ComplianceJanuary 07, 2021

Options for paying employees

Once you set up a a payroll system and calculate your employees' pay, you're ready to actually pay them. You may choose to pay them through direct deposit, but whatever method you choose you will likely be required by state law to provide some information with pay. If you decide to distribute employees' pay, there are certain rules you should follow to avoid legal and morale issues. Finally, special rules may apply when you are paying terminated employees.

The whole point of setting up a payroll system is to get your employees' pay into their hands, whether it's by check, through electronic means or even cash. Besides deciding how you want to actually give employees their pay, you will also have to provide other information that is required by law to accompany the payment and consider some guidelines to follow if you distribute pay or pay information to employees.

After you've set a up a program, calculated your employees' hours and regular rates, and made the necessary deductions, you have almost arrived at the whole point of your payroll process. Now is the appropriate time to decide whether you want to stick with the traditional paper check when paying your employees or whether direct deposit is the better choice for you and your employees.

Direct deposit of payroll

Direct deposit of payroll is a method of paying employees where an employee's pay is electronically "delivered" to an indicated bank on or before each payday. The employee receives a stub listing the gross amount of pay, any withholding or deductions, and the net amount of the check. Many businesses offer employees the option of direct pay deposit that automatically deposits paychecks into an employee's checking and/or savings account in participating banks.

Tools to use

A sample direct pay deposit enrollment form that allows the electronic transfer of wages to employees' bank accounts is included in the Tools and Forms section of the site. Electronic fund transfers are a convenience that provides benefits to both employees and employer.

Why use direct deposit? Automatic deposit of employees' wages directly into their bank accounts can streamline payroll operations, increase productivity, and save money for your business. A direct deposit transaction can cost as little as four or five cents to process, versus 30 to 50 cents for a check. In a direct deposit program, employee pay is deposited right into the employees' personal accounts, eliminating costly steps in the payroll process, including the need to stop payment on and reissue lost or stolen checks. Direct deposit means fewer check processing charges and reconcilement maintenance fees from the employer's financial institution.

Setting up direct deposit. First, determine what the state laws are where you employ individuals. Most states require that direct deposit be voluntary and prohibit you from barring individual employees from participating in direct deposit programs. Some also require that you provide a statement of wages so employees can see what was deposited in their accounts and what deductions were made.

You may set up a direct deposit relationship with a bank of your choice or the employee's choice. Contact those institutions that you are interested in dealing with and have them spend some time telling you about their program. Some may require a certain number of participants and some may require that you have electronic capability with the Automated Clearing House (ACH).

Work smart

If you don't have ACH access, some institutions will allow you to send in one deposit check and then they will deposit the various pay amounts into various accounts as you specify. Be sure to ask about this option if it interests you.

When you communicate your direct deposit program to your employees, be sure to highlight the benefits of direct deposit for them and have a form available for employees to elect direct deposit or to modify their choice.

Information to provide with pay

If your employees are paid by check or participate in a direct deposit program, you should provide them with a statement (paper or electronic) that details their gross wages, what deductions have been made, and what their net pay is.

In fact, some states require that a statement of some sort be provided to employees when they are paid. For specific information in your state please contact the secretary of state website.

Rules to follow when distributing pay

If your employees don't get paid through a direct deposit program, to be on the safe side, there are a number of rules that you should follow when you are distributing pay:

  • Deliver pay to each employee personally and discreetly.
  • Encourage employees not to leave checks or money in an unsecured area.
  • Do not leave one employee's pay with another employee (unless it's a supervisor) to be delivered.
  • Do not allow relatives of the employee to pick up an employee's pay if the employee is out on sick leave or vacation unless you have express permission from the employee (preferably in writing).
  • If you have a regularly scheduled pay period, such as every two weeks, try to distribute the pay at the same time of day on payday, so employees know when to expect their pay.
  • If you pay employees with checks, in the interest of confidentiality, you might want to put the checks in individual envelopes.
  • If you have to mail an employee's check because the employee is out on sick leave or vacation, use certified, insured mail.
  • Never demean employees or require them to perform tasks or make statements to get their checks, even if you're just joking with them.

Special rules for paying terminated employees

When employment terminates, there are certain things you'll have to take care of, including issuing the employee's last paycheck. Specific state laws may dictate how and when you must pay terminated employees.

If possible, it's best to give the check to the employee on the last day of employment. In some cases (for instance, when you fire an employee), you may not have enough time to prepare the paycheck before the employee leaves. In that event, you should get the check to the employee as soon as possible.

Work smart

When preparing an employee's final check, be sure to take out all appropriate deductions and to reduce pay by the amount of time not worked in that week, unless the employee is exempt under federal wage and hour law, and absences are less than a day's length in duration.

Also make sure that you don't deduct premiums for benefits if premiums are paid in advance. If the employee wants to continue benefits, he or she can do so under COBRA.

State laws for paying terminated employees. Some state laws require that you get the employee's last paycheck to him or her within a certain number of days. consult your secretary of state website or department of labor for information specific to your jurisdiction.

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