Payroll cards are a growing trend among small businesses. Research by the Mercator Advisory Group shows that the money loaded onto payroll cards is projected to reach nearly $51 billion by the end of 2021, up from $40.3 billion in 2017.
Payroll cards provide easy access to paychecks without the need for a bank account or banking relationship. The option of payroll cards is a critical necessity for many Americans who cannot – or choose not to – open a bank account.
Payroll cards allow employees to access their paychecks without setting up a bank account. Instead, they function like debit cards: Payroll cards are loaded with a paycheck each pay period and can be used to withdraw cash or make purchases. As a result, payroll cards can be an advantageous tool for small businesses with employees who don’t have bank accounts or have limited banking options in their location.
Depending on which payroll card service in which you enroll, it may be more cost-effective to provide a payroll card option to your workers. Printing and handing out checks can be expensive, and certain payroll companies may charge extra for direct deposit.
From a worker’s perspective, it’s essential to understand the different fees associated with payroll cards, as they aren’t exactly like traditional debit cards. While it can be an excellent option for employees with no bank account, you’ll have to pay some fees – like charges for ATM withdrawals, balance inquiries, fund transfers, monthly maintenance and account closures. The exact costs will depend on which company you’re working with.
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Here are some benefits of using payroll cards:
These are some disadvantages of using payroll cards:
You have several payroll card providers to choose from for your small business. Some of the best payroll services offer payroll cards as a way to compensate employees. If you’re working with a major payroll provider, talk with your representative to determine the best options for your business.
According to the American Payroll Association, these are some options to consider.
Transferring money from your payroll card to a bank account can be complicated or straightforward, depending on which payroll card provider you choose. Surprisingly, there isn’t much information out there on how to transfer funds from a payroll card to a bank account. Some services build it into their offerings, while you may have to speak with your bank or payroll card provider for transfers.
If your business offers your employees a payroll card, you must also provide an option for direct deposit or paper checks to be compliant with labor laws.
These are some other payroll card alternatives to consider. Some require the employee to have a bank account, while more traditional methods accommodate the unbanked.
Direct deposit allows your employees to receive their paychecks electronically. During the onboarding process, employees will provide HR with their checking or savings account information. On payday, you’ll use this information to transfer employees’ pay directly into their bank accounts.
Although employees need a bank account to take advantage of direct deposit, it’s a win-win: It eliminates the need for paper checks on your end, and your workers can cut down on trips to the bank.
Direct deposit is the most common form of payment from an employer to employee in the U.S. Nearly 94% of employees use direct deposit to receive their paychecks.
In the 1970s, the Automated Clearing House (ACH) improved how money was electronically transferred between banks. It not only solved the onslaught of paper checks, but featured bank-level encryption to reduce fraud.
ACH provides a direct link between two bank accounts. ACH transfers can be grouped between the two banks, and all transactions are held and checked before bulk processing. There are two ACH transfer types: ACH direct deposit and ACH direct payments.
PayPal has become a top alternative for companies that hire freelancers and contractors. Whether you employ one-time, seasonal, or part-time workers, PayPal can eliminate the need for paper checks and pay cards.
Contractors can even invoice you directly through PayPal to help keep your books accurate. When sending a payment, check the Service box. This option will correctly categorize this payment, apply appropriate fees, and provide an instant payment option for the freelancer.
As the number of smartphone users continues to rise, so does the access to mobile payments. According to estimates from eMarketer, over 100 million consumers used mobile payments in 2021.
Fueled by the pandemic, Americans are adopting contactless payments as the new norm. As more and more banks focus on a digital footprint, employees can upgrade their traditional direct deposit for instant pay through Cash App, Venmo, PayPal, Apple Pay, Google Pay and Zelle. [Read related article: Mobile Wallet Guide: Google Pay vs. Apple Pay vs. Samsung Pay]
With all of the digital options available, it may surprise you that the paper check is still widely used among small and midsize businesses. These companies lack payroll software and view paper checks as a trusted payment method.
Cash is a legal way to pay your employees; however, it’s not the generally preferred way for several reasons. Although you may save on fees, paying cash is tedious, as you will need to track accounting for your business manually. This can lead to human error, IRS audits and disgruntled employees. It also requires frequent trips to the bank to handle cash shortages and exact change. Once all of the worker paychecks are figured, you will have to deliver each one by hand.
Essentially, yes. They function in the same manner. A financial institution will hold the deposited money in an individual account, and the payroll card provides access to the money much like a debit card. Alerts can be set up to notify the account owner of low balances, or when funds become available after a deposit. Also, payroll cards tend to be affiliated with one of the major credit card issuers – such as Visa, MasterCard or American Express.
No. Despite the growing popularity of payroll cards, federal banking laws require businesses to offer employees at least one additional payment option. Payroll cards generally cost a business $7 per month per employee, whereas paper checks can cost $23 per month per employee. Given the high cost of paper checks, direct deposit is usually the second option. That is not to suggest that employers must only offer two forms of payment. Each state retains the right to regulate the specific methods of payment offered to employees.
Payroll cards are generally accepted anywhere that you would typically use a standard bank account debit card. They hold the same buying power as bank cards and can be used at stores, gas pumps, and even ATMs. Cash can be taken out of the account at ATMs, or by using a cash-back option at grocery or retail stores. Payroll cards can also be used to make payments online, on any sites that would accept the same brand of debit card.
The ability to deposit money on a payroll card depends on the services the provider offers. Some cards offer the option to add money at a money exchange center or ATM, while some do not. Review your provider’s terms to see if this option is available.
Determining whether a direct deposit or payroll card is better for your business greatly depends on your situation and preferences. If most of your employees do not have a bank account, it may be easier – and cheaper – to use payroll cards.
Payroll card fees can add up. Some cards have very few associated fees, while other cards charge a fee for normal monthly use, like withdrawing funds from an ATM. Also, not every card offers the option to deposit non-payroll money onto it.