How to Pay Employees – Payments & Payroll Methods Explained

Paying your employees is a critical aspect of running a successful business, directly impacting employee satisfaction and retention. With an array of payment options available today, including checks, payroll cards, and direct deposits, companies must adopt flexible and adaptable payroll processes that ensure accuracy and efficiency.

Timely and precise payroll management is essential, as it meets diverse payroll needs, from different payment schedules to employee preferences on payment methods.

Outsourcing payroll can provide the necessary resources and support to create a cost-effective system that aligns with your business’s needs. In this comprehensive guide, we’ll explore the best practices for paying employees, compare various payment methods, and highlight key considerations for setting up a reliable and compliant payroll process. Let’s dive into the essentials of how to pay your employees effectively.

Employee payments are regular payments ( i.e., salary, wages) made to an employee until they leave the company. The 1991 Payment of Wages Act requires that an employee’s contract clearly specify the method of wage payment.

What is Employee Payroll?

Employee payroll is the process of paying your employees for their work, either for a fixed period of time or on a selected date. You have options, all of which are dependent on the kind of work your employees are doing.

How to Pay Employees?

Select Employee Compensation Type

1. Salary Pay

A fixed type of compensation that is paid regularly to skilled and/or full-time employees, along with those in managerial roles.

2. Hourly Pay

When employees are paid hourly for their work. This payment option is often given to unskilled/semi-skilled laborers, part-time temporary, or contract workers.

3. Commission

Employees working in sales often work on commission, a type of compensation based on a predetermined sales target/quota.

Choose a Payroll Schedule for Employee Payments

A payroll schedule is a — yes, you guessed it — a schedule that determines how often employees are paid. A few common payroll schedules are weekly, biweekly, and monthly. Or, you can have multiple payroll schedules. (This occurs when you utilize more than one of the payroll schedules). Each option ushers in a litany of pros, cons, and factors to consider.

However, payroll schedules vary by country. Some countries’ laws regarding payment are more relaxed, like Canada and the U.S., where employers can choose their employees’ payment schedule. This in turn creates a variety of schedules within the two countries: 38% semi-monthly payroll, 31% multiple payroll schedules, 27% monthly payroll schedule, and 9% weekly payroll.

Some countries’ rules are stricter, like Brazil, where employers must pay employees at minimum once a month. Whichever payroll schedule you choose, it’s imperative to select one that is compliant with regulations and local labor laws.

• Weekly

Occurs when employees are paid once a week. This approach can help workers pay their expenses faster because of the higher frequency of paychecks. Having to run payroll more often, however, can heighten administrative costs and consume your team’s time.

• Bi-weekly

This payroll system happens when employees are paid every two weeks. A bi-weekly payroll schedule means your workforce doesn’t wait ages for their wages, and your payroll team need not run payroll on a weekly basis, bringing balance to the force, so to say.

• Bi-monthly

A bi-monthly payroll schedule pays employees twice a month, often on set dates like the 15th and the last day of the month. This approach provides regular, predictable paychecks, helping employees manage their finances effectively. For employers, bi-monthly payroll reduces the administrative workload compared to weekly or bi-weekly schedules.

• Monthly

A payroll period where employees are paid once a month, usually on a specific day. While a positive option for payroll administration — less time spent processing payroll — a monthly payroll approach can produce a challenging cash flow environment for employees, especially if an unexpected payment rears its ugly head towards the end of the month.

Employee Taxes and Deductions Calculation

Employees must fill out some forms, like the W-4 (which displays how much money to withhold from an employee’s wages for taxes) and an I-9 (verifies the identity of your employee and employment authorization), in order for you to process payroll.

Now there’s a couple of steps to calculating employee taxes. First, you’ll have to figure out their gross pay. Calculations differ between different types of employees (hourly, salaried, or commission).

To calculate a salaried employee’s gross pay, take the number of pay periods in a year and divide it by your employee’s annual salary.
Then, see if your employee has pre-tax deductions. If so, take the pre-tax deductions and subtract them from gross pay.

Now you calculate the tax withholding from your employee’s earnings, which includes federal income taxes, FICA taxes (includes Social Security and Medicare), state and local income taxes (if applicable), and state-specific taxes. (Remember to also pay employer’s taxes on your employees’ paycheck).

Try not to worry about doing math all by yourself, there’s plenty of accounting software out there to do the heavy lifting.

Compliance Requirements for Employee Payments

Payroll compliance is the adherence of federal, state, and local laws regarding payroll and payroll taxes. There’s a sundry of compliance requirements to consider, like minimum wage laws, overtime regulations and tax withholdings. Each varies between countries, so it’s important to research the specific country’s laws and regulations revolving around employee payments.

For instance, the U.S. has a federal law called the Fair Labor Standards Act (FLSA), which establishes minimum wage, hours worked, overtime pay, record keeping, and child labor standards. Businesses must comply with these rules and requirements set in place.

