Using payroll direct deposit to pay your staff their wages can benefit your small business in multiple ways. A direct deposit system transfers employees’ income into their bank accounts electronically from an employer’s payroll funds, leaving them with time to focus on more significant issues facing their company.

This article delves into how you can set up a payroll direct deposit for your small business. But before getting into how to do that, it’s important to know what it is first. 

What is Payroll Direct Deposit?

Payroll direct deposit is a specific type of direct deposit in which payments are transferred electronically from the employer’s bank account directly into the employee’s bank account.

Setting Up Your Small Business Payroll

Managing payroll effectively can be tricky and time-consuming for small business owners. It’s easier to handle payroll if you have your entire payroll operation online, with all your employees included, and a bank account  solely used to fund payroll.

Payroll errors can be costly, and missing vital CRA tax reporting deadlines can result in penalties. If you can afford it, it would be a good idea to employ a properly trained accountant or bookkeeper to administer payroll. Otherwise, you can avoid expensive fines and damage to your reputation by using a payroll tool like QuickBooks Online. This tool helps simplify the payroll process by making the correct deductions and reporting payroll taxes accurately.

What Employee Information Do I Need to Set Up Payroll?

When you hire your first employee, you must get their Social Insurance Number and file a TD1 Personal Tax Credits Return. The information on this form helps determine how much tax to deduct from the employee’s income. Keep this form on file, and use the CRA’s online calculator to determine much tax to deduct from each paycheque.

You also need your employees to supply the following:

• Their full name as it appears on the account into which you pay their wages
• Bank account details
• Current address (because employee tax is based on their home address and not their employment address)
• Date of birth
• Gender

Other information to collect about your employees includes:

• Hire date and employee number
• Internal department names and codes
• Wages, salaries, and any bonuses
• Whether the employee is full- or part-time, paid on a salary or hourly, and if paid hourly, the number of hours of work per pay period
• Deductions including charity and pension
• Benefits eligibility date if applicable
• Employee’s preferred language for communication purposes
• Home phone number
• Vacation information including accrual per pay period, allowable overdraw, or carryover
• Standby pay
• Reduction of tax at source

Advantages of Moving to Payroll Direct Deposit

While you may be used to using paper cheques as part of your payroll system, there are many benefits to switching to direct deposit. These include:

Reducing Risk of Fraud and Theft

Paper cheques display your business’s bank details, including your account number, business name, and address, and this data could  be used for fraudulent purposes. Paying employees electronically keeps this information confidential. 

Paper cheques can also be lost, soiled, or even fall into the wrong hands, enabling thieves to take money from employees. Direct deposit eliminates these risks by depositing employees’ wages directly into their bank accounts.

Avoiding errors

Direct deposit can help employers avoid  common payroll errors, especially when paired with an online payroll tool. Direct deposit can automate your payments, meaning errors like  missed payments or tax deadlines can be easily avoided. Plus, their confidential information remains secure  since wages are directly deposited into your employees’ bank accounts. 

When paired with an online payroll tool, direct deposit reduces the likelihood of your employees being either overpaid or underpaid because it calculates wages automatically, including overtime wages. It can also keep track of all payroll records, storing them properly and securely, so they are available when needed.

Saving Time, Money, and Effort

The CRA estimates that it can cost around four times as much to process a cheque as it does to handle a direct deposit. One estimate regarding the relative direct deposit cost showed that paper cheque processing costs $40 per biweekly pay period for a small business of 20 employees. By contrast, processing the same 20 employees’ wages by direct deposit typically costs around $10 (or it can be free if you’re using QuickBooks). Using direct deposit can help your business save money.

It’s also easier to view transactions online and immediately note any errors when using direct deposit. With direct deposit, you can easily view transactions at any time, from anywhere, allowing you to monitor your finances much more readily than if you relied on paper cheques and other information filed away in your office. 

Increasing Employee Satisfaction

Direct deposits can be fully automated, which can help you avoid late payments, meaning your employees can have access to their wages on payday. 

Your workers will  likely appreciate having their pay already in their bank accounts, so they don’t have to waste time heading to the bank to deposit their paycheques. Some banks even offer incentives to customers who use direct deposit so that employees can enjoy rewards points or discounted fees — and they have you to thank for it. 

Helping the Environment

Direct deposit is a paperless, electronic process. Reducing paper consumption and waste helps limit your business’ environmental impact and reduces its carbon footprint. This can considerably improve a small business’s green credentials.

Following in the Government’s Footsteps

The Canadian government is moving towards issuing all payments by direct deposit. Any employees who receive payments from the CRA — including income tax refunds, Canada child benefits, and working income tax benefits — are advised to sign up for CRA direct deposit.

How to Switch to Direct Deposit

There are many advantages to switching to direct deposits and now that you know some of them, you may be wondering how to set  it up for your own business. Below are some steps for setting up a direct deposit system that meets all your business needs.

To set up direct deposit, an employer must:

1. Choose a schedule: 

You can decide on a pay schedule of biweekly, weekly, or monthly. Most companies in Canada choose a  biweekly pay schedule. 

