Last editedMar 20233 min read
If you’re looking for a way to pay your employees, direct deposit is the gold standard. Nearly 94% of U.S. workers received their pay via direct deposit according to a recent American Payroll Association survey. Beyond payroll, there are a few additional uses to explore – but how does direct deposit work, and how long does it take? Learn how to set up direct deposit in our guide below.
What is direct deposit?
Direct deposit is an automated payment method that deposits funds directly into the recipient’s checking account. This allows payers to set up and transfer funds directly from their own bank accounts into the payee’s bank accounts, without visiting the bank in person or handling paper checks. Because direct deposits are automated, money is sent and received on time without any hassle.
How does direct deposit work?
Imagine that a business needs to pay its employees on the last day of each month. It would collect the necessary banking details, including account and routing numbers, usually provided by employees during onboarding.
A couple of days before the end of the month, the business sends these banking details and any other payroll instructions to its own bank. The bank transfers this information to the Automated Clearing House (ACH) network, which sorts the entries and routes instructions to each employee’s bank. The employee’s banks process payments, crediting each worker’s account with the pay they’re due.
What are the main uses of direct deposit?
The primary use of direct deposit within the United States is for payroll, as described above. It offers a reliable, secure way for employers to process pay without the need to visit banks in person. It also ensures that employees receive their pay on time each cycle.
Another main use of direct deposit is to send and receive government funds. For example, the IRS deposits tax refunds electronically into bank accounts. This ensures taxpayers get their refunds in a much timelier manner in comparison to paper checks. Social Security benefits are also paid by direct deposit, as are court-mandated child support payments. Some landlords and utility companies accept direct deposit for recurring payments using the bank’s “bill pay” option.
How long does direct deposit take?
Processing times vary by bank. ACH deposits will usually take between one and three days to transfer, which is why employers send payroll instructions ahead of payday. When payday takes place on the weekend, funds are often available on the Friday beforehand. Recipients can simply log into their online bank accounts to check the status of any incoming direct deposits.
How to set up direct deposit
If you want to submit direct deposit payments, you’ll need to acquire some basic information from your vendors or employees.
1. Ask for a direct deposit form. This collects the payee’s name, address, Social Security number, and signature for authorization. It will also collect the bank or credit union account details, including the checking account number and bank routing number.
2. Submit the deposit amount. In most cases, employees will want the full paycheck deposited into their accounts. However, some may wish to have a percentage sent into savings or a separate account. This should be specified on the form. Your bank might also ask for a voided check or deposit slip from each account to get started.
3. Collect and submit the direct deposit forms. Your business’s accounts payable department will need a good system in place to store and track this sensitive paperwork. You’ll also need to submit these forms to your own bank for direct deposit processing each pay cycle.
4. Understand security issues. Once direct deposit requests are sent to the bank, they’re very secure. The biggest risks happen during the setup process when you’re collecting these forms from your vendors or employees. Use secure networks to submit sensitive financial data.
The bottom line
Automated payments like direct deposit are far more convenient than issuing paper checks. Whether you’re collecting recurring payments from customers or sending out payments to employees, direct deposit offers a streamlined way to save time and money.
GoCardless can help with automated payment collection. We take both one-off and recurring payments directly from customer bank accounts on the day they’re due, with an easy setup for you and your customers. Going digital saves time, paper, and resources, cutting down on the potential for human error. We also partner with hundreds of third parties, including top accounting software like Xero to keep finances in one place.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.
