A paycard, sometimes called a payroll card, is a prepaid debit card employers use to pay employees who don’t have a bank account. A paycard, as an electronic payment type, is regulated in some states. Paycards cost little to set up and you can get them from dedicated providers, some banks, or payroll companies.
We’ll provide you with information on how to pay your employees using a payroll card instead of or in addition to a paper check or direct deposit. Paycards offer some advantages over paper checks, namely that employees don’t have to go to banks to cash them. We’ll also share suggestions on paycard providers and risks to avoid when offering paycards to your employees — like hidden bank fees.
States with Specific Rules on Payroll Cards
The chart below illustrates state requirements for businesses that issue payments electronically, such as paycards and direct deposit. For example, New York and California, shown in white allow employers to offer a paycard option, but only in addition to a paper check. A paperless system isn’t permitted as the only option in these states.
However, states shown above in green, like Texas, permit a paperless pay system like direct deposit and/or paycard only. They don’t require a paper check to be offered. In addition, most states have paycard regulations, such as requiring free ATM withdrawals or ensuring some way for the employee to receive their full pay without paying service charges.
Some states prohibit employers from getting any kind of commission or receiving any benefit from employees’ use of paycards. Therefore, we highly recommend using a paycard provider — whether PEO, payroll software, bank, or credit card company — familiar with employee payment laws in all states your employees work in.
4 Reasons to Offer Payroll Cards to Employees
Most employers use cash, paper checks or direct deposit as employee payment methods. But cash and checks can get lost or stolen — a hassle for you and your employees. And not every employee has a checking account. So here are four good reasons a paycard may make sense for your business.
1. Paycards Are Easier for Employees Without Bank Accounts
The most common reason that a business would want to provide a paycard option is that it’s more convenient for workers who don’t have a bank account. According to the Federal Deposit Insurance Corporation (FDIC), 7% of households don’t have a bank account and nearly 20% of individuals don’t use one. The FDIC refers to these individuals as unbanked or underbanked.
Here’s what one savvy business owner says:
“We highly encourage all employees that do not have a bank account to take advantage of the paycard service. The primary benefit for them is that their payroll funds are available immediately. The paycards save them the time (and in some cases cost) of having to cash their checks, as many of them physically are going to their local bank or a check cashing business to do so.” – Jonathan Marsh, CAEd, Owner of Home Helpers of Bradenton
2. A Paycard Saves Time
A paycard is similar to direct deposit, where the employer transfers payroll funds to the employee’s account on payday. The difference is that instead of the money going to an employee’s bank or credit union checking account, paid wages are added to the employee’s payroll debit card. Jonathan Marsh adds:
“We’re saving time by not having to process manual checks. The process of setting up an employee with a paycard is quick and only has to be done once for an individual employee.
Marsh notes another time-saving benefit:
“The biggest benefit is that paycards allow for the company to get payroll dollars out of the business bank account immediately upon processing payroll.”
So in addition to saving administrative time, you’ll save time reconciling your accounts or worrying about escheatment.
3. A Paycard Saves Money
A paycard saves you money over standard paper checks, whether in time spent printing them and passing them out, or in the cost of paper and postage. Like direct deposit, it typically costs you nothing to offer a paycard option to employees, although some payroll vendors may have an upcharge for managing electronic payment options.
Let’s say you run payroll every other week for 25 employees. That’s 26 payrolls a year for 25 employees at 50 cents for each standard first class stamp at the post office. That would cost $325 a year just in postage; your administrative time, paper, and envelopes cost extra.
And if checks are lost, voided, or reissued, that costs even more. With paycards, once payroll is processed the money is there.
4. A Paycard Helps Prevent Check Fraud
Check fraud occurs when someone steals your business information, such as the routing number on your checking account, to obtain unauthorized access to funds. It can also occur when someone modifies the check in some way, such as changing the amount or the recipient’s name.
