Should You Pay Employees by Check or Direct Deposit?
Your service business is booming and you’ve made the decision to hire staff. You create a great job posting and attract some great potential hires. So there you are going through the interview process when a candidate asks, “Do you pay through check or direct deposit?”
It’s okay if you haven’t even thought about this yet. In fact, you may have budgeted the amount you plan to spend on staff without thinking much about how you would pay. These aren’t contractors you pay at the end of the month or upon completion of a project. These are employees you are paying regularly. So which do you choose?
Depending on the type of business you run and the number of staff you have, one method may work better than the other. Also, your state or province may have specific laws or standards that will help sway your decision, and you can discuss these details with your accountant or bookkeeper.
We’re going over the general pros and cons of each method to give you a solid understanding of your options as you move forward with hiring.
First things first: get payroll software
Darren, Jobber’s Director of Operations and finance pro says that whether you’re paying by check or direct deposit, payroll software is a non-negotiable best practice for businesses with regular employees.
Why? Because your region’s tax rates change throughout the year and payroll software ensures that you’re deducting the correct amounts off each employee’s paycheck, and it even remits it straight to the government for you. It’s also a timesaver, because it automates the invoice process.
Payroll software allows you to easily enter a new employee into the system (along with their banking info if you’re going the direct deposit route). Once you enter their hours worked, it will calculate their gross amount, tax deductions, and net pay (which you’ll write on a check if you’re going the check route or this amount is deposited into their bank account). And, finally, the software will send your employee a neat and tidy paystub explaining the breakdown.
Imagine trying to do all of that yourself.
READ MORE: Best payroll systems for small businesses
Paying your employees with a check
- Quick option for short-term or contract employees: If someone is only working for you for a week or on a short-term contract, checks are most likely an efficient way to pay them, especially as you may not be responsible for taxing them (more on employees vs. contractors).
- Easy to issue a ‘stop payment’ if a mistake is made: If you (as the employer), catch a mistake such as over or underpaying employee hours, you can cancel the check through your financial institution before it’s processed.
- Accessible to employees without a bank account: Employees without a bank account can access their funds via check cashing institutions.
- Higher chances of fraud: The information you provide on checks—bank branch, bank account number, signatures, addresses—makes businesses vulnerable to fraud.
- Pricey: The cost of printing checks, fixing bank errors, replacing lost checks, and more can add up as your business grows. Small businesses printing a lower volume of checks often pay more for each check than large businesses, and the fees per check are higher than the fees you pay per direct deposit.
- More bookkeeping: A check amount sits on your balance sheet until it’s cashed as an unreconciled transaction. If your employees aren’t good at cashing their checks you’re constantly moving this amount forward and that means more bookkeeping for you.
- Environmentally unfriendly: Considering the amount of paper involved, checks are not a very green payment solution.
What do employees prefer?
Most of the pros and cons listed above are related to the employer’s side of things, but it’s also important to take how your employees feel into consideration. When you weigh the pros and cons from the employee’s side, direct deposit wins out.
With direct deposits, employees can:
- Have instant access to their money on payday thereby improving their cashflow situation
- Set up pre-authorized transfers for bills and savings since they know exactly what day money will be coming into their account
On the other hand, checks are not necessarily a sure thing. They may be received on Friday, cashed on Monday, and put on hold until Thursday depending on each employee’s situation.
Setting up direct deposits is easy. Speak to your bank directly to find out about their fee options. Most banks charge a fixed monthly fee in addition to a fee per deposit.
Verdict: which option do you choose?
The payment method you ultimately roll with comes down to your examination of what’s best for your employees and your business, but generally speaking, if you employ regular, full-time employees, direct deposits are your best bet from a cost saving, time saving, and security standpoint.
They are easy to administer and keep your employees happy and secure by providing instant access to their funds—a bonus for building a positive company culture.