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Direct deposits are a great option for paying your employees. This easy payment method simplifies your payroll and lets employees enjoy immediate access to their funds each payday.

Read on to learn more about direct deposits and how to set them up for your business in our step-by-step guide.

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 to set up direct deposit for employees

To set up direct deposit for your employees, you can follow these steps:

Choose a direct deposit provider

First, decide which provider will facilitate your direct deposits. In addition to managing the direct deposit process, this entity will also be responsible for storing the sensitive financial information required to conduct these transactions. 

You can either choose to work with a bank or payment management software that has direct deposit functionality. 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. 

It's important to note that even if you choose to use payroll software, a business bank account will be necessary to facilitate your deposit deposits.

Set up the system

If you choose a 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, this process can be done easily within the platform.

After creating your account, the platform will likely prompt you to verify your identity. How you do so may differ between providers, but often, 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.

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.

Run payroll

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.

How much does it cost to set up direct deposits for employees?

Payroll providers usually include direct deposits as a free service that's included in their basic services. Banks, on the other hand, may charge a one-time setup fee or per-transaction fees each time you send a direct deposit.

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. 

Makes sure 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.

Keeps recordkeeping accurate

The electronic recordkeeping conducted by direct deposit providers makes sure 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. 

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.

Incorrect or incomplete employee information

Missing information doesn’t just delay payment for the employee in question. It'll 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 at 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. 

Direct deposit vs. ACH payments

Direct deposit is a form of ACH payment, a system that uses the ACH network to transfer funds directly into a person's bank account. While direct deposit is popular for payroll, ACH payments are used for a wider range of electronic transfers, including bill payments and business-to-business transactions.

For paying your employees, direct deposit is an excellent option. On the other hand, you can use ACH payments for different financial obligations that require more control and flexibility, such as paying vendors or handling variable expenses.

Pay bills with Ramp

To pay your employees, direct deposit is a great choice. To pay everyone else, consider Ramp's automated accounts payable software. We automate your entire AP workflow so every bill is recorded, approved, and paid without any manual work.

Use any payment method—ACH, same-day ACH, card, check, or international wire. You'll also get complete visibility into the status of every bill and payment so you can budget effectively and make sure bills are paid on time. Plus, pricing insights benchmark your vendor payments so you know whether you're getting a good deal.

For effortless bill payments in one place, try Ramp.‍

Try Ramp for free
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Finance Writer and Editor, Ramp
Ali Mercieca is a Finance Writer and Content Editor at Ramp. Prior to Ramp, she worked with Robinhood on the editorial strategy for their financial literacy articles and with Nearside, an online banking platform, overseeing their banking and finance blog. Ali holds a B.A. in Psychology and Philosophy from York University and can be found writing about editorial content strategy and SEO on her Substack.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.


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