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Business Finance

What is Direct Deposit? a complete guide

Small business owners used to go to the bank to make payments or deposit checks. Based on the 2020 “Getting Paid In America” survey conducted by the American Payroll Association, more than 93% of employers now make direct deposits to the payroll. This means employees no longer have to deal with paper checks on payday either.

You’ve probably heard about direct deposit, but do you know how it works? Or are you wondering how to start using direct deposit? We will help you.

What is a Direct Deposit?

Direct deposit is a payment option that electronically transfers money to your bank account. It is generally faster and more convenient than using physical checks and is popular on payroll and receiving tax refunds in particular. Direct deposit also helps to reduce the risk of theft.

Direct deposit typically relies on an electronic network called the Automated Clearing House (ACH) to allow direct deposits between banks. The clearinghouse helps coordinate payments between financial institutions to reduce workload and save time.

How does direct deposit work for employers?

Direct deposit is a safe and effective way to handle payroll. To make employee payments directly, the employer needs to obtain the bank name, account number, and bank routing number from the payee.

The employee usually provides this information using a delayed check or a secure online form provided by the company.

After that, the payer/employer sends the payroll details to the bank. The bank then sends the details to the ACH to take steps and instructions to ensure payments reach the correct accounts.

It can take several business days for ACH to release payments to employees’ banks.

How employees can apply for direct deposits

To apply for a direct deposit, you first need to apply to your employer. It can be an electronic form or a written document.

Typically, you need to include your bank information:

  • An account and routing number, which is usually on the back of your bank statements or in the lower-left corner of your checks
  • Your bank address
  • A delayed check (sometimes)

Provide a copy of a suspended check if required – some employers use it for checking accounts and routing numbers.

Next, you will need to specify the percentage of the money you want to be deposited into your account. You can set it to 100%, but some people deposit to more than one account, for example checking and savings accounts.

Finally, send the form to your employer and wait for it to be processed.

It may take one or two payment periods before direct deposit takes effect. Consult your employer or payroll department for more information.

Do I need a bank account for direct deposit?

It is more common to have a direct deposit bank account. If you don’t have one, however, you have a few alternatives. These include:

  • A prepaid debit card
  • mobile wallets

You might also consider signing up for an online bank. It’s easy to create an account directly from your mobile.

What types of accounts work with direct deposit?

You can connect savings or checking accounts to receive a direct deposit. It is also possible to connect a debit card.

Main benefits of direct deposit

Let’s take a look at how direct deposits are beneficial for:

the employer

  • It avoids the hassle of handing out checks;
  • It allows you to make payments from anywhere;
  • This can reduce costs; and
  • Reduces the risk of confusion, complaint, or payday stress.

the employee

  • It avoids the stress of losing a check or changing it by mistake;
  • It allows you to split the money into different accounts;
  • It allows you to access your funds as soon as they are deposited; and
  • It makes your finances more predictable.

For all these reasons, the direct deposit has become a method for employers and employees in the United States. When using direct deposit to receive other payments, such as a tax refund, you will provide the same type of information to the payer. It’s easy, safe, and convenient.

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