- Direct deposit is the electronic transfer of wages from your bank account to your employees’ accounts.
- Direct deposit is easier, faster, greener and safer for employers and employees.
- There are six easy-to-follow steps to set up direct deposits for employees.
- This article is for small business owners who want to set up direct deposits for their employees.
These days, it can seem like everything that once existed on paper has been brought fully online, and that includes paying your employees. There’s a reason for this – in fact, there are plenty of reasons direct deposit is the dominant way to pay employees. It helps that it is very easy to set up direct deposits for employees. Learn more below.
What is direct deposit?
Direct deposit is the electronic transfer of money from one bank account to another without paper checks or cash. In a small business context, direct deposit involves giving employees their pay electronically (with payroll taxes deducted, if applicable). If you forgo paper checks and your employees log into their bank accounts on payday for proof of payment, you pay by direct deposit.
In addition to wages, people also receive other income through direct deposit, including child support, social security benefits, and tax refunds. However, in this article, we will discuss direct deposit as a method of paying employee salaries.
How does direct deposit work?
Direct deposit is a form of ACH payment. The abbreviation “ACH” stands for “Automated Clearing House,” which indicates that your deposit has passed through the US financial system. The National Automated Clearing House Association (Nacha) oversees this process.
The “clearing” which takes place in the “house” is the approval of your deposits. If you do not have enough funds in your account when your bank sends all of your direct deposits to ACH, your deposits will not be made. Assuming you have sufficient funds, each employee’s bank will receive your deposit, credit the employee’s account accordingly, and debit yours. The process usually takes one to two business days.
Did you know? Although direct deposit is a form of ACH payment, many companies also accept ACH payments from customers, which is very convenient for customers who do not wish to pay by credit card.
What are the advantages of direct deposit?
About 93% of American employees receive their paychecks by direct deposit. This is mainly because direct deposit is extremely beneficial for owners and employees of small businesses. Below, we’ll explain some key benefits of direct deposit for both groups.
Benefits of direct deposit for small business owners
Small business owners often prefer direct deposit to paper or cash checks for the following reasons:
- It’s more affordable. Cutting checks can be expensive. You have to constantly buy special paycheck paper and printer ink, after the often substantial expense for a desktop laser or inkjet printer. Additional postage costs come into play if you mail checks rather than delivering them in person. Direct deposit has none of these expenses and can be up to $ 3 cheaper per paycheck. Spread across your entire team, this can save you huge amounts of money.
- It is faster. Each of the costly steps of printing and sending paper checks is also tedious and time consuming. Direct deposit, on the other hand, is a fully automated process. Yes, in some cases you will first need a few minutes to collect and enter your employee information. Yet direct deposit is a much shorter process than printing and sending checks – and often employees, not you, add their information.
- It’s safer. In 2020, stories abounded about “mailbox fishing” – fraudsters stealing checks from mailboxes and changing their amounts and recipients. Direct deposit eliminates the possibility of this increasingly common form of fraud. Also, assuming your payroll department and bank implement extensive cybersecurity measures, all direct deposit data will be encrypted.
- It reduces your carbon footprint. It is common knowledge that using paper is bad for the environment. The amount of carbon emissions involved in postal mail is less often discussed. When you opt for direct deposit, your business plays no role in this environmental damage. Most small businesses massively reduce the use of non-renewable resources when they switch to direct deposit.
Benefits of direct deposit for employees
Employees often prefer paperless payroll options over physical checks for the following reasons:
- It eliminates bank travel. Employees who receive paper checks should take them to their bank for deposit. This race further delays when an employee’s salary becomes available. Of course, you could argue that this problem no longer exists since 12 million people have ditched in-person banking errands for mobile check deposits. However, mobile deposits still require a few minutes on your mobile app. Direct deposit also eliminates this time.
- It creates predictability and stability. With direct deposit, employees know exactly when their salary will be available. Compare that with paper checks, which force the employee to find time for mobile deposits or bank trips. Direct deposit is clearly the winner in helping your employees achieve predictable and stable finances.
- It allows a split deposit. Your employees cannot deposit paper checks into two bank accounts. Instead, they’ll have to deposit their checks into one account and then transfer the money to another account later. Direct deposit, on the other hand, allows split deposit. If an employee wishes to transfer 70% of his salary to his checking account and 30% to a savings account, it is quite possible.
- He organizes payslips. An employee’s paper pay stubs can easily be disorganized in a filing cabinet. When you activate direct deposit, your employees receive electronic pay stubs stored chronologically in your payroll software. This way, employees can easily access their salary details and deductions with just a few clicks.
How to set up direct deposit for your business
Generally, it is easy to set up direct deposit for employees. Here’s how to do it.
1. Choose a payroll service.
For most small businesses, the best option for direct deposit is a payroll service. This is because payroll departments calculate how much you need to pay employees per pay period, so they are in the best position to execute those payments. While you can set up direct deposit through your bank, choosing the right payroll service gives your business additional features and functionality that greatly benefit its day-to-day operations.
Payroll services are often affordable enough that any small business owner can use them. For example, OnPay’s pricing structure caters to very small businesses, and direct deposit is one of its main features. (Read our OnPay review for more information.)
Likewise, ADP can allow direct deposit even for the most complex payrolls. (Read our ADP review for more information.)
To remember : It is possible to go through your bank for direct deposit, but payroll services offer so many additional benefits that they are probably the best choice. Learn more about the best payroll services and their many benefits in our reviews of the best payroll services.
2. Register officially for direct deposit.
Most payroll services will allow you to sign up for direct deposit in just a few minutes. You will usually add your bank account information and respond to a verification email confirming that you are the one doing the direct deposit. You will then make a test deposit in which small withdrawals are taken from the account and record their amounts. If your payroll department tells you that you’ve entered the correct amounts, then your direct deposit setup is complete.
3. Obtain the bank details of your employees.
To deposit wages directly into your employees’ bank accounts, you will need each employee’s bank account number, routing number, and bank name. You will also need to know if you are making a deposit to a checking account or a savings account. You can either request this information from your employees or have it added to your payroll software themselves if your payroll department allows it.
In addition to the employee’s banking information, you will need to obtain authorization. To do this, have your employees complete and sign an authorization form. You can usually customize these forms to suit your business, but whatever they look like, they should allow you to pay salaries electronically.
4. Enter the banking information of your employees.
If your employees haven’t added their information directly to your payroll software, now is the time to do so. Note that if you have chosen the banking route instead of using payroll services, you should start by compiling all of your employee information in your accounting software. You can then export everything into a single Nacha file to send to your bank. Alternatively, just like with payroll software, manual addition is possible.
5. Establish your payroll schedule.
Determine whether you will pay your employees weekly, biweekly, bi-monthly, or monthly. If you’re switching from paper checks to direct deposit, make the change far enough in advance for direct deposit to begin on your next pay date. The process typically takes seven to 10 business days to complete. You should also confirm with your payroll department that your direct deposit services will not interrupt or change your typical pay schedule.
At the same time, you need to update the deadlines for receiving payment cards from your team or other time and attendance records. Upon receipt of these records, you should review them and file them with your payroll department. The key here is that payroll departments typically need to receive this information a certain number of days before executing direct deposit. Set your deadlines based on this timeline.
6. Run payroll as usual.
After following the steps above, your payroll and direct deposit should be fully automated. Your employees should now receive their pay electronically every payday. If there is a problem, you can always contact your payroll department for assistance; their customer service is supposed to handle that. But if you’ve chosen your payroll service right and followed all of the above steps, you should be fine.