How to Set Up Direct Deposit for Employees

December 12, 2023

Direct deposit is a secure and convenient way to pay your employees. Explore what you need to get started.

Nowadays, employees expect the convenience of money arriving directly in their bank account without the hassle of visiting a local bank to make a deposit.

So, it's a no-brainer for most businesses to set up a direct deposit system as the first order of business when hiring employees. But if you've never gone through this process before, you may have questions on how exactly it works.

We'll answer those questions, explore the benefits (and a few minor drawbacks) of direct deposit, what you need to get started, and how integrated HR and payroll software like Paylocity can make it simple.

Key Takeaways

  • Direct deposit allows businesses to send an employee's or contractor's paycheck directly into their bank account.
  • Automated paychecks are generally more convenient, secure, and provide more flexibility for your employees.
  • To set up direct deposit for your employees, you’ll need a company bank account, a payroll provider, employee authorization, and their bank account information.

What is Direct Deposit?

Direct deposit (also called "electronic funds transfer") is how businesses can send an employee’s or contractor's paycheck directly into the bank account. This can be set to run automatically to your custom pay periods: weekly, biweekly, or monthly.

Digitizing this process saves everyone from handling physical checks and allows employees to get their money faster. It also means your payroll process can be integrated into an all-in-one HR solution like Paylocity. You then have the option to print physical checks if you need to or forgo them entirely.

Updating Your Direct Deposit Information in Paylocity (No Need to Call HR!)

If you’re an employee who uses Paylocity and you’d like to add or update your direct deposit information, you can easily do so through the employee self-service portal. Click here for a step-by-step guide.

How Does Direct Deposit Work?

Once direct deposit has been set up, it’s a fairly simple process.

Banks process direct deposits at the end of each payroll period. Your company's bank will roll up all your direct deposits and send them in one batch to the Automated Clearing House (ACH) network. The ACH forwards those payments to your employees' accounts.

Despite being electronic, this process usually takes one or two business days.

What Do You Need to Set Up Direct Deposit?

To set up direct deposit for employees, you'll need:

  • A company bank account
  • A payroll processing service
  • Authorization from all employees you want to pay with this method
  • Employees' routing numbers and bank account number

Once you have that information, you’re ready to set up direct deposit.

Steps on How to Set Up Direct Deposit for Your Employees

1. Decide on a payroll provider

If you don’t have one set up already, you’ll need a payroll provider that offers direct deposit services. You can do this either through your bank, or with dedicated HR and payroll software.

Need some help deciding on a provider? Read our article on the must-have payroll features, and check out our HR and payroll buyer’s guide.

2. Connect with your bank

Set up direct deposit through your bank's online banking portal. They'll ask you to sign an ACH terms and conditions form for approval. They may also ask for financial statements to ensure you can pay.

If you're using payroll software, most of this paperwork is handled for you. You'll usually be asked to sign off on a small test deposit. Once that's cleared, you're all set.

3. Collect information from your employees

Start onboarding employees into your new system by gathering their up-to-date information. Bank account numbers, bank account types, bank names, etc.

If your payroll solution is self-serve, you can easily send logins to the team and have them handle all this themselves.

4. Create a payroll schedule

It takes seven to 10 days for your direct deposit to activate, so make sure you're setting this up well before your first payroll date (ideally during the pre-boarding period). If you use timecards, decide on a lead time for submitting those in the system.

5. Run payroll

Check with your bank that direct deposit has been activated. If so, you're ready to run your first payroll with it. Make sure you know when employees can expect their pay to appear in their bank account. If someone's pay hasn't gone through, your payroll provider should be able to help.

How Long Does It Take To Set Up Direct Deposit?

If you’re using a payroll software provider, it should only take a few hours to port all your information to the new system and set it up.

After that, you just need to set up the direct deposit payments themselves. This could take at least a few days, so it’s crucial that you budget one or two payroll periods for all of this setup to go through. This gives you time to get the necessary information and ensure everything is in order for your first automatic payouts.

Benefits and Drawbacks of Direct Deposit for Employees

Direct deposit is great for your business and your employees, but there can be some drawbacks. Let’s start by looking at the abundant pros.

Benefits of Direct Deposit

1. Convenience

Before direct deposit, all employees had to physically receive their paychecks and take them to the bank to deposit. Checks can be lost or stolen, and it takes time for them to clear after they've been handed over to the bank.

With direct deposit, employees can rest easy, knowing their pay will be safely deposited in their account as soon as it's issued.

2. Security

Direct deposits are encrypted digital signals that can't be lost or stolen in transit. Even if a hacker intercepted the signal from the payment provider to the bank, they couldn't read information like bank account numbers or payment figures.

