Paying Unbanked Employees
Small companies and organizations in the United States often choose to not hire people who are unbanked or have issues getting an ID because they don’t know that they are allowed to hire them.
Being unbanked means neither a person nor their spouse has a savings, checking, or money market account. As of 2022 in the United States, approximately 6 percent of adults were unbanked (Source: https://www.federalreserve.gov/publications/2023-economic-well-being-of-us-households-in-2022-banking-credit.htm#:~:text=Six%20percent%20of%20adults%20were,savings%2C%20or%20money%20market%20account.). This can be for a variety of reasons, including issues with social security numbers, losing access to banking services after being convicted of certain crimes, and being undocumented. Unbanked adults are people who work, eat, live, and function like the rest of us. Any organization choosing to not make room for unbanked employees is cutting itself off from a significant percentage of the workforce. Below are common ways organizations pay people who are unbanked:
1) Prepaid Debit Cards
Reloadable prepaid debit cards are arguably the most powerful tool for unbanked individuals in the United States. These cards function very similarly to checking accounts. Individuals can use reloadable prepaid debit cards to deposit checks without paying a fee, get direct deposits from their employers, and make virtual payments. Unbanked individuals with proper ID in most cases should be able to get a reloadable prepaid debit card. Helping an employee get one of these cards could make it easy for your organization to pay by both check and direct deposit.
2) Check cashing services and money orders
An unbanked employee who isn’t able or prefers not to be paid with a reloadable prepaid debit card can many times be paid them with postal money orders or checks. If they have a valid ID, an employee can use check cashing services to get cash in exchange for the paycheck you’ve given them. There is a fee to use check cashing services which is why this isn’t the ideal first choice for many people, but it is an option.
For money orders, your organization pays the fee on the front end during purchase of the money order. Organizations purchase money orders from all sorts of places from Walmart to the Post Office. Postal money orders don’t charge the receiver any fee to cash it at any post office, while many private organizations charge people fees to cash their money orders. The main downside to money orders is there is a maximum amount that can be put on each money order (post office limits each money order at $1,000 max). However, your organization can buy multiple money orders at the same time if the maximum amount is a barrier. Cashing money orders usually requires the receiver to have a valid ID.
3) Cash
Organizations and companies are legally allowed to pay employees in cash if they properly record the relevant transactions in their books. This is commonly done when the employee doesn’t have a relevant ID (an example could be the employee has trouble getting an SSN and lives in a state that doesn’t give those individuals state IDs).
Paying Employees Without ID
Whether you pay unbanked employees via check, direct deposit, or cash, don’t forget to follow all relevant government guidelines. Remember that the government in the United States allows certain individuals to get an ITIN, which is a number very similar to a SSN. This allows residents to pay taxes. Assuming your employee has an ITIN or SSN, you shouldn’t have any significant issues with the technical parts of issuing a W2 or 1099 form.
Be sure to consult an experienced professional prior to paying an employee who is unbanked to make sure all relevant laws/regulations are followed.
Murtaza “Murti” Khan
Blog posts are intended to be short informal reflections, not all inclusive content. Every organization is in unique circumstances and there are exceptions to all best practices