How to set up direct deposit in 5 simple steps (2024)

Direct deposit is convenient for both employers and employees, saving both parties time and potentially money. It can also unlock certain benefits for employees, such as certain checking or savings accounts that pay high interest rates. Follow the proper procedure to ensure your employees have access to direct deposit options.

What is direct deposit and how does it work?

Direct deposit is an electronic payment process that allows money to be transferred directly into a recipient’s bank account. With direct deposit, there are no paper checks or physical currency involved. This method is commonly used with payroll, Social Security and tax payments and refunds.

Direct deposit is a fairly straightforward process. Your employees provide the necessary information, with the most important data points being their bank account and routing numbers. Once you have that information and authorization from the employee to pay them, you can initiate a direct deposit payment. Typically, you do this two or three days before the employee’s scheduled payday.

Some employers use their bank or payroll service provider to initiate the payment, but it will ultimately go to an automated system, typically the automated clearing house (ACH). Once the ACH knows where to route the payment, it will be deposited into employees’ accounts.

5 steps to set up direct deposit

Setting up direct deposit requires a few basic steps. These steps can help get you started so you can pay your employees on time and without paying exorbitant fees.

1. Open a business bank account

One of the first things you need when setting up direct deposit is a business bank account. The funds paid to employees will be drawn from this account. You can open a business bank account with banks, credit unions and online banks. Look for a bank with the services you need and one that doesn’t have too many fees, as these can add up quickly.

2. Choose a bank or payroll provider for direct deposit

If you already have a business bank account, you can see if direct deposit is available. If it isn’t, you will need to find a provider. Many banks and payroll software companies offer these services, so it’s a good idea to shop around before settling on one. This will help you avoid excessive fees and find a payroll provider that offers the services you need.

3. Collect employee information

To set up direct deposit, you will need relevant information from employees. They will need to fill out a direct deposit authorization, providing information such as:

• Their full names.
• Their account types.
• Their bank account and routing numbers.

You might also ask employees to provide a voided check to verify their account information.

4. Enter employee information into the payroll system

If you are using payroll software, the next step is to enter employee information into the system. Alternatively, if you outsource your payroll to a payroll service provider, you can send employee information to that company. Either way, you may want to verify employee information is accurate before you complete this step.

5. Run payroll

Once you have everything set up, it’s time to run payroll and pay your employees. During this step, you’ll also calculate their earnings, deductions and net pay. If you are using payroll software, generate the direct deposit or ACH file. If you are working with a payroll service provider, they might generate this file for you.

Although there can be a lot of work to set up direct deposit, the process becomes much smoother once everything is in place. You will generally only have to repeat step five unless information must be updated.

Updating direct deposit details

Sometimes, employee details, such as bank account or deposit amount, change. The process for updating these is typically similar to the initial process of setting up the account.

Generally, the first step is to provide employees with a form to update their information.

Employees will fill out the form with the updated bank account details, including account type, account number and routing number.

Then, they submit the form and later verify that your account details have been updated. You should also monitor future deposits to ensure everything goes through as expected.

Filling out the information on a direct deposit form

Direct deposit forms may vary from organization to organization, but they usually have some common elements. The Office of the Comptroller in Hartford, Connecticut, provides a good example of a direct deposit form containing three sections.

Section I

This form asks for information specific to people filling it out, such as a department ID and employee number. Your form may or may not have those fields, but every form will ask for your name. The checkboxes for “new,” “change,” and “delete account” are also common.

Section II

This section is the most important one. It is where employees add their financial institution name, account number and routing number. They will also specify whether the account is a checking or savings account.

Section III

In this section, you can add an additional account and choose how to split the deposit between your two accounts. You can either deposit a flat dollar amount into a specific account or choose a percentage split. With the latter, you’ll specify what percentage to deposit into each account.

Authorization

There is also a statement at the bottom of the form stating employee authorization for you to make the direct deposit(s). Employees sign and date the form underneath the statement, indicating they agree to the statement and authorize you to make the direct deposit(s) into their account(s).

Benefits of using direct deposit

Direct deposit can have many benefits over using paper checks, including predictability, convenience and security, said Bradley Hilton, CFP® at Sonas Financial Planning. “For most depositors/companies, it hits your account(s) on its regular schedule and usually isn’t delayed if the deposit day is a weekend,” he said.

He lists other benefits, too: It’s secure because you don’t have to worry about a check being lost or stolen, and there won’t be any signatures forged. Hilton also notes the environmental benefits of direct deposit. There are no checks, no paper or emissions for the delivery of those checks or potentially driving to the bank to deposit them.

Direct deposit can also give employees utility and control, Hilton said. “Direct Deposit can benefit your life by helping you budget and time your expenses, it can help you save money if you set up separate accounts for different goals in your life and have amounts directly deposited to different goal accounts.”

Direct deposit can also have these benefits:

• Safety: There is less risk of a check being lost, stolen or damaged.
• Lower cost: Direct deposit generally costs less to process than paper checks, which might involve printing, mailing and handling costs.
• Global payments: For businesses with international employees and contractors, direct deposit can be an easier way to pay worldwide.

Employer verification and waiting periods

When setting up direct deposit, employers typically like to verify employees’ bank account information and keep to a waiting period. The purpose of this is to ensure everything is set up correctly and allow time to correct any errors or discrepancies that may appear.

First, you must verify the employee’s information to avoid sending payments to the wrong account. There can be several ways to do this, such as with trial deposits, a bank verification letter or a voided check.

Once the employees’ information has been verified, there might be a waiting period before direct deposit is fully active. The length of the verification period may vary, but it is generally one or two pay periods. During this time, you might continue to issue paper checks.

Frequently asked questions (FAQs)