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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 does direct deposit work?

Direct deposit functions through an automated process where an employer's bank sends payment instructions to the Automated Clearing House (ACH) on predetermined days. These requests are processed by the ACH and then forwarded to the employees' respective banks, where the funds are credited to their accounts. At the same time, the corresponding amount is debited from the employer's business account.

Here’s a deeper look into the direct deposit process:

  1. The employer contacts their bank to initiate the direct deposit system.
  2. At scheduled intervals, the employer’s bank collects and bundles all direct deposit requests and sends them to the ACH in batches.
  3. The ACH processes these requests and forwards them to the employees' banks.
  4. The employees' banks receive the instructions and credit the employees' accounts, while the employer's account is debited for the total amount.
  5. Typically, this process takes one to two business days, according to the National Automated Clearing House Association (NACHA).

The exact timing can vary depending on factors such as the banks involved, the payroll software, and any holidays. However, with the help of your bank or payroll software, you can easily set a payroll and direct deposit schedule that works best for your business.

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.

FAQ
What is a NACHA file?
A NACHA file is a standardized format used to process electronic payments through the Automated Clearing House (ACH) network. It contains detailed instructions for transferring funds between financial institutions, including information about the sender, recipient, and transaction amounts. NACHA files are commonly used for tasks like payroll direct deposits, vendor payments, and bill collections. They must meet strict formatting and security guidelines to ensure accurate and secure fund transfers.

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 setting up direct deposit for your employees

Direct deposit offers numerous advantages for both employers and employees. It has become the preferred method of wage payment due to its speed and security, replacing manual, time-consuming processes such as preparing and distributing paper checks. 

For employees, setting up direct deposit is simple and allows them to receive their pay predictably and directly into their bank accounts, helping them manage their finances without the need to visit a bank. This method also promotes financial autonomy, as employees can allocate funds between checking and savings accounts, automating their savings effortlessly.

Cost Efficiency and Security

For employers, direct deposit reduces costs associated with printing and mailing paper checks, leading to substantial savings over time. It also provides greater control over payroll timing, ensuring that funds are withdrawn on a predictable schedule, enhancing cash flow management. Additionally, direct deposit increases security by eliminating the risk of lost or stolen checks and securing sensitive financial information. 

By automating payroll, businesses streamline operations, reduce administrative overhead, and ensure secure, on-time payments, which boosts both operational efficiency and employee satisfaction. It’s also an environmentally sound option as it reduces paper use.

Employee Benefits: Speed, Security, and Convenience

Direct deposit provides significant benefits for employees, including faster access to wages since funds are transferred electronically, avoiding the delays that come with cashing physical checks. This method eliminates the risks of lost or stolen checks and provides employees with a reliable, accessible electronic record of their pay. 

Employees gain peace of mind knowing their paycheck will be delivered securely and on time, regardless of weather, bank hours, or other external factors. Additionally, direct deposit enhances convenience, allowing employees to skip trips to the bank, saving them time and effort.

Flexibility and Convenience for Employers

Employers also gain flexibility through direct deposit, as payments can be split between multiple employee accounts, such as checking and savings, giving employees more control over their financial planning. Payroll is simplified, reducing the workload for HR staff by eliminating the need to process and mail paper checks. 

The system also streamlines record-keeping, making it easier to track payroll data and correct any errors. This digital method allows both parties to access payment history, making it easier to resolve discrepancies and maintain accurate financial records.

Environmental and Administrative Benefits

Direct deposit is an environmentally friendly choice as it reduces the need for paper and postal resources, aligning with corporate sustainability goals. It minimizes the manual labor involved in payroll processing, freeing up time for more strategic tasks within the company. Employers benefit from secure, accurate, and efficient payroll processes, while employees enjoy the convenience of automated payments, ensuring a win-win for both parties.

How does a small business set up direct deposit for employees?

For small businesses, setting up direct deposit offers convenience by eliminating the need for physical checks and manual deposits, improving payroll accuracy, and boosting employee satisfaction. However, banks may charge per-transaction fees, so it's important to weigh these costs against the time and efficiency gained. Cash flow management is also crucial, as direct deposit requires submitting payroll funds in advance, meaning businesses need consistent cash flow to meet payroll obligations.

Additionally, some employees may prefer alternative payment methods, so offering multiple options can be helpful for small businesses. Compliance with local labor laws is essential, as employee consent is often required, and regulations may dictate how payroll is processed. Overall, direct deposit is a cost-effective and efficient option but requires careful consideration of fees, cash flow, and employee preferences.

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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.‍

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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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