What Is a Payroll Clearing Account?

by Osmond Vitez; Updated September 26, 2017

Payroll clearing accounts are a beneficial way for companies to manage their payroll process. Large companies can automate their payroll check process using a PCA and direct deposit, allowing less time for checks to clear from their bank account. PCAs also protect the integrity of a company’s main bank account.

Definition

A payroll clearing account is a zero-balance bank account used by companies to clear payroll checks for employees. A PCA is popular with large companies that have several thousand employee checks cashed each pay period. The PCA keeps cash separate from the regular company bank account and helps protect the company from having its daily operating account compromised by outsiders. It also helps maintain integrity with the direct deposit system that is standard with most companies.

Payroll Process

Once the payroll amounts have been approved on paper, a transfer is made from the main company bank account to its PCA. This transaction usually occurs a few days to one week in advance of the upcoming pay date. If the company uses direct deposit, transfers will be made from the PCA to the employee bank accounts at a specified time on the pay date. If the company issues paper checks, these will clear against the PCA balance until it reaches zero and all checks have been cashed.

Account Review

Most times the PCA payroll process works in a seamless order for clearing payroll checks. Any exceptions will lead to an account review of the PCA and outstanding payroll checks. Direct deposit employers will receive an exception report from their bank regarding which employee paychecks were not deposited as a result of an error. For paper checks, it is somewhat harder for employers to find out which employees did not cash their checks. Printing off an online bank statement and reconciling the account is the best option for this scenario.

Advantages

PCA payroll clearing can have some strong advantages for businesses. The most important is that it prevents unwanted access to the main company bank account. If the PCA is compromised, it can be closed and another one set up with a different account number. Another good advantage is that it aids in the direct deposit process for large companies. Bank statements and reports can be generated from the PCA without a lot of unnecessary transactions from daily operations included.

Disadvantages

PCA payroll clearing may be unsuitable for small and midsize companies that have fewer employees. If the company issues payroll using live checks, tracking any remaining balance in the PCA can be time consuming. Some companies only keep the payroll balance in the PCA for a few days; employees attempting to cash checks after this date will be unable to do so. This creates more work for the accounting department by re-issuing checks for previous payroll periods.