Direct deposit is the most common way to pay employees, and with good reason. Employee paychecks are deposited directly into their bank accounts, usually within a couple of days after you process it. Learning how to set up direct deposit is simple—you need bank account information, documented employee approval, and a service to help facilitate. It’s generally error-free, and you don’t have to wait around for employee paychecks to clear your bank account.
Setting up a small business direct deposit correctly takes some time and attention to detail, but it’s not difficult. We outline the steps and things to consider when offering this to your employees.
1. Choose a Direct Deposit Solution/Provider
The two most common ways to set up direct deposit are through your bank or with your payroll service. Some payroll software applications also have this function and will integrate your payroll to the bank. In addition, some HR services or software with payroll capabilities can provide direct deposit services. If you are paying for payroll services, it makes sense to let them handle the direct deposit work.
No matter which option you choose, your bank is the one that transfers the funds. Thus, if you don’t work with your bank directly, you will need to share your bank account information with the software or service provider.
Direct Deposit Costs
Banks usually charge a setup fee of up to $150. Some will charge monthly or transaction fees. According to the National Federation of Independent Business, this runs $1.50 to $1.90 per individual deposit. (Compare this to $3 or more for paper checks.)
If you work with a payroll service, like Gusto, it will handle direct deposits at no charge to you. It can verify your bank account automatically through its setup process and have you paying employees and payroll taxes in less than a week. To top it off, you can try it free for 30 days.
2. Set Up Direct Deposit Service
Once you’ve decided on your direct deposit service, it should tell you the steps you need to set up your direct deposit. Remember that it can take up to 10 days to have everything in place, so don’t jump the gun and tell your employees to expect direct deposit on the next paycheck!
How To Set Up Direct Deposit Through Your Bank
To arrange direct deposit with your bank, you can call and talk to a representative to lead you through the process, or use your online portal to do it electronically. You’ll sign the ACH Terms of Agreement, and may need to provide financial statements to prove you currently have and are likely to continue to have the liquid capital to finance the regular payrolls. At this time, you may want to discuss how often you plan to run payroll as well.
How to Set Up Direct Deposit With a Payroll Service Provider
If you are using a payroll service, it will set up the direct deposit for you. You need to provide your bank account information (routing number and account number). There may be a verification process for you to go through that could include a test withdrawal of a negligible amount.
3. Get Employee Authorization and Bank Information
Although direct deposit is one of the most common ways to pay employees, your workers must choose to be paid via direct deposit. There are some states that let you mandate that all employees sign up for this option. Regardless, you need permission to access their account information.
Pro Tip: We recommend you download a direct deposit authorization form template you can distribute to all employees.
You will need the following information from your employees:
- Bank routing number
- Bank account number
- Bank account type (checking/savings)
- Bank name
- Social Security Number
- Employee name and address on the account (for verification to avoid mix-ups in delivery)
If you have an HR or payroll software or service with an employee portal, you can have your employees fill out the information through the portal.
4. Determine Pay Cycle
- Determine required lead time: How much lead time does your bank or payroll service need to finish the deposit after you process payroll? Also, decide whether they need a longer lead time for holidays or weekends. In general, you need to log payroll two to four days before the day your employees get their checks. Some businesses will move that back more when payday falls on a weekend or holiday to get deposits in the Friday before.
- Determine your own financial schedule: Your funds must be liquid and available to transfer into your business account before paychecks can be distributed, so be sure your schedule works with anticipated cash flow.
- Determine payday frequency: The most common pay cycles are monthly, semimonthly (15th and 31st) or biweekly. Biweekly employees usually get 26 paychecks a month at a slightly smaller amount; semimonthly get 24 paychecks at a slightly higher amount.
- Set deadlines with employees for submitting hours or time cards: Give yourself enough time to review the data and submit the processed payroll for direct deposit.
- Inform employees of the paydays: Generally, funds are available by 9 a.m. local time at the receiving depository institution, but it’s not set in stone; employees should expect funds by midnight of payday.
Your first pay run can take up to 10 days to deposit, so allow extra time for set up to complete. It’s a good idea to run a test pay run of only a penny or other token amount. Ask employees to be on the lookout for this and to let you know if they have not received it by a specific date so you can track down any errors.
Small Business Direct Deposit Errors
One of the prime benefits of direct deposit is that it is generally timely and error-free, as long as you enter the correct payroll information. However, errors can occur. Here are some of the most common, even though rare overall, problems people experience with direct deposit.
Wrong Employee Account Number
Prevention is the best way to stop these errors. First, ask for a copy of a canceled check, so you can verify the account and bank routing numbers manually. Next, do a single test deposit of a penny to ensure the payment goes through correctly. Banks often catch errors and will either put the money into the correct account (sometimes with a delay) or refund it back to you.
