How to set up direct deposit for employees: A step-by-step guide
The steps required to set up direct deposit might look different depending on the method you use, but here’s what you can expect:
Step 1: Choose a direct deposit provider and sign up
Decide whether you’re going to use your bank or business software for payroll. If you’re using a bank, you can usually sign up in person or through your online account. With payroll software, signing up for direct deposit will likely be integrated into the process of setting up your account.
Step 2: Collect info from your employees
Your employees need to sign a form authorizing you to pay them electronically. You’ll also need to collect the following information from each of your employees:
Name of their bank
Bank account number
Bank routing number
Whether the account is a checking or savings
If you use an HR software, it could help you manage this process, as employees can likely log into their account to authorize payment and provide their bank account details directly. Otherwise, you’ll need to gather this information manually.
Step 3: Enter their info into the system
If you manually collected your employees’ bank account information, you’ll have to do this step manually as well. Enter your employees’ bank account information and save it to the system.
Step 4: Plan your direct deposits
Share your pay schedule with your provider and employees so they know when to expect the money.
Step 5: Run payroll to send the money
Once the direct deposit service is activated and verified, you’re ready to pay your employees. This process differs slightly depending on whether you’re using a bank or business software provider, but generally takes less than 10 minutes.
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How does direct deposit work?
Direct deposit is when your business deposits a payroll check directly into your employee’s account. It’s entirely digital and automatic, meaning your employees won’t have to manually accept the money and you won’t have to physically sign a check.
When you send money via direct deposit, it goes through the Automated Clearing House (ACH). The ACH facilitates transactions between financial institutions in the US. It’s a common payment method for employers of all sizes, and is popular because it reduces the amount of paperwork required to run payroll.
How much does setting up direct deposit for my employees cost?
The cost of direct deposit depends on which provider you use. In general, you’ve got two options — your bank or payroll software.
If you use your bank to send the direct deposits, fees might include:
Setup fee. It’s only charged once when you enroll your business in direct deposit.
Transaction fee. Charged every time you send money to an individual employee’s account.
Monthly fee. Charged according to the billing cycle.
Some banks don’t offer direct deposit but partner with a payroll provider that does. Bank of America, for instance, sends its customers to ADP for their direct deposit needs.
On the other hand, if you use payroll software to facilitate your direct deposits, the fees depend on the software you choose — though direct deposit is generally included in the price. For example, with Intuit QuickBooks Online Payroll, direct deposit is a service provided at no extra cost.
Real world cost example
Let’s say you have a small business bank account with Wells Fargo and are sending 10 direct deposits to pay employees in a one-month period. Wells Fargo doesn’t charge a setup fee, but it charges $0.50 for direct deposits made to non-Wells Fargo personal bank accounts. Its monthly service fee is $10 a month.
(10 x $0.50) + 10 = $15
That means you’d pay around $15 monthly using Wells Fargo for direct deposit.
If you signed up for Intuit Quickbooks Online Payroll services, your fees would be $13.50 per month, plus $4 for each employee as of April 2020.
The math: ($4 x 10) + $13.50 = $53.50
That means you’d pay around $53.50 using payroll software for direct deposit. Though it costs more than our bank example, you’re also getting several services such as:
Full-service payroll that includes automated taxes and forms
Health benefits for your team
Expert product support
While using your bank for direct deposit may be cheaper on the surface, it might be worth considering payroll software if you can take advantage of its other services.
Pros and cons
Businesses frequently use direct deposit to streamline the payment process. A few reasons why it’s popular:
Convenient and reliable. Your employees will know exactly when and where their money is sent, which can help them manage their finances more accurately.
It saves you timePaying your employees via direct deposit can be as simple as running payroll — which you can manage whether or not you’re at the office. It’s quicker than writing and signing checks or counting out cash.
Electronic records for everybody.Both you and your employees keep a digital payment history that’s easy to keep track of — with no physical bookkeeping required.
More secure than check or cash.It’s too easy to lose or misplace cash and checks, posing a risk to both you and your employees. On the other hand, the ACH has strict standards to make sure that the direct deposit process is safe and secure.
Before signing up for direct deposit, weigh the drawbacks, including:
Incremental added payroll cost.Direct deposit doesn’t come free, and the fee increases with each employee that signs up.
Less flexibility for employees.Your employees must commit to receiving the money in the same bank account, which could be frustrating if they use multiple accounts or switch banks.
Direct deposit is a common and convenient way to pay your employees, though you’ll have to ensure the fees associated with it make sense for your business. The right payroll software can make this process painless.
Frequently asked questions
It can take anywhere from two to 10 days, depending on the provider, before your direct deposit is set up and ready to roll.
No, when you use direct deposit in the US, the money must go to another US bank account since it’s facilitated by the ACH. So if you’re paying an employee who lives in an international location, they must have a US bank account for you to pay them using direct deposit.
It depends on the provider you use, though you can usually schedule payments up to a year in advance or more. For example, with Wells Fargo you can schedule direct deposit payments up to 13 months in advance.
Amy Stoltenberg writes about lifestyle and money for Finder, researching the best options for shopping, banking, insurance and authentic travel experiences. After studying writing and fashion at Savannah College of Art and Design, she worked designing apparel at a corporate behemoth before opting for a career with unlimited travel time. When her laptop’s closed, she can be found wandering the streets looking for happy hour and hole-in-the-wall eateries.
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