As a small business owner, you might be wondering, “Can I pay payroll with a credit card?” It’s a question that pops up when cash flow gets tight or when you’re eyeing those juicy credit card rewards. Whether you’re a startup founder juggling expenses or an employer facing a temporary cash crunch, using a credit card for payroll could seem like a lifeline. In this guide, we’ll break down how it works, the pros and cons, and whether it’s a smart move for your business.
Why Consider Paying Payroll with a Credit Card?
Running a business isn’t always smooth sailing. Sometimes, client payments are delayed, or unexpected expenses drain your cash reserves. In these moments, funding payroll using credit cards can help keep your team paid on time. Plus, some business owners see it as a way to rack up rewards like cashback or travel points. But before you swipe that card, let’s dive into how this process works and what you need to know.
Why Traditional Payroll Providers Don’t Allow Direct Credit Card Payments
You can’t just pull out your credit card and pay employees directly through most payroll providers like ADP or Gusto. Why? Traditional payroll systems are built for bank transfers, direct deposits, or checks. Credit card transactions often involve high processing fees, and payroll providers avoid them to keep costs down. Plus, IRS regulations and labor laws add layers of complexity, requiring precise tracking of wages and taxes, which credit card payments can complicate.
To get around this, third-party payroll services like Plastiq or Melio act as middlemen. They let you use a credit card to fund payroll, then transfer the money to your employees via ACH, wire, or checks. This workaround makes credit card payroll possible, but it comes with some catches.
How Paying Payroll with a Credit Card Works
Here’s the basic process for funding payroll using credit cards:
- Choose a Third-Party Service: Sign up with a platform like Plastiq, Melio, or Rho that supports credit card payments for payroll.
- Link Your Credit Card: Connect your business credit card to the platform.
- Upload Payroll Details: Provide employee names, salaries, and bank details (or use payroll software integration).
- Fund the Payment: The platform charges your credit card and sends funds to your employees or your business account for distribution.
- Pay Fees: Most services charge a 2–3% processing fee per transaction.
- Track Payments: Funds are transferred via ACH, wire, or check, and you get a record for bookkeeping.
This process ensures employees get paid on time while you leverage your credit card’s payment window (often 30–60 days) to manage cash flow.
Pros and Cons of Credit Card Payroll
Like any financial decision, paying employees with a credit card has upsides and downsides. Let’s break it down:
Pros
- Improved Cash Flow: Credit cards give you a grace period (up to 60 days) to pay off the balance, helping you bridge gaps when cash is tight.
- Earn Rewards: Use a rewards card to earn cashback, miles, or points on payroll expenses. For example, a card like the Capital One Spark Cash offers 2% cashback, which can offset fees.
- Simplified Bookkeeping: Payments are consolidated on your credit card statement, making it easier to track expenses.
- Quick Funding: Third-party services can transfer funds instantly, ensuring employees are paid on time.
Cons
- Processing Fees: Expect a 2–3% fee per transaction, which can add up for large payrolls. For a $10,000 payroll, that’s $200–$300 in fees.
- Interest Risk: If you don’t pay off the balance in full, high interest rates (often 15–25% APR) can outweigh rewards.
- Limited Acceptance: Not all payroll providers or employees accept credit card-funded payments, requiring third-party platforms.
- Compliance Concerns: Missteps in tax reporting or labor law compliance can lead to penalties, so accuracy is critical.
IRS and Labor Law Considerations
Using a credit card for payroll doesn’t change your obligations under U.S. tax and labor laws. Here are key points to keep in mind:
- IRS Compliance: Payroll taxes (Social Security, Medicare, federal income tax) must be calculated accurately and paid on time. Credit card fees are tax-deductible as a business expense, but you must report them correctly.
- Fair Labor Standards Act (FLSA): Employees must receive at least the minimum wage, and any fees from third-party services cannot reduce their net pay below this threshold.
- Electronic Funds Transfer Act (EFTA): If using payroll cards (a related option), you must offer employees another payment method, like direct deposit or checks.
- State Laws: Some states have specific rules about payroll payment methods, so check your local regulations to stay compliant.
