- Direct deposit enables employers to send money electronically to employees.
- The payment method offers benefits to employees and employers alike.
- Ninety-four percent of U.S. employees rely on direct deposit to receive their paychecks.
Nearly 94% of U.S. workers receive their paycheck via direct deposit, according to a 2020 survey from the American Payroll Association. The electronic payment method provides a convenient way for employees to get paid immediately without visiting a bank or depositing a paper check.
But ease of payment is just one of the benefits of direct deposit. Learn more about how direct deposit works, its additional benefits, and what employees and employers should consider before implementing it.
What is direct deposit?
Direct deposit refers to the digital transfer of payment into a recipient's checking or savings account. These electronic fund transfers are made possible by the Automated Clearing House (ACH), a network of banks and financial institutions.
To make an ACH transfer — a direct deposit — the employer sends money from its bank account directly to its employees. Banks validate the requests, and the ACH clears the transactions. The process usually takes a few days. Employers can use direct deposit for a one-time payment or on a recurring basis.
How does direct deposit work?
Implementing direct deposit is a relatively simple process that can make getting paid that much easier. Here's how direct deposit works:
- Step 1: Employees request a direct deposit form from their employer: Employees need this form to submit the appropriate information to their bank.
- Step 2: Employees fill out their bank account information: They need to list their bank's name, bank account number and routing number.
- Step 3: Choose a deposit amount: Employees can select how much of their paycheck they want to be deposited into their accounts. For example, they may opt to have a certain percentage deposited into their savings account, while the rest goes to their checking account.
- Step 4: Attach a voided check or deposit slip: In some cases, they may also need to attach a voided check or deposit slip to set up direct deposit.
- Step 5: Submit the form: The employee must then send the form back to their employer, who will use it to establish direct deposit for the employee's paycheck.
|How Long Does It Take to Set Up Direct Deposit?|
|Once employees have submitted the proper forms, establishing direct deposit can take from a few days to a few weeks. The time period depends on how long it takes the employer to confirm the employee's bank account details.|
Benefits and drawbacks of direct deposit for employees
For employees, direct deposit offers advantages as well as some considerations. Understanding the benefits and drawbacks can help employees decide whether direct deposit is right for them.
Benefits of direct deposit for employees
There are multiple benefits of direct deposit for employees. These include:
- Payment flexibility: Direct deposit enables employees to divide their paycheck between checking and savings accounts, making it easier to achieve savings goals.
- Paycheck security: Losing or misplacing a paper check is no longer a concern for employees who leverage direct deposit.
- Banking convenience: Employees don't need to visit a bank branch or ATM to deposit paychecks.
- Immediate paycheck accessibility: Employees can access their paychecks as soon as the money appears in their bank account.
- Bill payment timing: In most cases, employees can align recurring bill payments (like loan payments, utilities and credit cards) to be paid after their paycheck is received.
Drawbacks of direct deposit for employees
While the convenience and speed of direct deposit are enticing, the payment method still has a couple of drawbacks for employees to consider:
- Potentially restrictive: Some employees may prefer a paper check to deposit when and where they want.
- Potential hassle when changing banks: If employees want to switch financial institutions, then they need to complete new forms to set up direct deposit for their new accounts.
Benefits and drawbacks of direct deposit for employers
Business owners should also consider the pros and cons of offering direct deposit to their employees. Many prefer the ease and convenience of paperless payments; however, there are some drawbacks, such as maintenance fees and security requirements.
Benefits of direct deposit for employers
As employers evaluate direct deposit, they should consider the following benefits:
- Cost savings: Direct deposit can help reduce the cost of processing paper checks because there are no more checks to print.
- More control: Direct deposit can give employers more control over their payroll and related costs.
- Reduced risk: Direct deposit helps reduce the likelihood of misplaced paper checks, which can lead to payment fraud.
- Deposit flexibility: The payment method enables employers to pay their employees, regardless of the business's location.
Drawbacks of direct deposit for employers
Despite the many benefits, employers should consider a few drawbacks of direct deposit, including:
- Time sensitive: Employers do need to stay on top of their payroll cycles and submit the direct deposits so that employees get paid on their designated payday.
- Maintenance fees: Banks typically charge a setup fee for direct deposit, and business owners may also pay a fee for each deposit.
- Security required: Business owners need to establish security protocols to protect their employees' bank account information.
Direct deposit FAQs
Is direct deposit a wire transfer?
While wire transfers also move money electronically between banks, they are different from direct deposits in a few key ways. A wire transfer relies on the individual bank to process the transaction, and the money only moves when the bank confirms that the payee has sufficient funds available. Wire transfers tend to be faster than direct deposit transactions, but they're also more expensive.
Direct deposits rely on the ACH network of banks to process and clear the transactions. The direct deposits are typically cleared in batches, making it less expensive for banks (and employers too). However, while a wire transfer can process within a day, direct deposits usually take three days.
Does direct deposit cost money?
Direct deposit is free for employees, but employers pay some fees for the service. Employers usually pay a setup fee to establish direct deposit as an option for their employees, and they also pay a small fee for each transaction to maintain the service.
Can you direct deposit into a savings account?
Employees can deposit their paycheck into a checking account, savings account or other bank account. When they set up direct deposit, employees can denote where they'd like their paycheck deposited. They can even split their pay between multiple accounts.
How long does a direct deposit take?
It takes between one to three business days for a direct deposit paycheck to become available in your bank account.
How do you check direct deposit status?
Employees can check to see whether their paycheck has been deposited via their bank's mobile or online application. They can also contact their employer's human resource department for information about paycheck statuses and direct deposit processes.
The bottom line
You'll want to consider several factors when using direct deposit for a business or selecting it as a way to receive a paycheck. Review the pros and cons of direct deposit to make a smart decision about whether direct deposit is right for you.
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