Direct deposit remains the most popular payment method in today’s workplace, and it’s easy to see why. Employees appreciate the immediate access to their funds each payday, while business owners have an easier time managing their finances and resources with it.
If you’re ready to experience the benefits of direct deposit firsthand, read on to learn more about this payment type and how to set it up for your business in 6 simple steps.
What is direct deposit?
Direct deposit is a process that electronically transfers funds from one bank account to another through a transaction network known as the Automated Clearing House, or ACH for short.
Employers use direct deposit to safely and securely deposit paychecks directly into their employees’ personal bank accounts—eliminating the need for employees to physically cash their checks after payday.
How do direct deposits work?
The process starts when you send your direct deposit provider a set of instructions describing the amounts that should be transferred to each employee’s bank account.
The provider sends these instructions to the ACH network, which in turn passes them along to each employee’s financial institution. The bank credits the appropriate amount to the account, and the same amount is then debited from your business account.
You can generally expect this process to take 1 to 2 business days. Transferred funds clear automatically, so employees have immediate access to their money once the ACH payment posts.
5 benefits of direct deposits for small businesses and employees
Saves time and money
Small business owners may be used to working with limited resources, but the time, money, and effort you save on this aspect of your business allows you to divert these resources to other areas.
For instance, paper checks require manual labor and supplies to print, stamp, and mail out checks to each employee. Replacing lost or misplaced checks can result in more fees from your bank or payroll provider.
In comparison, direct deposit takes up much less of your company’s resources. After the initial setup, running payroll might only require a few minutes of your time at the end of each pay period.
Ensures employees are paid on time
Direct deposit’s streamlined and automated payment process helps you pay employees on time. Once you initiate the payment, your provider and the ACH network handle the rest.
Employees also don’t have to wait for a check in the mail or visit their bank to cash it in, so they can use their funds immediately.
Offers greater security
With paperless payments, the possibility of a check getting lost or stolen is eliminated. And because checks contain sensitive information about your business bank account, cutting them out of your process also reduces the risk of fraud for your organization.
Enables accurate record keeping
The electronic record keeping conducted by direct deposit providers ensures there’s a record of all transactions in case mistakes occur, funds go missing, or paper pay stubs are misplaced.
Running direct deposit through your payroll software can also help you keep track of payroll taxes and other deductions, so you can save money and avoid penalties at tax time.
Helps control your finances
Direct deposit gives you a better handle on your business finances by allowing you to predict when payments leave your bank account. If you want to avoid a cash shortage each month, for example, you may arrange your payroll and direct deposit schedule so it doesn’t overlap with rent or loan repayment deadlines.
With physical checks, on the other hand, money only leaves your account when employees cash their checks. Because they have to make time to do so, you can never be certain when exactly those transactions will take place—making it much harder to plan out your finances.
Electronic payments help employees manage their money better too. When they opt in, they can request to divide their paychecks among several bank accounts. Many take advantage of this by diverting a portion of each check into their savings.
Direct deposit setup options for small businesses
There are 2 ways to set up direct deposit for your business—through your bank or through payroll software or a similar provider.
Through your bank
Banks facilitate direct electronic transfers all the time, so working with the financial institution that already manages your business account may simplify things for you. But because you’re responsible for submitting direct deposit information to your bank yourself, this route requires slightly more oversight than the following option.
Through your payroll service or software
Alternatively, you can set up direct deposit through your HR or payroll service provider, payroll software, or any other payment management software with direct deposit capabilities. For many businesses, this may be the better choice, as some payroll platforms come with a wealth of additional features—such as payroll automation—that can improve how you manage your finances.
Those who already use payroll software with direct deposit services may also stick with their existing platform. Not only is the software already integrated into your payroll process, running direct deposits through your bank would be an additional, unnecessary expense for your business.
How to set up direct deposit for employees
How you set up direct deposit depends in part on which of the above options you choose. But no matter your decision, follow the 6 easy steps outlined below to streamline the process.
Choose a direct deposit provider
In addition to managing the direct deposit process itself, your provider is also responsible for storing the sensitive financial information required to conduct these transactions.
That’s why it’s important to do your due diligence before you make your decision. Make sure to ask each provider about their capabilities, direct deposit schedule and lead times, setup process and requirements, pricing, fees, and anything else you deem necessary.
You may find it helpful to start your search with your bank (and your payroll provider, if you already have one), since you’ve already developed a professional relationship with them. The information you gather there will also serve as a useful baseline for any other providers you consider.
Set up the system
Your actions here depend on the kind of direct deposit provider you’ve chosen.
If you move forward with your bank, you can work with your representative to set up the process or you may be able to do it yourself through your online banking portal. Your bank will ask you to sign off on the ACH network’s terms and conditions, and it may also request recent financial statements to verify you have the funds needed to cover your deposits.
If you use payroll software or a similar provider, you’d follow the company’s own setup process.
After creating your account, the platform will likely prompt you to verify your identity. How you do so may differ between providers, but in many cases, it’s as simple as verifying your email address. Your provider may also conduct a test withdrawal—which essentially assesses whether your bank account is connected properly by withdrawing a small amount and asking you to verify the transaction.