2. Choose a system:

 You can choose between an in-house system or outsourcing payroll. Unless you are an accounting expert, you will likely need help calculating payroll, and if you decide that in-house is good for your business, then automating a payroll system is probably your best bet. QuickBooks Online + Payroll is a great solution for completing your payroll accurately and on time. 

3. Create a company account:

When setting up direct deposit, you have to consider which financial institution you want to process your payments through. Your chosen bank will largely depend on your business needs and personal preferences. Look out for e low business account fees, rewards cards, and transaction fees.  

4. Collect and verify employee information: 

To set up direct deposit, you’ll need your employee’s banking information, like bank account number, routing number, bank name and address and the name of the account holder. You can find this information on a voided cheque or direct deposit form that employees can access through online banking or a teller. 

5. Register with the CRA:

After opening a business account and setting up a direct deposit, you must register your business with the CRA to obtain a business number. When business owners register for a business number, they will also register for the program accounts they require. For direct deposit, you should ensure you're registered for payroll deductions (RP) to ensure your employees get the proper remittances deducted from their pay cheques. 

Why Use QuickBooks?

QuickBooks’ standard payroll plan prints paycheques, runs payroll, calculates taxes, and allows employers to pay employees by direct deposit at no extra cost. It also automatically:

• Files and pays taxes by each due date
• Pays and files year-end summaries and employee forms such as T4s
• Prepares and files Records of Employment (ROEs) 
• Gives employees online access to their records
• Pays contractors
• Calculates, tracks, and pays workers’ compensation

Note: Regardless of the support you may receive from a third party, it remains your responsibility to provide accurate and up-to-date information to your payroll service supplier. For example, suppose an employer doesn’t let their payroll service provider know when an employee has left. In that case the system continues to pay the employee’s wages until the employer passes along that information.

How Easy Is It to Set Up Payroll Direct Deposit with QuickBooks?

QuickBooks supplies step-by-step instructions to help employers set up their payroll direct deposit. It also has a timeline that indicates the processing time required to move to its direct deposit feature. Before you start running direct deposit payroll, keep these facts in mind:

• Because the setup’s timing is crucial, you should select a designated principal officer who can be on hand throughout the process to promptly answer emails requesting essential information, such as proof of identity.
• It can take up to two business days to approve an employer’s ID.
• The entire setup and verification process can take up to a week, so it’s good practice to begin the setup the day after finishing a payroll using paper cheques to ensure the account isn’t pending when it’s time to run the next payroll.
• Employers must approve paycheques they’re paying through direct deposit by a specific time of day, two banking days before the pay date.
• Completing the risk analysis can take up to three days after the initial setup.

How Much Does Direct Deposit Cost?

You can expect to pay a small one-time fee when you first set up direct deposit with a bank. There is  a payroll processing fee for each transaction or activity in the account, such as making a deposit or transferring money. This fee varies by bank and can depend on the relationship a small business owner establishes with their bank manager.

The good news is small business owners can get payroll direct deposit for free if they’re already a QuickBooks Online subscriber. QuickBooks offers small businesses free direct deposit when they add a standard or advanced payroll plan to an existing account.

Are Payroll Direct Deposits Safe and Secure?

Unlike paper cheques, which can be lost or stolen, there’s a minimal risk of electronic payments going astray. If the account is set up with accurate information from the employee, and the employer has sufficient funds in their payroll account, regular payments should go through.

With the increase in cyber-attacks you should take every precaution to keep your banking secure. Basic precautions include:

• Choosing strong passwords.
• Refraining from sharing user IDs and PINs with anyone other than a trusted finance officer
• Declining prompts asking for the device to remember passwords and other confidential banking information
• Installing the latest version of a reputable anti-virus software and keeping it updated
• Regularly checking statements and reporting any unusual activity or unauthorized transactions to the bank immediately
• Closing any screens if required to leave the workspace while checking an account online
• Refraining from using public Wi-Fi or public computers to access the bank account

Paying your employees regularly and on time is  vital to keep a business running smoothly and maintaining employee morale. Moving to payroll direct deposit is a great way to make sure this happens. Electronic payments also free up time and energy, allowing you to focus on strategic planning. Want payroll direct deposit for free? If you’re already a QuickBooks Online subscriber, you’re covered.

Payroll Direct Deposit FAQs

Can I set up a direct deposit myself? 

There are three ways to set up direct deposit for a business. It can be set up with the help of a bank representative; an online payroll tool , such as QuickBooks Online Payroll; or, depending on the financial institution, through an online bank account. The final two options allow you to set up direct deposit on your own (with  little guidance).

How long does it take for direct deposit to process? 

On average, a direct deposit can take 1-3 business days to process.

Does direct deposit go straight to employees’ bank accounts? 

A direct deposit will always be transferred directly from the employer’s bank account into the employee's bank account unless the account is closed for some reason. In this case the money will be returned to the employer’s account.

Disclaimer

Money movement services are provided by Intuit Canada Payments Inc.

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