If, despite all this, the employee claims they are not getting their paycheck, start by verifying you are sending to the account they’re checking (for example, if the employee gave you their savings account information instead of checking.)
If somehow, the money does go to a legitimate but wrong account, you have five days to request a reversal. The payee must be notified, as outlined in the form instructions, but this is only a heads-up vs request for permission to transfer. You may first need to put a trace on the money to find where it has gone. In the meantime, you can cut your employee a paper check, put in an out-of-cycle payment to cover the paycheck, or have the employee work with their bank to credit them the money pending the actual deposit.
Payroll Didn’t Deposit on Time
If you completed payroll on time, but your employees are saying they did not get their paychecks, you should first check that you actually did meet the correct deadline and that you allowed enough time for processing. Direct deposit can take two to four days to process—longer, if payday falls on a weekend or holiday.
If you have your dates correct, check that your account had sufficient funds to cover payroll. If that is not the problem, then call your bank or payroll service.
The Wrong Paycheck Amount Was Deposited
If your employee receives the wrong paycheck amount, check your payroll records. Were hours correctly calculated? Were all withholdings accounted for? Are the decimals in the right place? (It happens.) Also, check that the employee did not ask for a split payment and that part of the balance wasn’t deposited to another account or is going to someone else for child support or other withholdings.
You can correct errors by processing an additional transfer or check payment. If you overpaid, you may be able to dock future paychecks, but be careful. Some state laws have strict rules about how you can retrieve overpayments (for instance, California); you still have to ensure the employee is receiving minimum wage. The National Automated Clearing House Association (NACHA) has rules prohibiting partial refunds on direct deposit.
Deposits Are Delayed Due to Holidays
Some banks don’t record deposits on holidays. Your best bet is to be prepared and run payroll early. The best employers plan so that deposits are made on Fridays if a payday falls on a weekend or bank holiday. That way, employees have their paychecks for the weekend.
Direct Deposit Payment Made Twice
This is usually due to human error in the payroll. Be sure to check that an employee is not listed twice and their payroll information is correct.
You have five days for recalling the erroneous paycheck by putting in a Request for Reversal order. The reversal must be for the full amount, and the employee must be notified about the transaction.
NACHA rules stipulate the entire amount must be refunded at once. Thus, if an employee’s account does not have enough funds to bankroll the reversal, then you will need to work with them on some other way to pay back the error.
Pros and Cons of Small Business Direct Deposit
- Easy; set it up, and it runs on its own.
- Creates electronic record of the payroll transaction; no need to track down if a check was cashed or lost.
- Better control over finances, as you know exactly what is taken out of your account and on what day vs waiting for employees to cash checks.
- No threat of lost checks.
- Don’t pay for paper checks, printing, or mailing. Studies find it saves business owners about $3 per paper check.
- Employees get paid even if you are on vacation or out sick.
- With a split deposit, employees can direct a fixed amount or percentage of their pay into a savings or investment account.
- Many financial institutions offer free checking when employees use direct deposit.
- Employees may not have a bank account.
- You need to get payroll done on time, every time, so that direct deposit can transfer funds correctly.
- Changing banks means changing direct deposit information.
- You can’t put a stop on the payment like you can with a paper check.
- You must have sufficient funds in your account when payroll comes, out or you’ll incur overdraft fees.
Can I pay contractors via direct deposit?
Yes. Direct deposit works just as well for irregular or infrequent payments as it does regular payroll runs. You need the same information that you would for salary workers.
Do I have to have all my employees on direct deposit?
No. Some employees choose not to use direct deposit. In fact, 16% of adults do not have a bank account, according to the FDIC. Thus, it’s likely some of your employees will want checks or a pay card. There are some states that allow you to mandate that all employees be on direct deposit. If you prefer to have only this payment method, check your state’s labor codes to see if it’s allowed.
Can I use direct deposit for all my employee payments?
Direct deposit is not limited to salaries only. You can use it for:
- Bonuses and commissions
- Mandatory withholdings like child support payments
- Dividend and interest payments
- Travel and other employee expense reimbursements
What’s ACH mean? What’s NACHA?
Direct deposit is also called an Automated Clearing House (ACH) payment. ACH is the US financial network that coordinates these payments across institutions worldwide. The National Automated Clearing House Association manages the network and sets rules for transfers. Funded by the financial institutions it serves, it works to keep compatibility and uniform standards for payment systems.
With a little work upfront, direct deposit can save your business time, money, and headache. By sending paychecks directly to your employees’ accounts, you don’t have to deal with paper checks and employees have access to their money right away.
Work with your bank or payroll solution to get the direct deposit set up accurately, then test it out to ensure everything is working. After that, be sure to get payroll done in a timely manner, and direct deposit will handle the rest.