What Is Direct Deposit & How Does It Work?
Direct deposits are becoming increasingly popular with employers and employees alike. Learn exactly what direct deposit is, how it works, and if you should use it.
What is direct deposit? Direct deposit is an electronic payment method widely used across the US by employers to send employee payments conveniently and without the hassle of paper checks. However, there’s a lot more to know and consider before deciding to offer direct deposit to your employees or choosing to be paid via a direct deposit as an employee.
This beginner’s guide explains everything you need to know about direct deposit as an employer or an employee, including how direct deposit works, how long direct deposits take, and how to implement direct deposit. Let’s dive in.
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What Is Direct Deposit?
Employers use direct deposit to transfer wages, reimbursements, bonuses, and other payments electronically to employees’ bank accounts through the automated clearing house (ACH) network.
Direct deposit has largely replaced traditional paper checks in the workplace, as both employees and employers favor its faster, more convenient, and more secure payment abilities.
How Does Direct Deposit Work?
How does direct deposit work in the US? At a basic level, direct deposit is an ACH payment method in which money is transferred out of one bank account via the ACH network and deposited into another bank account.
Here’s a simple step-by-step explanation of the direct deposit process for employers:
- In a normal direct deposit transaction, an employer or third-party payroll provider starts a direct deposit transaction within the ACH network. The entity that starts the transaction is referred to as the originator.
- The direct deposit transaction is sent to the originator’s bank, which then sends the transaction to an ACH network operator.
- The ACH network operator then reviews, routes, and processes the transaction so that the funds are delivered to the recipient’s (employee’s) bank account.
- The direct deposit funds are available within the recipient’s bank account within two business days at most.
In the US, most direct deposits rely on the ACH network pioneered and managed by the National Automated Clearing House Association, more commonly known as Nacha. The ACH network connects thousands of banks and is the system used to facilitate electronic payments.
Nacha serves as the administrator for the ACH network, setting guidelines and regulations for those using the ACH network. The Federal Reserve and The Clearing House (unrelated private company) operate the ACH network, meaning these entities sort, route, and process all ACH transactions.
Direct deposit is typically offered at no cost to employees but may cost employers depending on their bank’s direct deposit processing policy.
How Long Does Direct Deposit Take?
ACH Network-supported direct deposits can be processed on a same-day, next-day, or two-day time frame, and the funds should be available in the receiver’s bank account by 9 AM on their scheduled arrival day.
The time it takes for a direct deposit payment to process depends on which time frame your employer (or your employer’s third-party payroll solution) chooses.
Regardless of the direct deposit time frame, employers are responsible for scheduling or automating direct deposits to ensure that payments are made on time. Contact your bank for more information if a direct deposit payment is running late.
What Is A Direct Deposit Form?
A direct deposit authorization form is a document in which employees or contractors provide information about their identity and bank account to authorize direct deposit payments from their employer.
Employees may need to include a voided check with their direct deposit authorization form. However, many payroll companies have begun to use micro-deposits to confirm and verify bank account ownership and authorize deposits.
In this case, the payroll company will perform one or more micro-deposits in which they transfer small sums into your account (usually less than $1), withdraw those funds, and ask you to confirm the specific amounts deposited.
If you use payroll software, such as Gusto, signing up for direct deposit is an entirely digital process that can take just a few minutes to complete for both employers and employees.
Should You Use Direct Deposit?
Whether you should use direct deposit depends on whether you are an employee or an employer, as there are different advantages and disadvantages of direct deposit for employers versus employees. Keep reading for a full break down of the pros and cons of using direct deposit for employers and employees.
If You Are An Employer…
Adopting direct deposit as an employer can benefit your employees by making it easier for them to access their salaries and save your business time running payroll. Direct deposit can also help your business automate payroll and improve your record keeping as you move away from manually printing checks.
- Make it easier for employers to be paid
- Automate the process of running payroll
- Allow employees to split paychecks into different accounts
- Reduce the occurrence of lost or stolen paychecks
- Save money and time on printing paper checks
- Bank fees for direct deposit
- Remembering submission deadlines
If You Are An Employee…
Employees choose to use direct deposit because of its convenience, as it typically means funds are available within employee bank accounts by 9 AM on payday. Convenience aside, there are several benefits to direct deposit for employees, alongside a couple of disadvantages employees should consider.
- Faster access to paycheck funds
- You want to split your salary among multiple accounts automatically
- You want to eliminate the chance of getting your paycheck stolen
- You want to keep your salary private
- No choice in mandatory direct deposit states
- You may need to open a bank account if you don’t already have one
The Bottom Line On What Direct Deposit Is & If You Should Use It
Direct deposit is one of the most popular electronic payment methods in the US and is used by the vast majority of the nation’s businesses. With direct deposit, salary can be paid directly from one account to another. It’s convenient, fast, secure, and benefits both employers and employees alike.
However, if you’re still a direct deposit holdout, it’s incredibly easy to adopt direct deposit for your business with just a single phone call to your bank.
That said, managing direct deposit is only as easy as you make it. If you’re interested in making payroll as hands-off and automated as possible, it might be time to adopt a payroll software solution for your business.
Check out our guide to the best payroll software for small businesses, including feature breakdowns, pricing, and security information. Every software option on the list supports both direct deposit and paper checks, so you can take your pick.