If you plan to run direct deposits through your existing software, this process may be even shorter, as you’ve likely already provided much of the information they need when you created your account.
Collect employee information
You’ll also need to gather bank account information and other details from your employees, including:
- Bank account number
- Bank account type (checking or savings account)
- Bank routing number
- Bank name
- Allocation amount (75% in checking and 25% in savings, for example)
- Social Security number (SSN)
- Name and address of the account owner
- A voided check (to verify employee information and reduce errors)
Many states also require employees to give signed authorization before their employers can pay them with direct deposit, so it’s best to get their consent before putting their information into your system.
The easiest way to collect employee direct deposit information and their consent is through a direct deposit authorization form. Your provider may have a form for you to use, or you can find templates online and adjust them for your own needs.
If your payroll software offers an employee self-service (ESS) portal, they may be able to input their information directly into the system instead.
Enter employee information into the system
If you collected employee information manually, now is the time to input the data into your system and check for errors or missing information.
Some providers allow you to upload this information to their platform using a NACHA file exported from your accounting software or through a simple spreadsheet, so make sure to ask if they offer this time-saving feature.
If employees submitted their information through their portals, you can skip this step and move on to the next one.
Set up and share the pay schedule with employees
Creating a pay schedule helps keep you and your employees on top of your payroll responsibilities so they get paid on time every time.
It’s important to create a schedule that works best for your organization and your cash flow cycle to ensure payroll goes smoothly. For reference, most companies follow a monthly, semimonthly (with payment arriving on the 15th and 31st), or biweekly pay cycle.
You’ll likely need to process payroll several days ahead of payday (and even more for holidays and weekends) so your provider can process the transactions in time, so account for that when building your schedule. Establish cutoff dates for submitting employee time cards or hours, so you have enough time to review them before sending them to payroll.
If you need further assistance with creating a payroll and deposit schedule, your provider will be able to help you.
Once you submit your employee direct deposit information and confirm your provider has received it, you’re ready to start direct deposit for the first time.
If you’re using payroll software, you can run payroll and kick off the deposit process with just a few clicks. If you’re working with your bank, you’ll need to create a new NACHA file in your accounting system and upload it to your banking platform.
Typically, funds should be available to your employees by midnight of payday, although this can change depending on the bank receiving the funds.
Consider first doing a trial pay run, also called a prenote. This involves sending a payment as little as a penny to each employee. This practice verifies that your transactions go through without issue, so you can resolve any problems you encounter before your first real pay run.
Things to consider when setting up direct deposits for your business
To make setup as simple as possible for you and your employees, here are some things to think about before you get started with direct deposit.
Federal and state laws on direct deposit for employers
Direct deposit regulations differ between states. As an employer, it’s your responsibility to stay updated on the latest legislation surrounding this payment method. So, it’s important that you review what you can and can’t do with direct deposits before setting it up for your business.
Start by discussing your needs and expectations with your direct deposit provider—they can point you in the right direction. For more information on the guidelines for employee direct deposit payments, review the Electronic Fund Transfer Act.
Setting up contractors and vendors for direct deposit
Contractors and vendors can also reap the benefits of direct deposit payments.
However, some providers have separate processes for setting these entities up with this payment method, while others don’t have this capability at all. This is especially true for payroll software platforms, as these groups are often paid through accounts payable and aren’t subject to the payroll taxes that employees are.
So if you’d like to set your vendors and contractors up with direct deposit, make sure to choose a provider that supports this functionality, such as an integrated accounting system.
Common errors with small business direct deposit and how to avoid them
Setting up direct deposit is a relatively simple process, but nothing is perfect. Keep reading to learn about some common issues business owners encounter when setting up this payment method, and how to avoid them.
Employee provided incorrect or incomplete information
Missing information doesn’t just delay payment for the employee in question. It will take time and effort for you to find the problem and gather the information needed to fix it.
That’s why, ideally, you want to catch these issues before they even come up. One way to do that is by asking for as much employee information as you can upfront. Having this information helps your provider identify the right bank accounts and avoid mix ups during delivery.
For example, asking for an employee’s SSN, name and address on the account, and a voided check all provide enough details to help you independently verify whether you’re sending payment to the right account.
But if the money meant for an employee was sent to an account owned by someone else, you have 5 days to request a reversal through your provider. Keep in mind that submitting a request doesn’t guarantee you’ll get your money back.
Employee received the wrong payment amount
First, look to your payroll records to make sure no mistakes were made there. Some common places to find errors include withholdings, total hours worked during the pay period, and decimal placements on payment amounts.
You may also want to check whether the employee has requested their funds be split between multiple accounts, or whether their wages have been garnished for child support, back taxes, and the like.
Using payroll software that automatically tracks and calculates these figures on your behalf can help you avoid mistakes in the future.
Experience the benefits of direct deposit for yourself
Although it takes time upfront to set up, direct deposit offers huge upsides for you and your employees. Not only will they get immediate access to their hard-earned funds each payday, you’ll save yourself the time, effort, and money required to send out checks after each pay cycle.