Table of Contents
Direct deposit is a payment method that allows an employer to directly transfer money into its employee’s bank account. It can be used as part of the payroll system, but it has many benefits beyond just salary payments. Here are all the details about this process from start to finish.
Direct deposit is the most popular method of paying workers since it enables their salary to be transferred straight into their bank account within days of processing. You just need your workers’ bank account information, signed permission, and a service to assist you set up direct deposit. The actions you’ll need to follow are detailed below.
1. Select a Direct Deposit Service Provider
Direct deposit may be set up in two ways: via your bank and through your payroll software. Many payroll software programs offer this feature and can handle payrolls as direct deposits automatically. Direct deposit services are also available via certain HR services or software that has payroll features. If you’re paying for payroll services, it’s a good idea to delegate the direct deposit task to them.
Your bank is the one that sends the money, regardless of whatever option you select. If you don’t deal directly with your bank, you’ll have to provide your bank account information with the program or service provider in order to set up direct deposits.
Costs of Direct Deposit
Banks often charge a $150 startup fee. Some companies may impose monthly or transaction fees, which can range from $1.50 to $1.90 per transaction.
If you use a payroll provider like Gusto, it will take care of direct deposits for you at no extra cost. It can instantly validate your bank account throughout the setup process and have you paying workers and payroll taxes in a matter of days.
2. Create a direct deposit account.
Once you’ve settled on a direct deposit provider, it should outline the actions you’ll need to do to set it up. Remember that getting things in order may take a few days or even a week. Setting realistic expectations with your team is critical so that your workers don’t anticipate direct deposit with their next payment if it isn’t feasible.
To discover how to set up direct deposit via your bank or through a payroll service provider, click the tabs below:
- By way of your bank
- With the assistance of a Payroll Service Provider
You may contact your bank and speak with a person who will walk you through the procedure, or you can utilize your internet portal to do it electronically. Because each bank operates differently, contacting your local branch to learn about their procedures is an excellent place to start.
You’ll sign the automated clearing house (ACH) terms of agreement and may be required to submit financial documents to demonstrate that you have and will continue to have enough cash to fund regular payrolls. You should also talk about how frequently you intend to run payroll at this time.
If you use a payroll provider, the direct deposit will be set up for you. You must enter information about your bank account (routing number and account number).
You may be required to go through a verification procedure, which may involve a test withdrawal. To ensure that the service can access your money, a little amount (typically around $1.00) will be put into your account and subsequently withdrawn (or vice versa).
3. Obtain employee authorization as well as bank account information.
Despite the fact that direct deposit is the most popular method of payment, your employees must elect to be paid through direct deposit. Many states have their own rules regarding how workers may be paid and whether or not you can require your staff to use electronic payments.
Regardless, you’ll need written permission from your employee to view their bank account information.
To set up direct deposits effectively, you’ll need to gather certain information from your workers in addition to permission. You will most likely need the following information:
- Routing number of a bank
- Account number at a bank
- Type of bank account (checking/savings)
- Name of the financial institution
- The number assigned by the Social Security Administration
- On the account, the name and address of the employee (for verification to avoid mix-ups in delivery)
Pro Tip: If your HR or payroll software has an employee portal, you may have your employees fill out the information there. However, be sure that you have full access to this information as the employer since some services disguise sensitive information like bank account numbers and Social Security numbers (ex. **** *** **038).
4. Establish a Pay Cycle
To ensure that payroll goes effectively, establish a regular pay period that works best for your business and workers when setting up your direct payments. Consider the following factors to assist you in making your decision:
- Determine the necessary lead time: How much time does your bank or payroll provider require after you process payroll to complete the deposit? Also, consider if a longer lead time is required for vacations or weekends.
Payroll should be logged two to four days prior to the day your workers get their paychecks. When payday comes on a weekend or holiday, some companies may push it back to get deposits out the day before.
- Determine your own financial schedule: Before paychecks can be distributed, funds must be available to transfer into your business account, so make sure your schedule works with the expected cash flow.
- Determine your pay cycle: Monthly, semimonthly (15th and 31st), or biweekly are the most typical pay periods. Biweekly workers typically get 26 paychecks per year at a little lower rate, whereas semimonthly employees receive 24 payments at a slightly higher rate.