However, even if a paycard is lost or stolen, it’s less risky than a check. The paycard, like any prepaid debit card, requires the use of a PIN to obtain funds; that reduces the risk of unauthorized use. The paycard itself can be replaced.
Payroll Card Providers
Newer vendors focused solely on paycards can provide employers with unique paycard options for employees. Some examples are Global Cash Card, rapid! PayCard, FlexWage Payroll Card and Sole. Often your payroll software can be set up to direct electronic payments to these third-party paycard providers in much the same way you set up direct deposit.
Some of these paycard providers pay interest or offer rewards points. Others send text messages to card holders once funds are received. Most cost little or nothing for the employer to set up. However, we recommend FlexWage if you want a card that issues the same day it’s requested and protects employees’ funds with a Visa liability insurance policy.
In addition to working with a paycard company, you may be able to set up paycards with your existing payroll service provider, bank, credit card company, or even a professional employer organization (PEO). Some of these providers may offer additional services to your business beyond merely providing paycards.
Payroll Service & Software
Most online payroll service or software companies have an option to provide electronic payments such as direct deposit or paycards. Many are able to issue employees a paycard directly or by working with a third-party paycard provider.
Payroll software streamlines your entire payroll process by allowing you to input hours, wages and employee information. It processes net pay, often by allowing you to print checks or provide electronic payments with a one-time set up.
If payroll software sounds like a good option, we recommend Gusto as a small business payroll software provider that gives your employees the option of being paid with a paycard. Gusto starts at just $39 a month and $6 per employee. You get HR, benefits, payroll processing and a free timekeeping option at that price.
Banks & Credit Unions
Because paycards are similar to debit and credit cards, banks like Chase and US Bank, and credit unions offer paycards as part of their suite of business banking services. In fact, Chase interfaces with ADP to offer paycards in 23 states. However, be aware as there are fees that your employees may incur after the first few paycard withdrawals. If you go this route, make sure you look for a paycard option that’s free for your employees to use.
Credit Card Providers
Professional Employer Organization
The most hands-off way to provide a paycard payment option to your employees is to work with a professional employer organization (PEO) that handles most of the employee HR and payroll administration for you. Of course, you wouldn’t partner with a PEO just for a paycard.
A PEO can provide your business with human resource (HR) services, employee benefits, payroll processing, year-end taxes, and payment options such as a paycard. So if you’re already using a PEO, or are interested in working with one, then asking about their paycard options is a smart next step.
Beware of Payroll Card Fees
There are very few downsides to offering a paycard as long as you follow the rules in your state. But be aware of fees that your employees may be charged. Some ATMs charge costly service fees, as much as $5 or more per withdrawal. Banks may also charge employees to check balances or withdraw funds. Marsh adds:
“The only downside I have seen from using a paycard is for the employee. We signed the company up for the paycard service after being marketed to by a paycard provider, who sold us on all of the free aspects of the service. However, our employees have found that some services related to the use of the paycard do incur fees such as some ATM withdrawals as well as balance inquiries via phone call.”
Educate Your Employees about Paycards
If you choose to provide your employees with an option to use a paycard in lieu of direct deposit or a paper check, make sure you spend a few minutes educating them on how to avoid paying service fees. Include topics such as:
- How to use in-network ATMs, bank tellers, or POS systems to obtain cash and balance information to avoid paying fees
- How to store their PIN by memorizing it, and not having it written down or kept anywhere near their paycard
- Who to contact in case they need a replacement card if theirs is lost or stolen
The Bottom Line on Paycards
While offering paycards is a great option, it shouldn’t take the place of other payment methods like direct deposit — after all, employees like having a choice. But in states where it’s legal to provide a paycard in lieu of a paper check, it can save you both time and money. Consider offering a paycard to your staff, especially if you employ workers without a bank account.
Don’t forget that Gusto can provide employee payroll cards as a payroll option, in addition to full-service HR, benefits and payroll.