As mentioned, tax withholding requirements differ too, but it’s helpful to know aspects of those requirements, like rules and deadlines. Learning about income tax rates and tax brackets impact salary calculations is worthwhile knowledge to acquire as well. Utilizing a global payment platform that specializes in compliance is a beneficial choice when making international payments.

International Payroll Considerations

Managing employee payments across countries, along with currency conversion, tax implications and legal compliance, is an enigmatic process that leaves much for international companies to consider. Here’s some tips to cultivate and conserve your efficient and compliant global payroll system:

• Know what you need – Making international payroll payments is hard to navigate, so before you set sail on those tumultuous seas, consider what your company needs — international payments-wise. It’s a good idea to determine all the countries your global workforce is situated in to first understand the global scope you’re working with, and then assess legal and tax requirements, local currencies, exchange rates, etc.
• Work with a global payroll partner – This option is an advantageous one, brimming with facets that pay your global workforce efficiently and compliantly. A global payroll partner makes sure you accommodate all legal requirements and keeps you up to date on ever-changing local laws. A global payroll partner means you don’t need to hire staff to work on salary and tax deductions, payment processing, and ongoing and never-ending paperwork.
• Partner with an EOR – An employer of record (EOR) performs the task of hiring, onboarding and managing payroll on behalf of another company. They ensure your business remains compliant with local laws and regulations — another advantageous and efficient option to consider.
• Keep accurate records – A best practice to implement is keeping accurate records of employee financial data regarding wages and tax obligations. Staying consistent with this method helps ensure compliance and helps with accurate reporting, and of course, reduces the risk of error.
• Educate your payroll team – Keeping your payroll team trained and up to date with global payroll tech and practices is central to avoiding the ever-dreaded compliance issues. Continuously educating your payroll employees on this subject will enable them to efficiently manage new challenges that are bound to come their way.

Employee Payment Method – Type of Payments

Direct Deposit

A popular and convenient method of paying employees, direct deposit subtracts the element of physically handing a paycheck to employees. You can run it manually, hire a bookkeeper, or utilize numerous payroll software platforms that automate and streamline your payroll process. Direct deposit saves you time and is secure but is time sensitive — you must run payroll on time for your employees to be paid on time.

1. Cash

A payment option where employers pay employees with cash. While cash is accessible and harbors no transaction fees, there is a limit to security. (At greater risk of theft). Tread with caution, as it can be difficult to keep track of records without an audit trail.

2. Check

Also a popular method of payment, an employer can hand an employee a physical paycheck for them to deposit into their bank account or use a cash-checking service (if they don’t have a bank account). You can, however, run into some accessibility issues, as the empire of digital transactions continues to grow.

3. Payroll Cards

Employers can pay employees by means of a prepaid card, which is filled with wages on each pay day for that pay period. The card can be utilized like a debit card and has the option for an employee to withdraw funds via a bank cashier or ATM. While accessible to employees without a bank account, there is a possibility of the card being lost or stolen. Plus, the card does not accrue interest.

4. E-wallets

Otherwise known as digital wallets, this method of payment allows employees to receive their paychecks electronically via a digital wallet provider, like Apple Pay or Venmo. E-wallets are quick, efficient, and accessible to workers without normal banking assistance. However, there are privacy concerns regarding e-wallets because transactions have the potential to be tracked. There’s also the element of leaning on technology too much for transactions. (i.e., battery life and internet connection).

Common Payroll Payments Challenges and Solutions

Delayed payroll payments and managing employee inquiries can trap you in a payroll maze with no map to help you escape. Here’s a few best practices and solutions to conquer these challenges:

• Automation – Payroll automation tools and platforms help lift the weight of running payroll manually off your team, minimizing errors and saving time. For example, you can automate the calculation of wages, taxes, and deductions, formulate pay stubs, and dispatch direct deposits.
• Keep Up to Date with Compliance Requirements – These laws and regulations are ever-changing, making them difficult to keep pace with. Still, you must make a continuous effort to inquire about the latest changes and inspect your payroll process often to ensure they are reflective of the law.
• Create Policies and Procedures – Providing policies and procedures constructs a clear path for consistency and accuracy in effective payroll management. Subtract confusion by documenting every step of the payroll process, such as calculations, deductions, recordkeeping, and data collection.
• Transparency – One of the best ways to scale down conflict is to make sure employees are in the know about your payroll procedures and policies by providing them with access to it. Should an issue arise regarding an employee and their paycheck, communicate with them until the problem is resolved.

Hourly Payroll Challenges for Employee Payments

Complexity of Tracking Work Hours

Managing hourly payroll can be a daunting task due to the complexity of accurately tracking employee work hours. Many businesses rely on manual timekeeping systems or outdated software, leading to errors and inconsistencies. Employees might forget to clock in or out, misreport their hours, or experience system glitches. These issues not only complicate payroll processing but also result in underpayment or overpayment, affecting employee satisfaction and trust. Implementing a reliable, automated time-tracking system can significantly reduce these challenges, ensuring accurate and efficient recording of work hours.

