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Grow Your Business Finances

Paperless Pay: Should You Make the Switch?

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utah778 / Getty Images
  • Paperless payroll systems offer a cost-effective and environmentally friendly way to simplify your business.
  • Businesses save between $2.87 and $3.15 per pay run by paying employees electronically.
  • There are multiple services you can choose from, but do your research to ensure you comply with local laws concerning how employees are paid and how payroll records are kept.

Payroll used to mean hours of tedious, painstaking work for small business owners, who then had to store mountains of papers and data. But thanks to the availability of multiple online payroll services, small businesses can make the process paperless and (almost) completely painless.

Instead of printing out payroll reports, paying employees with paper checks, and recording time and attendance via a paper timesheet, online payroll programs allow you to handle these tasks electronically – all of which can save you time and effort. They can even help you save on printing and postage costs.

"Paperless payroll is a term that describes how an entire payroll can be processed without generating any paper," said Eric Wade, product manager/product owner for payroll system provider Paychex

There are many options for paperless payroll systems, all of which offer different features and capabilities. However, the main components of a payroll system are the same. 

"There are multiple components of a paperless payroll, including recording employees' time electronically, employees being paid via electronic payment methods (versus a negotiable paper check), delivering pay stubs to employees electronically, payroll reports being generated electronically, and delivering W-2s to employees electronically," said Wade. [Read related article: Best Payroll Services]

Editor's Note: Looking for information on payroll systems? Fill in the questionnaire below, and you will be contacted by payroll providers ready to discuss your payroll needs.  

When choosing a paperless payroll service, consider all of the various payroll functions that can go paperless, such as entering timesheets or timecards, generating electronic paychecks and stubs, and using direct deposit to transfer funds. Consider how you use each function and decide whether it's viable to replace it with a paperless process.

Next, look at the different types of services offered by payroll providers and determine which ones you need. Use that to decide which provider is right for you.

  • Electronic payroll records: This option helps you avoid paper clutter and stay organized. The Fair Labor Standards Act (FLSA) requires all payroll records to be accurate, for businesses to keep payroll records for at least three years and that your online records be printable if the need arises.

  • Employee self-service (ESS) models: ESS models make it so that you can share pertinent information about your business (such as employee handbooks, benefit options and business history) with employees online. An ESS also enables employees to clock in and out of work electronically. It then automatically computes time and attendance data.

  • Electronic funds transfer (EFT): An electronic funds transfer allows you to transfer wages without exchanging a physical check. To do this, your employees will need to provide their bank account and routing numbers. Then for each pay period, your bank will transfer wages from your business's account to employees' accounts. Keep in mind that direct deposit and EFT laws vary from state to state.

Some services give you several options to choose from. One such example is electronic funds transfer. Employees can opt in to direct deposit during their onboarding process to have their wages transferred to their bank accounts. Or they can opt to receive a pay card to have their funds transferred directly onto a debit-like card. 

While having all of these tasks completed online might make some small business owners nervous, there are several benefits to running a paperless payroll, including increased security and peace of mind. For instance, if there was a natural disaster, your paper records would likely be damaged or destroyed, but your online records would be safe, and you would be able to access them from any place at any time.

Second, paper payroll is an extremely green practice. "Switching to paperless payroll is environmentally friendly, requiring less paper and printing resources," said Wade.

There are also tremendous cost savings. Wade said research from the Electronic Payments Association and the American Payroll Association (APA) found that businesses save between $2.87 and $3.15 per pay run by paying employees electronically, such as via direct deposit, instead of via paper check. Businesses save another $1.20 by providing pay stubs online, the research found.

"In addition, the APA indicates that if a check is lost and needs to be replaced, there can be an additional cost savings of $8 to $10 per replacement check," Wade said.

Paperless payroll systems also help save you money (and protect your business) by ensuring small business owners are paying and filing their taxes on time, said Tomer London, co-founder of payroll system provider Gusto. Paperless payroll programs file all local, state and federal taxes automatically, so business owners no longer have to remember to send in forms or make payments, London said.

"Running payroll manually is a time-consuming, complicated and error-prone process," said London. "As a result, one-third of small business owners get fined every year for filing or paying their payroll taxes incorrectly."

Wade pointed to several other benefits that paperless payroll offers, including:

  • Time savings – Employers save time they would have otherwise spent preparing checks, delivering checks to employees, resolving lost and undelivered checks, fixing check-cashing problems, and dealing with fraud issues. Businesses also save time – time they would have spent answering employee questions. With paperless payroll platforms, employees can log in and resolve questions and issues themselves.

  • Reliability – Employers can pay employees on time regardless of the holidays or unexpected events, such as bad weather or natural disasters. Employees know they will be paid on time and do not need to come into work to pick up their checks or wait for their checks to be delivered.

  • Accessibility – Employers have convenient access to their payroll data online or via a mobile device. Employees also have convenient access to their payroll data, including their personal information, direct deposit information, pay stubs and W-2s.

  • Digital record-keeping – Storing three years' worth of paper payroll records per employee can lead to a lot of wasted space and hours spent establishing and maintaining an organized filing system. Most paperless payroll services provide digital storage of all records and continued access to employee records whenever you or your employees need them.

London said paperless systems also allow for numerous integrations with popular accounting software programs like QuickBooks and Xero, which streamline and walk you through the process of recording payroll expenses. "People no longer need to manually record payroll entries," London said.

Before going completely paperless, however, businesses should first make sure that their state allows for it. Wade said certain states require employers to offer paper checks as a payment option, while other states mandate that employees be able to opt out of online paystub delivery.

In addition, the Internal Revenue Service requires that all employees consent to receive their W-2 forms online. Employees who don't consent must receive a paper copy.

To learn more about what to look for in a payroll system, check out our payroll system buyer's guide. If you are ready to get started, see which payroll systems we recommend for different types of businesses.  

Editor's Note: Looking for information on payroll systems? Fill in the questionnaire below, and you will be contacted by payroll providers ready to discuss your payroll needs.  

Kiely Kuligowski

Kiely is a staff writer based in New York City. She worked as a marketing copywriter after graduating with her bachelor’s in English from Miami University (OH) and is now embracing her hipster side as a new resident of Brooklyn. You can reach her on Twitter or by email.