Always consult a tax professional or payroll expert to ensure you’re meeting IRS and labor law requirements when funding payroll with a credit card.
Top Tools for Paying Payroll with a Credit Card
Here are three trusted platforms that make credit card payroll possible, along with how they work, their fees, and who they’re best for:
1. Plastiq
- How It Works: Plastiq lets you pay employees or vendors with a credit card, even if they don’t accept cards. You upload payroll details, charge your card, and Plastiq sends payments via ACH, wire, or check. It integrates with accounting software like QuickBooks for seamless bookkeeping.
- Fees: 2.9% per transaction, plus additional fees for same-day ACH ($0.99) or wire transfers ($8.99–$39).
- Best For: Small to medium businesses with irregular cash flow or those chasing big credit card welcome bonuses. Ideal for owners who want flexibility in payment delivery (e.g., checks or wires).
2. Melio
- How It Works: Melio allows you to fund payroll with a credit card and send payments via ACH, check, or wire. You can integrate it with payroll software or manually enter employee details. Vendors or employees don’t need a Melio account to receive funds.
- Fees: 2.9% per credit card transaction. No fees for ACH payments if you use a bank account.
- Best For: Startups or freelancers who need to pay contractors and want to earn rewards while managing cash flow. Great for businesses with frequent vendor payments alongside payroll.
3. Rho
- How It Works: Rho is a business banking platform that offers credit card-funded payroll through its integrated financial tools. You can charge payroll to your Rho corporate card and distribute funds via ACH or wire, with robust expense tracking.
- Fees: Varies by plan, but credit card transactions typically incur a 2–3% fee. Rho’s all-in-one platform may bundle fees with other services.
- Best For: Growing businesses that want a comprehensive financial platform combining payroll, banking, and expense management. Perfect for those prioritizing automation and scalability.
When Does It Make Sense to Pay Payroll with a Credit Card?
Funding payroll with a credit card can be a smart move in specific situations, but it’s not a one-size-fits-all solution. Consider it when:
- Cash Flow Is Tight: If you’re waiting on client payments but need to meet payroll deadlines, a credit card can bridge the gap.
- Chasing Rewards: If you’re working toward a big credit card bonus (e.g., 90,000 Chase points for $8,000 in spending), payroll payments can help you hit the threshold.
- Emergency Situations: Unexpected expenses or slow sales can make credit card payroll a temporary fix to keep operations running smoothly.
However, it’s not a long-term strategy. Relying on credit cards signals deeper cash flow issues, and ongoing fees can erode profits. Explore alternatives like business lines of credit or factoring receivables for more sustainable solutions.
FAQs About Paying Payroll with a Credit Card
Can I use a credit card to pay W-2 employees?
Yes, but not directly through most payroll providers. You’ll need a third-party service like Plastiq or Melio to fund payroll with a credit card, which then sends payments to employees via ACH, wire, or check. Ensure compliance with IRS and labor laws.
Will paying payroll with a credit card hurt my credit score or count as a cash advance?
It won’t count as a cash advance with most third-party services, as they process payments as purchases. However, carrying a balance or maxing out your credit limit can hurt your credit score. Pay off the balance in full to avoid high interest.
Is it legal to fund payroll through a credit card?
Yes, it’s legal as long as you follow IRS and labor law requirements, like paying payroll taxes on time and ensuring employees receive their full wages. Check state-specific regulations and consult a professional to stay compliant.
Conclusion
Paying payroll with a credit card can be a lifesaver for small businesses facing cash flow hiccups or aiming to maximize credit card rewards. Platforms like Plastiq, Melio, and Rho make it possible by bridging the gap between credit cards and traditional payroll systems. However, the 2–3% processing fees and potential interest charges mean it’s best used as a short-term fix or strategic move, not a long-term habit.
Before diving in, weigh the pros (flexibility, rewards) against the cons (fees, compliance risks). If cash flow issues persist, consider more sustainable options like a business line of credit or optimizing your invoicing process. Whatever you choose, prioritize keeping your employees paid on time and your books in order—it’s the backbone of a healthy business.