These days, it can seem like everything that once existed on paper has moved entirely online, and that includes paying your employees. There’s a reason for that – actually, there are many reasons why direct deposit is the dominant way to pay employees. It helps that it’s super easy to set up direct deposits for employees. Learn more below.
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 means electronically delivering employees their wages (with payroll taxes deducted when applicable). If you forgo paper checks and your employees log in to their bank accounts on payday for proof of payment, you’re paying by direct deposit.
Aside from wages, people also receive other income through direct deposit, including child support, Social Security benefits and tax refunds. However, in this article, we’ll discuss direct deposit as a method of paying employee wages.
Direct deposit is a form of ACH payment. The abbreviation “ACH” signifies “automated clearinghouse,” which indicates that your deposit has gone through the American financial system. The organization National Automated Clearing House Association (Nacha) oversees this process.
The “clearing” that takes place in the “house” is the approval of your deposits. If you don’t have enough funds in your account when your bank sends all your direct deposits to the ACH, your deposits won’t go through. Assuming you have enough funds, each employee’s bank will receive your deposit, credit the employee’s account accordingly and debit yours. The process typically takes one to two business days.
Approximately 93% of U.S. employees receive their paychecks through direct deposit. That’s primarily because direct deposit is tremendously beneficial for both small business owners and employees. Below, we’ll explain some key direct deposit benefits for both groups.
Small business owners often prefer direct deposit to paper checks or cash for these reasons:
Employees often prefer paperless payroll options to physical checks for these reasons:
Typically, it’s easy to set up direct deposit for employees. Here’s how to do it.
For most small businesses, the best option for direct deposit is a payroll service. That’s because payroll services calculate the amount you must pay employees per pay period, so they’re in the best position to execute those payments. Although you can set up direct deposit through your bank, choosing the right payroll service offers your business additional features and functionality that greatly benefit its everyday operations.
Payroll services are often affordable enough for any small business owner to use. For example, OnPay’s pricing structure is geared toward very small businesses, and direct deposit ranks among its key features. (Read our OnPay review for more information.)
Likewise, ADP can enable direct deposit for even the most complex payrolls. (Read our ADP review for more information.)
Going through your bank for direct deposit is possible, but payroll services come with so many additional benefits that they’re likely the better choice. Learn more about the best payroll services and their numerous benefits in our reviews of the best payroll services.
Most payroll services will allow you to register for direct deposit in just a few minutes. You’ll typically add your bank account information and respond to a verification email confirming that you’re the one running direct deposit. You’ll then run a test deposit in which small withdrawals are taken from the account, and you record their amounts. If your payroll service tells you that you’ve recorded the right amounts, then your direct deposit setup is complete.
To deposit wages directly into your employees’ bank accounts, you’ll need each employee’s bank account number, routing number and bank name. You’ll also need to know whether you’re depositing to a checking or savings account. You can either seek this information from your employees or have them add it to your payroll software themselves if your payroll service allows.
In addition to employee banking information, you’ll need to obtain authorization. To do so, have your employees complete and sign an authorization form. You can usually customize these forms to your business, but no matter how they appear, they should permit you to pay wages electronically.
If your employees didn’t add their information directly to your payroll software, now’s the time to do so. Note that if you’ve gone the bank route instead of using payroll services, you should start by compiling all your employees’ information in your accounting software. You can then export it all to a single Nacha file to send to your bank. Alternatively, just as with payroll software, manual addition is possible.
Determine whether you’ll pay your employees weekly, biweekly, bimonthly or monthly. If you’re switching from paper checks to direct deposit, make the change with enough time to get direct deposit running by your next pay date. The process typically takes seven to 10 business days to finalize. You should also confirm with your payroll service that your direct deposit services won’t interrupt or alter your typical pay schedule.
At the same time, you should update the deadlines for receiving your team’s pay cards or other time and attendance records. Upon receiving these records, you should review them and file them with your payroll service. The key here is that payroll services typically need to receive this information a certain number of days before running direct deposit. Set your deadlines based on this timeline.
After you’ve taken the above steps, your payroll and direct deposit should be entirely automated. Your employees should now receive their wages electronically every payday. If anything goes wrong, you can always contact your payroll service for help; their customer service department is meant to handle this. But if you’ve chosen your payroll service well and followed all the above steps, everything should go just fine.