an employee is sick, on vacation, or working remotely.
- Decreased risk of theft and fraud- since direct deposit is electronic, it reduces the risk of theft and fraud, whereas a check can be forged or a paycard can be lost or stolen.
- High fees- employers pay a setup fee in addition to a transaction fee each time they deposit wages into an employee’s account. These fees can add up depending on your business’ size, causing it to be costly in the long run.
- Lower accessibility- direct deposit requires that your employee have access to a savings or checking account. Some employees may not have access to a bank account causing this form of payment to be completely inaccessible to them.
- Privacy and control- paper checks allow an employee to have more privacy and control over their paychecks. By using paychecks employees can keep their banking information private from their employers, they also have more control over their money as they can choose which bank to cash the check at.
- Accessible to employees without bank accounts- As mentioned before, not all employees have access to a bank account. Paper checks allow them to access their funds via a check-cashing institution.
- Easy option for short-term or contract employees- If an employee is only working for you for a short time or on a short-term contract, then checks are the most efficient way to pay them.
- Time Consuming- paper checks don’t deposit instantly into an employee’s bank account. Employees who receive paper checks also may not be able to cash them on holidays or the weekends, they may have to wait until the next banking day to cash their checks.
- Easy to Lose- Paper checks are easy to lose, get stolen, or damaged. If an employee loses a check, then you will have to spend additional time replacing the check. Lost checks also have your business’ bank account and routing number, giving someone a potential way to access your business bank account and information.
- Paperless- Like direct deposit, paycards are a seamless and paperless way to transfer wages to employees.
- Convenience- also like direct deposit, paycards are convenient for both employees and employers. Employees don’t have to physically go cash a check or wait for their funds to appear in their account, and employers don’t have to mail out paper checks, but instead, just load wages directly onto the employee’s cards.
- Frozen Cards- some service companies (hotels, restaurants, gas stations, airlines, etc.) can place a temporary hold or “freeze” on a card for days and weeks at a time. This can be a huge disadvantage for your employees if some of them only have the paycard as their only means of payment. They’ll be out of luck until their card unfreezes, preventing them from making any payments.
- Fees for Both Employers and Employees- both employers and employees pay fees for paycards. For some paycards, you or your employees could be charged a fee for ATM withdrawals or a point-of-sale fee each time the card is used. Some even charge fees for checking the balance of the card or if the card isn’t used in a set period of time.
All three forms of payroll have their pros and cons, and as an employer, it is up to you to find which one is the best for your employees and business. Usually, employees tend to prefer direct deposit for its convenience, but it’s best if you ask them directly to see what benefits (convenience, low fees, etc.) matter to them.
Are you struggling with managing your human resource needs? SolveHR offers several transactional and strategic HR services to help your business. Contact us today to find the right solution for you, so you can focus on what matters—growing your business!