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4 Tips on How to Pay Employees

Woman taking a picture of a check with a smartphone
Take your time in deciding how to pay employees. The wrong setup wastes time and money, so get it right the first time. Here are four decisions you need to make.

1. Payment Method

The most common payment methods are direct deposits and paper checks. But writing checks can cost $3 each when you factor in the cost of the checks and postage, plus the time you spend putting them together.

Direct deposit is easier and less expensive. Automatic transfers cost less than 35 cents per direct deposit. But employees without bank accounts can't accept payment this way. One solution is to make direct deposits the standard unless they ask for paper checks.

If many of your employees don't have banks, paycards are another option. You give employees a card and transfer money onto it every paycheck. They can use it like a debit card or take money out at an ATM. Some paycards, like SOLE, don't charge a fee for direct deposit.

2. Payment Schedule

Some common payday setups are weekly, every two weeks, twice a month or monthly.

Employees like getting paid more often because it makes budgeting easier. They don't have to stretch one paycheck a whole month until the next payday. The flip side: paying more often means more administrative work for you.

If you pay every two weeks, you'll be sending out three checks some months. So this system can be a little more complicated.

Choosing to pay only once or twice a month makes it easier to track for accounting. If you send out paychecks on the last day of the month, when you also update your financial records, you can handle payroll and your bookkeeping at the same time.

3. Hourly vs. Fixed Salary

The advantage of paying hourly is that you only pay your employees when they actually work. So if you go through a slower time with fewer projects, you don't pay your employees as much. But if you get busy and an employee needs to more work than 40 hours in a week, you're required to pay them overtime — 1.5 times their hourly rate.

Paying a fixed salary makes your expenses more predictable. Depending on an employee's position and salary, they may be exempt from earning overtime for working more than 40 hours a week. And a salary can make employees more loyal, since you're making a commitment to pay them regularly.

4. Payroll System

You must calculate each employee's taxes and take-home pay. The cheapest option is to manage payroll yourself. But this means handling all the calculations on your own, which can get complicated.

You can also automate using payroll software. Payroll software automatically calculates taxes. Some programs will even send out checks for you. Of course, you need to pay for this service.

Finally, you can hire an accountant or payroll company. Having a professional reduces the chance of errors. But this is also the most expensive option.

Every company has to decide how to pay employees. Consider the factors above to find the right solution for you.