What Does it Mean to be a “Payee”?

Financial terms can get confusing sometimes. Try as you might, no matter how many jargons you look up, there is a new one that always gets added to your list of unknown terms. The term ‘payee’ might just be one among them. What exactly is a payee, and how does a payee work? Let’s explore this in more detail.

What Is A Payee?

 Simply put, a payee is the exact opposite of a payer. In other words, a payee is someone who receives a payment from a payer in exchange for some goods or services. 

A payee can refer to anyone you make a payment to, including your friends, family members, service providers, and merchants. Pretty much anyone that you make payments to in exchange for certain goods and services becomes a payee. 

A payee can sometimes include more than one party in a single transaction. This usually occurs in electronic transfers when a payer draws money from his/her account and splits it up into several payee transactions. It might even be the case that a payee and payer are sometimes from the same party. This usually occurs whenever you write a check for yourself, make withdrawals and deposits in your bank account, or even when you digitally transfer funds from one of your accounts to another.

It is also possible for someone else to act as a representative payee on behalf of someone who has either been incapacitated or cannot be trusted to manage their own funds.

Understanding A Payee

A payee can be anyone, including an individual or an entity such as a custodian, a trust, or even a business organization. Basically, a payee provides certain goods and services to a payer in exchange for value. This value usually occurs in the form of money paid to the payee, either in cash, bank transfer, check, or digital transfer. In return for the payment, the payer receives the goods and services provided by the payee. There is usually a bill of exchange that is drawn up to record the transaction. This bill of exchange records the value of the goods and services that exchanged hands along with the name of the payee.  

If the transaction occurs through a bank account, the payee needs to have an active account with a bank to receive funds transmitted to them by the payer.

The terms ‘payee’ and ‘payer’ have similar definitions even when it comes to promissory notes and coupon payments from bonds. As such, the payee of a promissory note is the party who is receiving the payment, while the payer is the party that promises to make a payment of a predetermined amount of money. Similarly, when it comes to coupon payments from bonds, the bond issuer becomes the payer, while the person who is receiving the coupon payments is referred to as the payee.

It is important to note that the payee has the right to accept or reject the payment made to them, according to any agreements or contracts that had been earlier drawn up. It is also advisable for both the payer and the payer to agree to the payment so that there are no disputes that might arise later.

Paper Checks

Usually, ‘payee’ is a term that you encounter when banking. When it comes to a paper check, you might have noticed a line that reads, “Pay to the order of.” This is where you would write the name of a payee.

This gives the right to the payee to negotiate the check however they want. For instance, they can either encash the check or deposit it into their bank account. If they wish to, they can even sign the cheque over to someone else. 

Take one of your paychecks, for instance. Here, you should see your own name written on the line that says, “Pay to the order of” since you are the payee of the paycheck. In the case of a check for your rent, the landlord’s name will appear as the payee, as they are the party who receives the payment.

Online Bill Payments 

If you are making an online bill payment, you will need to provide your bank with information about the payee you are making the bill payment to. For example, suppose you are making an online bill payment to your utility provider. In that case, you need to inform your bank about the payee of the mentioned amount and where the electronic payment or check should be sent. 

Payee Endorsement

You might have noticed a section called “Payee endorsement” in checks and money orders. This is where the payee will have to endorse the check that they use by providing their signature or placing a stamp. 

Once the payee has endorsed a check, then they have authorized the bank to receive the funds on their behalf. If there is more than one party involved, then all of them might have to endorse the check depending upon the laws of the state and the rules of the check. 

Once the endorsement has been completed, the payee will present the check to a financial institution or a credit union to cash the check or deposit it. After this, it is the financial institution’s responsibility to take care of the rest of the process. Assuming that a payee’s bank account and the payer’s bank account are different, the financial institution will then move the funds from the payer’s account to the payee’s account. The transaction is completed.

Representative Payees For Social Security

There can be a representative payee if someone is incapacitated or cannot be trusted to make the payments and requires someone else to make payments on their behalf. In this case, the representative payee will manage the payments of Social Security Income or even the Supplemental Security Income of the incapacitated individual.

In case the Social Security Administration believes that the beneficiary can’t manage their own funds, then they will appoint a representative payee who will receive funds on behalf of the beneficiary of the payment. 

A representative payee generally holds the same rights as a standard payee. In other words, they will be able to negotiate the check that they receive. However, they are not allowed to use the payment for their own benefit. Instead, the payment that they receive must be used only for the benefit of the beneficiary. They must manage the funds so that the money is either saved for or spent on things that will assist the beneficiary in some way or the other.

Read More

• How to Cash a Check Without an ID
• Where to Get a Cashier’s Check Without a Bank Account
• How to Close Chase Account
• How To Sign Over a Check
• How to Close Bank of America Account
• What is the Chase ATM Withdrawal Limit?

Conclusion

A payee is someone who receives payment for providing certain goods and services to another party. There are several ways in which a payee can receive funds from the payer, including paper checks, online bill payment, and so on. You can even have a representative payee for someone who has been incapacitated.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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