- Set deadlines for workers to submit timecards or hours: Allow ample time to examine the information and send the completed payroll for direct payment.
- Inform workers about paydays: Generally, money is available at the receiving depository institution by 9 a.m. local time, but this is not guaranteed; employees should anticipate cash by midnight on payday.
Allow additional time for set up on your first pay run, since it may take longer than normal. It’s a good idea to do a test pay run with just a cent or a little quantity of money.
Ask workers to keep an eye out for it and to notify you if they don’t have it by a certain date so you can trace down any mistakes.
Errors with Direct Deposit: What You Need to Know
Direct deposit has the advantage of being usually prompt and error-free, as long as you input the proper payroll information. However, mistakes may happen. Here are some of the most frequent (albeit uncommon) issues with direct deposit, as well as how to deal with them.
The only approach to avoid these mistakes is to prevent them. To begin, get a copy of a canceled check so you may physically verify the account and bank routing information. To verify that the money goes through properly, make a single test deposit of a cent. Banks often detect mistakes and either transfer the funds to the proper account (sometimes with a delay) or return the funds to you.
If the employee still says they haven’t received their salary, double-check that you’re paying to the account they’re checking (for example, if the employee gave you their savings account information instead of checking).
You have five days to seek a reversal if the money is sent to a legal but incorrect account. As stated in the form instructions, the payee must be informed, although this is simply a heads-up rather than a request for permission to transfer. To find out where the money has gone, you may need to run a trace on it first. In the interim, you may cut your employee a paper check, make an out-of-cycle payment to cover the payroll or have the employee work with their bank to credit them the money until the deposit is made.
If your payroll was finished on time but your workers claim they did not get their paychecks, double-check that you met the proper date and left adequate time for processing. When payday occurs on a weekend or holiday, a direct deposit may take two to four days to complete.
Check if your account has enough money to cover payroll if your dates are accurate. If it doesn’t solve the issue, contact your bank or payroll provider.
Check your payroll records if your employee gets the incorrect paycheck amount. Were the hours calculated correctly? Is it true that all withholdings have been accounted for? Are the decimals positioned correctly?
Check to see whether the employee requested a split payment and if a portion of the amount was put into another account or is going to another person for child support or other withholdings. You may rectify mistakes by making a second transfer or paying with a check.
You may be able to deduct future wages if you overpaid, but be cautious. Although certain state laws (such as California’s) have stringent regulations regarding how to recover overpayments, you must nevertheless guarantee that the employee is paid minimum wage.
On holidays, some banks do not register deposits. Your best option is to plan ahead and run payroll as soon as possible. If a payday comes on a weekend or bank holiday, the best employers schedule deposits for Friday. Employees will receive their paychecks for the weekend in this manner.
This is typically due to a payroll mistake by a person. Check to see whether an employee is listed more than once and that their payroll information is accurate.
You have five days to file a Request for Reversal order to reverse the incorrect paycheck. The reversal must be for the whole amount, and the employee must be informed.
The National Automated Clearing House Association (NACHA) requires that the full amount be repaid at the same time. If an employee’s account does not have sufficient money to cover the reversal, you will need to work with them to find another method to compensate for the mistake.
Conclusion
Direct deposit may save your company time, money, and headaches if you put in a little effort upfront. Although the direct deposit is usually error-free, it is not without risk. You avoid dealing with paper checks and your workers have immediate access to their money by sending paychecks straight to their accounts.
Work with your bank or payroll software to set up direct deposit correctly, then test it to make sure it’s functioning. After that, be sure you complete payroll on time and direct deposit will take care of the rest.
Frequently Asked Questions
How hard is it to set up direct deposits for employees?
The process of setting up a direct deposit is relatively easy. You take your banks routing number and account number, as well as the names on those accounts to their respective banks. From there, it should be just a matter of filling out forms with basic information about yourself and your employer before putting the appropriate documents into the mail for processing.
What account information is needed for direct deposit?
You’ll need your bank account number. If you don’t have one, simply create an online banking login to get it for yourself.
