Payee: Definition, How They're Paid, Duties, and Limits

What Is a Payee?

A payee is a party in an exchange of goods or services who receives payment. The payee is paid by cash, check, or another transfer medium by a payer. The payer receives goods or services in return. The name of the payee is included in the bill of exchange and it usually refers to a natural person or an entity such as a business, trust, or custodian.

Key Takeaways

  • A payee is a party in an exchange of goods and services who receives payment.
  • The payee provides goods and services to the payer who obtains them through the exchange of value (most often money).
  • Payees may also be more than one party in a transaction and sometimes they are the same party.
  • The Social Security Administration may designate a representative payee if it believes the beneficiary can’t be trusted or is not capable of managing their own funds.

Understanding a Payee

In any type of transaction, there will be a party that provides the goods or services and the party that receives the goods or services. To receive goods or services a payer must provide an exchange of value, which is most often money, to the payee.

In a banking situation, the payee must have an active account that is in good standing through which funds can be transmitted by the payer. This is, of course, if the transaction is not done in cash.

In the case of a promissory note, through which one party promises to pay another party a predetermined sum, the party receiving the payment is known as the payee. The party making the payment is known as the payer. For coupon payments from bonds, the party receiving the coupon is the payee and the bond issuer is referred to as the payer.

Payees have the ability to accept or reject amounts being paid to them, based on an agreement or contract.

Investment management transactions frequently have payee accounts that receive payments for the benefit of a client's separate account. For example, in contributing to an individual retirement account (IRA), a customer (e.g., John Smith) may write a check from their checking account to their investment management company, with the payee being the company's name receiving the funds "For the Benefit of" (FBO) the client. This would appear as "XYZ Management FBO John Smith." The funds will ultimately be deposited into John Smith's account as the payee, with XYZ Management being the custodian.

Payees may also be more than one party. This typically happens in electronic transfers when a person withdraws money from the payer's account and splits it into a variety of payee allocations. Depending on the banking institution, these types of transactions may have approval requirements for numbers, percentages, and types of accounts.

Sometimes, the payee and payer may be the same party. This can occur when a person writes checks, makes withdrawals and deposits, or electronically transfers funds from one of their accounts to another.

It is a good practice to ensure that the payer and the payee are in agreement on the amount being transferred between parties to avoid disputes.

Special Considerations

Social Security and Supplemental Security Income (SSI) benefit payments are often payable to a “representative payee” rather than the ultimate beneficiary (the person entitled to receive benefits). The Social Security Administration (SSA) may designate a representative payee if it believes the beneficiary can’t manage funds on their own.

The SSA outlines an entire process on how to become a representative payee, what the duties are, and how the process should be managed and reported.

A representative payee has rights and powers similar to that of a conventional payee, but a representative payee must manage money for the benefit of the actual beneficiary. Funds must be spent on (or saved for) only in ways that help the beneficiary. In this aspect, the representative is acting as the fiduciary to the actual payee.

Representative payees exist to take the burden of money management off the beneficiary's plate. An effective representative payee should improve the beneficiary's life. If a representative payee is doing something that works against an ultimate beneficiary, the Social Security Administration should be immediately notified.