Payroll & Business Experts Blog

How Does Direct Deposit Work?

Posted by PrimePay Business and Experts Blog

Sep 21, 2010 12:15:00 PM

how direct deposit worksDid you know that 3 out of 4 employees who are offered direct deposit use it as the way to receive their payroll funds?  Ninety-seven percent of those that use direct deposit are very satisfied with it.  Direct deposit is an easy, secure and convenient way for employees to receive their money. 

Direct deposit also benefits the environment since employees won’t receive a paper check to cash.  According to the NACHA sponsored website... electronicpayments.org... each year, checks use more than 674 million gallons of fuel and add 3.6 million tons of carbon dioxide to the environment as they travel through the payment cycle.

5 Steps for Implementing a Direct Deposit Program
In just 5 simple steps, you can set up your employees to receive their paychecks through direct deposit.  When you work with a payroll services provider, most of these steps are handled for you.  In this example, we’ll assume you are working with a payroll company for your payroll processing.

  1. Sign Up for Direct Deposit:  Your employees will need to fill out a Direct Deposit Authorization form which your payroll company will send to you.  This form gives your employees the opportunity to have all their payroll funds deposited into one bank account or to have their money spread out into multiple accounts.  These accounts can be checking, savings or another type of account such as a money market account.  Employees will need to attach a copy of a voided check so the bank’s routing number and the employee’s account number can be verified.
  2. Send a Test File:  Your payroll provider may send a test deposit through to make sure the routing and account numbers have been entered correctly.  This test is called a ‘pre-note’ and is sent through with a zero dollar amount.  If there are any problems with the test, the employee’s financial institution will contact the employer about any necessary changes.  Those changes will need to be submitted to your payroll company.
  3. ACH File is Sent:  Each pay period, when you submit your data to your payroll provider for processing, they will send an ACH file to your company’s financial institution for the amount of the direct deposit.  This ACH transmission is usually processed at least 2 days prior to the payday or payment date.
  4. Payroll Funds are Available:  On payday, the company’s financial institution will debit the business’s payroll account for the total dollar amount of direct deposit transactions that were on the ACH file.  Simultaneously, the financial institutions that receive the transactions for your employees will credit their accounts and accept the direct deposit funds.  Employees who receive their pay through direct deposit have immediate access to their funds on payday.
  5. Pay Statements are Provided:  Since employees are receiving their payroll checks electronically, you may still need to provide them with a paper or electronic pay statement.  The rules on this vary by state.  This was discussed in one of our previous blog postings… What States Require Printed Pay Statements?

    To stay with a paperless and eco-friendly payroll, you can provide your employees with online pay statements.  An online pay statement provides employees with the same information normally seen on a paper statement such as gross and net pay, taxes withheld, year-to-date totals and accruals for vacation and personal time.  Check out our blog posting from earlier this year… Reduce Identity Theft with Online Pay Statements.

Download the White Paper… Direct Deposit: A Simple, Safe, and Smart Solution for Small and Medium-Sized Businesses

Download a Checklist for Implementing & Executing Your Direct Deposit Plan

Topics: payroll

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