What Are Acceptable Forms of Payment for Payroll? (2024)

Under the Fair Labor Standards Act, a small business employer may pay wages in cash or a negotiable instrument payable on demand, such as check or direct deposit. The state labor department administers a state's wage and hour laws, which include acceptable forms of payment for payroll. State law might be more specific than federal law and may include the option to pay by debit card.

Check

If you pay your employees by check, payment must be available on demand. If payment is refused and the reason can be attributed to you, then the employee has not been paid. For example, this might happen if you have insufficient funds in your company bank account. Even if you gave the employee her check by payday, if payment is refused, technically, she has not been paid. You may hand write paychecks; however, for a professional look, use payroll software to generate them.

Direct Deposit

Under federal law, you may pay by direct deposit, provided you give your employees the option to receive payment by check or cash. You must also allow your employees to choose their own financial institutions if they choose direct deposit. On a state level, direct deposit laws are highly specific. The state might say you must obtain an employee's written consent to pay her by direct deposit. It might have specific laws concerning whether you can make direct deposit mandatory. In addition, you might have to offer alternative payments, such as cash, check or payroll debit card, if an employee does not want direct deposit or does not have a bank account. To enable direct deposit, you must use payroll software, which generates direct deposit pay stubs.

Considerations

A written payment instrument includes other forms of written payments besides check, such as cashier's check or money order. The state might allow you to use other forms of payments besides the state-mandated methods, provided the employee gives her written consent.

Cash

Cash is an acceptable form of payment, but you must exercise caution when using it. Written payment instruments leave an automatic paper trail, but cash does not. You must generate your own paper trail to prove you paid an employee in cash. Prepare a written statement each time you pay her. Have her sign the statement to acknowledge receipt and make a copy for your records. Ensure that you follow the tax laws that apply to other forms of payments. This includes withholding federal and state taxes from cash payments and submitting them to the government plus giving cash-paid employees annual W-2s.

Debit Card

Payroll debit cards allow employees to make purchases from retailers and get cash at ATM machines, up to their paycheck amount. They are a convenient way for employees who do not have bank accounts to access their take-home pay. Depending on the third-party company, employees may have the option to obtain their pay at no cost, or they might have to pay certain withdrawal fees. The program might be free for employers. Whether you can pay your employees by debit card depends on state law. For example, in Texas, you may pay by debit card if the employee agrees to it in writing. Beware, however, of pay cards that result in a fee each time the employee uses it. Such deductions could cause problems under state law.

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