Direct Deposit vs. Check: How to Pay Employees

Advantages of checks

Checks have been a go-to for many service businesses because: 

1. They’re good for short-term contracts

If you’re only bringing on an employee or subcontractor short-term, like for a single job or season, a check is one of the easiest ways to pay them. Since checks don’t require any setup, they make a simple and straightforward payment method.

2. They’re accessible

Some employees may prefer not to receive electronic payments, or they may not have a bank account at all. Checks make getting paid accessible for employees who prefer tangible payment methods and who don’t want to (or can’t) link their bank account to your payroll system. 

3. They’re easier to stop

If you make a mistake, issuing a stop payment with your bank prevents your check from being cashed. Then you can reissue a new one with the correct information, preventing you from having to deal with a payment problem like an accidental overpayment. 

4. They don’t require a payroll system

Checks can be issued, recorded, and distributed without a formal payroll system. While it adds more work administrative work to your plate, they’re easy to implement and quick to put in place.

Disadvantages of checks

Despite their pros, checks also come with cons, such as:

1. They’re pricey

Printing checks costs money, and so do payment errors. As your business grows, these add up, causing you to spend more on processing fees, adding to your operating expenses, and impacting your profit margin. 

2. They’re slow

Checks take time to write, process, and payout, delaying when your employees get paid. 

3. They’re subject to fraud

Because checks are physical documents that include sensitive business information, they make you vulnerable to fraud. They’re also easy to lose, misplace, or tamper with, increasing their chances of landing in the wrong hands. 

4. They create more bookkeeping work

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.

5. They’re outdated

Since so many businesses pay employees through direct deposit, handing out checks may make your business look outdated and be unappealing to new employees.

6. They’re inconvenient

Employees don’t want to have to do extra work after their day’s done. Having to go cash a check before their bank closes for the day is inconvenient, especially if it’s a holiday weekend or they’re working late.

Direct deposit benefits

Using direct deposit as your main payment method has a variety of pros. 

1. It’s fast

Depending on the payroll system you use, the amount you’re transferring, and where it’s going, direct deposit can work almost instantly. Even when it takes time to process, the need for in-person distribution is eliminated, saving you and your employees time.

In most cases, an employee’s pay will be available in their bank account the same day it’s paid out.

2. It’s cost-effective

In the long term, direct deposit is cheaper than checks, especially if you have a recurring payroll set up for the same amount at predictable intervals, like biweekly or monthly.  

3. It’s safer

Direct deposit offers much more security than paper checks, reducing the risk of lost or stolen payments as well as potential fraud. 

4. It’s easier for employees

With electronic payments, employees don’t have to do extra work to get paid beyond providing you with their banking information to get set up in your system

5. It’s good for record keeping

Electronic funds transfers (EFTs) like direct deposit are easy to track, giving you a paper trail to fall back on if there’s an issue or dispute. They’re also virtually impossible to lose, damage, or steal, reducing the potential for problems to arise in the first place.

6. They can run an autopilot

Using a payroll system, direct deposits can be set up to run on a recurring basis for salaried employees with predictable pay. This saves you from having to do the extra footwork of submitting another payment each month.

Disadvantages of direct deposit

Direct deposit does come with a few cons, including:

1. It requires setup

To get direct deposit working, you’ll need your employee’s banking information and a payroll system. While you can use EFTs through your bank, it’ll mean manually sending them each payday, and it won’t help you with payroll filing come tax time. 

The best way to handle direct deposits is to use a payroll system, which you’ll need to choose and set up. 

READ MORE: Best payroll systems for small business

2. It offers less cash flow management

Since direct deposit is set up on a continual, recurring basis, payments are issued at predetermined intervals. This means that you won’t be able to wait for a client to pay you before you issue a physical check to an employee, making cash flow management challenging.

3. It costs money

Not only will some direct deposits come with fees, but you’ll also need to pay for payroll software, adding to your overhead costs.

4. It requires your employee’s banking information

To set up direct deposit for an employee, an employer needs: 

• A signed deposit slip or a voided check from the employee authorizing them to deposit funds into their account
• The employee’s bank account information, including bank name, bank account number, and routing number
• The type of account (checking or savings)
• The employee’s name, address, and sometimes Social Security Number for verification purposes

Some employees may not want to share their direct deposit information with you, or they may not have a bank account at all, making direct deposit less accessible.