Direct deposit can also increase security inside your company. With the right payroll system, measures like multi-factor authentication protect your company's finances from unauthorized access or tampering. This also protects employee privacy, since personal information isn't printed on a paper check for all to see.

3. Automation

With automated paychecks, you don't have to spend time printing, signing, distributing, and reconciling paper checks. All the little jobs like handling envelopes, postage, or other manual chores are eliminated.

4. Employee experience

Direct deposit is more than just a way to get paid. It's also a way to give employees more choices and control over their finances, which provides a better overall employee experience.

  • It supports multiple accounts: Employees can have one payment go into multiple bank accounts without you having to cut separate checks. They can arrange for most of their paycheck to go to their checking account while putting some of it away in their savings or investment account. This gives them much greater control of their finances for much less effort, and it wouldn't be possible without direct deposit.
  • Remote and hybrid work: With no physical checks, employees don't have to worry about being in the office to collect their wages. Putting everyone on a direct deposit makes it easier to hire remotely, giving you many more options for filling new roles.

Disadvantages of Direct Deposit

The advantages of direct deposit make it an obvious solution for most businesses and employees. But there are a few factors to consider when making the switch.

1. Can't stop payments

A physical check can be stopped or voided. Once your direct deposit payments are gone, they're gone. This is why it's extra important to check everything is set up correctly the first time.

2. Employees need to start over when changing banks

If an employee moves to another bank, you'll have to set up direct deposit for them all over again. It's a routine transaction, though, so as long as they communicate the change ahead of time, there shouldn’t be an issue.

And with all-in-one HR and Payroll software with an Employee self-service portal, employees can update this information themselves!

3. Costs and fees

Direct deposit is much cheaper in the long run, but businesses will likely pay setup fees in the beginning, ranging from $50 to $149 on average. Some banks also charge monthly or per-pay-cycle fees.

You should also expect to see a small transaction fee ($1.50-$1.90 on average) for each employee payment deposited.

Direct Deposit Fees Example

  • Per-Pay-Cycle Fee = $1.50
  • Per-Deposit Fee = $1.25
  • 20 Employees Receiving Direct Deposit

$1.50 + ($1.25x20) = $26.50 Total Fees

4. Doesn't benefit unbanked employees

Direct deposit requires an employee to have a bank account to receive funds, and it’s not a guarantee that everyone in your workforce will have one. 

As of 2021, an estimated 4.5 percent of U.S. households (about 5.9 million) are unbanked. You’ll need to consider other payment options, like paper checks or payroll debit cards, to ensure every employee can receive their wages. 

Opt for Payroll Software for Seamless Direct Deposit

To get the most out of direct deposit, you need a payroll solution that lets you integrate easy payments with all the other documents and data you need to keep your business running smoothly.

Even better, opt for an all-in-one HR and payroll platform, like Paylocity, that also integrates community tools.

We can help you eliminate the manual entry, errors, and headaches associated with ineffective payroll technology, all while also driving a better employee experience.

FAQs on Setting Up Direct Deposit

Is Direct Deposit Only for Payroll?

Direct deposit isn't just for payroll. You can use it for:

  • Reimbursements
  • Bonuses and incentives
  • Benefits and allowances
  • Commissions and royalties
  • Expense reimbursements
  • Dividends and profit sharing

How Much Does It Cost to Set Up a Direct Deposit for my Employees?

Setup costs will depend on the size of your business, your payroll software, and the bank you use.

A bank may charge anywhere from $50 to $149, on average, to set up direct deposit. Also, if there are any compliance concerns, you may need to pay for legal advice.

How Can I Check Direct Deposit Status?

If you're running direct deposit through payroll software, you can check within the platform. If not, you'll have to check with your bank or check in with employees individually.

Can an Employer Require Direct Deposit?

Under U.S. federal law, employers can require direct deposit for employee payroll payments under certain conditions, but many state laws prohibit such a mandate.

Regardless, under the Electronic Fund Transfer Act (EFTA), employers must receive employee authorization to use direct deposit. They also must not require employees to use a specific bank for direct deposit, unless another payment option is available (cash, check, cash card).

Can 1099 Employees Get Direct Deposit?

Yes, you can pay independent contractors (usually paid with IRS Form 1099) via direct deposit. Once they've filled out a W-9 form, you can pay them with whatever payroll software you use. Just make sure your software can handle 1099 and W-9 forms.

Can I Set Up Direct Deposit for Employees Without a Bank Account?

Unfortunately, employees can't receive direct deposit payments without a bank account. If you have unbanked employees, and don’t want to deal with the hassle of paper checks, consider using paycards instead. 

Paycards work just like a debit card, but instead of linking to a bank account, an employer deposits an employee’s wages onto the card each payday. This can be a more convenient method of paying employees who can’t use direct deposit. 



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