Last updated on March 7th, 2024 at 02:04 pm
Small business owners used to trek to the bank to make payments or deposit checks. Based on the 2022 “Getting Paid In America” survey conducted by the American Payroll Association, now, over 93% of employers make direct deposits for payroll. It means that employees, too, no longer have to deal with paper checks on payday.
You have probably heard about direct deposit, but how does it work? Or how do you get started with direct deposit? Continue reading this guide to direct deposit created by our team at Remitly for answers.
What is direct deposit?
Direct deposit is a payment option that transfers money electronically to your bank account. It’s usually faster and more convenient than using physical checks and is popular for payroll and receiving tax refunds, in particular.
Direct deposit also helps reduce the risk of making payments, as you don’t have to worry about lost or stolen checks.
Direct deposit typically relies on an electronic network called the Automated Clearing House (ACH) to enable 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 an effective way to make payroll. To make employee payments directly, the employer needs to get the name of the bank, the account number, and the bank’s routing number from the payee.
The employee often provides this information using a voided check or a secure online direct deposit form provided by the company.
After that, the payer/employer sends the payroll details to the bank. The bank then sends the details to ACH to make arrangements and instructions that ensure the payments get to the right accounts.
How can employees sign up for direct deposit?
The first step to getting your pay processed as digital payments is to find out if your employer offers direct deposit. If they do, you’ll need to request it from your employer. This can be an electronic direct deposit form or a paper document.
Typically, you need to include your banking information:
- An account number and routing number, which is usually on the back of your bank statements or the bottom left corner of your check
- Your bank’s address
- A voided check (sometimes)
If required, provide a copy of a voided check — some employers use it to verify accounts and routing numbers. Learn how to void a check in the U.S. by checking out our guide on the subject.
Then, you’ll need to specify the percentage of the money you want deposited into your account. You can set it at 100%, but some people deposit it into multiple accounts, such as checking and savings accounts.
Finally, submit the form to your employer and wait for it to be processed.
It may take one or two pay periods before direct deposit goes into effect. Check with your employer or the payroll department for more information.
Do I need a bank account for direct deposit?
It’s most common to have a bank account with direct deposit. However, you do have some alternatives if you don’t have one. These include:
- Prepaid debit cards
- Mobile wallets
You may also consider signing up with an online bank. It’s easy to create an account right from your mobile phone. Read our list of the 5 top online banks in the U.S. to get started.
Top benefits of direct deposit
Direct deposit offers numerous benefits for both small business owners and employees. Let’s have a look at some top direct deposit benefits.
For the employer
- It saves the hassle of distributing checks.
- It enables you to make payments from anywhere.
- It may reduce costs.
- It reduces the risk of confusion, complaint, or stress about payday.
For the employee
- It saves the stress of losing a check or misplacing it.
- It enables you to divide the money into different accounts.
- It allows you to access your funds as soon as they’re deposited.
- It makes your finances more predictable.
For all these reasons, direct deposit has become a method for employers and employees in the U.S. When using direct deposit to receive other payments, such as your tax refund, you’ll enter the same sort of information with the payer. It’s easy, safe, and convenient.
Direct deposit FAQs
If you still have questions about the direct deposit process, check out our answers to these frequently asked questions.
Where can I receive a direct deposit?
Generally, you can have a direct deposit credited to a savings or checking account. People without bank accounts may be able to obtain a prepaid debit card as a direct deposit option.
Do you have to pay fees for a direct deposit?
No, you typically don’t pay fees to receive electronic payments like direct deposit. However, you should double-check with both the organization making the electronic payment and your bank.
How do you sign up for direct deposit of Social Security benefits?
If you’re in the U.S., you can sign up to have your Social Security benefits sent as an electronic payment at the Social Security Administration website. Follow this link to get started.
How do you check on direct deposit for tax refunds?
The IRS has a tool that allows you to quickly check the status of tax refunds. Visit this site to find out when you can expect your direct deposit.
Is a direct deposit the same as a wire transfer?
A direct deposit and a wire transfer are both electronic transfers that move money from one bank account to another person’s account. However, they’re not the same.
Direct deposit is an ACH payment made through the Automated Clearing House system. Wire transferring uses a different system like the Federal Reserve Banks’ Fedwire Funds Service, SWIFT, or the Clearing House Interbank Payments System (CHIPS).
As previously mentioned, you typically don’t pay fees to get a direct deposit into your bank account. However, your bank or credit union will likely charge fees for receiving an electronic transfer by wire.
Learn more: Wire vs. ACH transfers: What’s the difference?
What do I do if my direct deposit doesn’t arrive?
If your direct deposit doesn’t arrive in your bank account as expected, you can first contact your bank or credit union to find out if you have any pending electronic payments.
If they don’t have any record of the transaction, contact your employer or the organization sending the direct deposit to find out if they initiated the direct deposit. When you contact the payer, be prepared to double-check that your bank account information is correct.
What are pay stubs for direct deposit?
Pay stubs are records of a direct deposit. You may receive them virtually through email or an employee portal operated by your employer or on paper.
Pay stubs typically include the following information:
- Your name and address
- The dates of the pay period
- The total amount that you earned before taxes (gross wages)
- Tax deductions
- Employee benefits deductions
- Other deductions like child support or charitable contributions
- The amount of money you were paid after deductions (net pay), which is the deposit amount you’ll see in your bank account
You should keep your pay stubs in a safe place for at least a year to help with filing taxes.
Do direct deposits go through every day of the week?
No, direct deposit payments are typically only credited Monday through Friday. They also won’t be credited during federal holidays when the Federal Reserve is closed. These holidays include:
- New Year’s Day
- Martin Luther King, Jr. Day
- President’s Day
- Memorial Day
- Juneteenth
- Independence Day
- Labor Day
- Columbus Day
- Veterans Day
- Thanksgiving Day
- Christmas Day
How do I set up direct deposit for my employees’ accounts?
Small business owners can set up direct deposit through a payroll provider. A provider is a third party that manages your payroll payments for you in exchange for a fee.
In addition to setting up your small business for direct deposit services, a payroll provider can also manage your payroll system, sparing you the hassles and expenses of using payroll software.
How long does it take to get direct deposit payments?
A direct deposit will typically appear in a bank account within one to three days after the payment is sent to the payee’s account.
What time does a direct deposit hit?
When banking institutions make a direct deposit available varies. Some banks and credit unions may set the time at midnight, while other financial institutions may only make funds available during regular business hours.
Contact your financial institution to find out when you can expect to see your direct deposit reflected in your bank account balance.
Is direct deposit safe?
Direct deposit is generally a safe payment method. Information like your checking account or savings account number is encrypted for your protection.