Overtime Calculation and Compliance

Overtime calculation is another critical challenge in hourly payroll management. Different regions and industries have specific regulations regarding overtime pay, which can vary widely. Employers must ensure compliance with these regulations to avoid legal penalties. Accurately calculating overtime requires a deep understanding of the applicable laws, as well as precise tracking of hours worked beyond regular shifts. Mistakes in overtime calculations can lead to costly disputes and diminished employee morale. Leveraging advanced payroll software that automatically applies the correct overtime rules can help businesses stay compliant and maintain employee satisfaction.

Incorrect tax deductions and withholdings

One of the most significant challenges in hourly payroll is ensuring correct tax deductions and withholdings. Employee payments must reflect accurate deductions for federal, state, and local taxes, as well as other withholdings such as social security, Medicare, and retirement contributions. Incorrect calculations can result in legal issues, fines, and frustrated employees. Businesses must stay updated with ever-changing tax laws and ensure their payroll systems are configured to handle these changes. Utilizing a comprehensive payroll solution that integrates tax compliance features can minimize errors and streamline the payroll process.

Mistakes to Avoid When Making Employee Payments

Employees Misclassification

Here’s the scenario — you hire a worker and classify them as an independent contractor, when they should be classified as an employee. But how did this happen? Misunderstanding complex laws, increasing regulatory scrutiny, fluctuating workforce dynamics, and trusting a worker’s word at face value, are a few unintentional reasons why misclassification of employees occurs.

Avoiding misclassification consists of implementing a proactive course of action, such as running regular worker classification audits and generating crystal clear job description contracts to refrain from a bog of confusion and misunderstanding.

Employing tax and legal experts in the countries where you operate and applying proper tech solutions can help deter a route towards misclassifying employees. Papaya Global’s AI-powered payment platform helps ensure compliance by warning about inaccuracies and offers real-time data analytics of your global workforce.

Non-payment of Payroll Taxes

As a business owner, you must withhold and pay payroll taxes that pertain to your company. Paying payroll taxes is required, and the penalty of not paying those taxes, depending on the jurisdiction, can range from monetary penalties to jail sentences.

Taxes to pay can include: FICA taxes (Social Security and Medicare), federal and state income taxes, and federal and state unemployment taxes. It’s also important to complete correct employee wage and tax reporting forms. For example, businesses must send a form 1099-NEC to independent contractors that they can file for taxes.

Not Staying Updated on Payroll Laws

Keeping pace with ever-changing payroll laws can feel like a marathon with no end in sight, especially if your company operates globally. You must follow the federal, state, and local laws where your employees and contractors work. Remaining compliant is everything — luckily there are automated global-focused platforms available to use, global payment providers and EORs to choose from to help you pay your workforce compliantly.

Inadequate Payroll Recordkeeping

Incomplete, missing, and unorganized records can concoct a payroll tempest, best avoided by keeping complete and organized payroll records. The reliance of manual entry can result in errors that can take months to excavate. Unorganized records can cause the payroll team to miss an employee payment, which in turn could lead to a thorny path of lowered morale and retention.

There are laws in place that require employers to keep records utilized for paying employees, such as time schedules and time cards. Such laws are dependent on where you live. In the U.S., for instance, the FLSA (Fair Labor Standards Act) requires that the employer keep records used to gauge employee payment for two years.

How Do I Set up Employee Payments?

You can set up employee payments in a variety of different payroll platforms and software solutions, but working with Papaya Global means having a streamlined, automated process to pay your global workforce. To set up payments, follow these few simple steps:

1. Set up your workforce wallet in your applicable locations and currencies
2. Upload and update your worker’s bank information
3. Determine a payment received date for each payment group
4. Place funds into your workforce wallet three days before payday (You will be sent a reminder!)
5. Approve payments and pay! You’ll be able to track their status until the funds reach the recipients’ accounts

Papaya Global can also help you manage your business through our OS feature, Time & Attendance solution tool, which streamlines your workforce management while providing global time-tracking alongside local regulations compliance.

Impact of Digital Transformation on Employee Payments

It’s safe to say that digital technology is altering the terrain of employee payments — for the better. Automated systems allow for a faster payroll running process, as it eliminates redundancies and minimizes errors, therefore making it more accurate, enabling your team to work on other important tasks.

A lead character in the tech world of payment processing is AI, which waves a red flag at inconsistencies in your payroll data and can automate data, ultimately creating a more efficient payroll process.

There are benefits galore to this digital transformation. The use of AI, for example, can aid HR teams in creating personalized experiences for employees, which can bolster retention. AI can process large quantities of data without a need for more resources and composes the HR process into a fast and efficient one.

Eliminate manual data entry and replace it with automation at Papaya Global. Have the global payroll advantage and pay your international workforce through us. Schedule a demo today.

And learn more on Papaya Academy