How to set up direct deposit for employees: A 6-step guide

Paying your employees doesn’t have to be a chore. If you use direct deposit, not only will you save money and time, but it can make your employees happy. If you’re ready to help your team become part of the 93% of Americans that Payroll.org says receive their pay through direct deposit, keep reading this guide about how to set up direct deposit for your employees.

We’ll walk you through everything you need to know about direct deposit, including its benefits and potential drawbacks, and how to set up payroll for direct deposit in 6 simple steps:

• 1. Pick a direct deposit provider
• 2. Start setting up direct deposits
• 3. Collect employee information
• 4. Upload employee information into payroll system
• 5. Schedule payroll and direct deposits
• 6. Run payroll

1. Pick a direct deposit provider

The first step in setting up direct deposit is to choose a provider. A direct deposit provider allows you to send money from your company account to your employee accounts using the ACH system. 

Your bank or a payroll services company may be able to set you up with a system, or you can choose to use payroll software to transfer money. Outsourcing payroll can save you time, especially if you don’t have a dedicated payroll specialist. 

Sending direct deposits costs money. Depending on the payroll provider you choose (and how their system works), you may be charged once in a lump sum or have to pay a per-employee and per-transfer cost. Some providers may run a credit check on your company to ensure it's in good standing and will be able to pay your employees and the provider.

When you’re trying to decide which payroll provider to use, make sure to find out:

• What size companies they work with and can handle
• What they charge—this includes the cost of their services and the cost of transfers as well as what they charge to set up direct deposit for each employee
• How long it takes to set your company up for direct deposit
• How long it takes to add new employees after the initial setup

Once you’ve decided on a provider, your next step is to make sure you have an account that can be used for sending direct deposits.

2. Set up the proper bank accounts

Not all business bank accounts are the same. While it would be great if you could send direct deposits from your normal business bank accounts, you’ll need a special type of account. These payroll accounts are designed to handle regular ACH transfers. 

Setting up these accounts is usually straightforward, but there are some factors to be aware of:

• The verification process can take several weeks.
• The bank may require you to sign forms stating that you agree to follow their policies regarding ACH payments.
• The bank may need to examine financial statements that prove your company has enough money to make these deposits.

If you use payroll software, many of these steps will be streamlined because much of the information necessary to set up direct deposits is already in your system. With QuickBooks, you can instantly connect your bank account and set up company payroll and direct deposits.

3. Collect employee information

After you’ve set everything up, you’ll need to collect deposit information from your employees. You can have them fill out paper forms, or if you have an employee HR portal, they can input the information themselves.

Here is the information you’ll need to set up direct deposit for employees:

• The employee’s bank name
• The employee’s routing number
• The employee’s account type
• The employee’s account number

Depending on your bank and where you live, you may also need to provide an employee’s Social Security number and have them read and sign a consent form that allows you to make deposits into their accounts. Some providers require a voided check along with the above information.

You’ll need to keep some of this information as a part of your payroll records, so do everything you can to ensure this data is secure.

4. Upload employee information into the payroll system

Once you’ve collected the necessary employee information, it’s time to upload it into your payroll system, and there are two ways to do this: 

• Manual entry: You or a member of the HR or payroll team can enter the information into the direct deposit/bank system one employee at a time.
• NACHA form: The NACHA form is necessary for ACH payments. You can generate the form using your payroll software and upload it to your bank’s direct deposit services system to speed the upload process. 

A NACHA form needs to have the following information:

• The name of the business or customer
• An email address for online payments
• The bank’s name
• The amount
• The kind of bank account
• An account number
• The transaction type
• Statement that allows debits: this should include language that explains that a transaction can be revoked.
• A signature field

Once the information has been uploaded, set up a payroll and direct deposit schedule.

5. Schedule payroll and direct deposits

Switching from paper checks to direct deposit reduces the amount of time you spend on payroll after the initial setup period. 

No matter how you’ve been paying your employees, you probably already have a payroll schedule. Whether you want to keep it the same or change it when you transition to direct deposit, communicate all changes with your company. That includes the people who could be impacted by the change, starting with your payroll team. Work with them to figure out the timeline for the transition, and then let the rest of your team know what is changing.

You’ll set the dates in the payroll system to coincide with the proper schedules. Then you can run payroll.

6. Run payroll

Running payroll is the last step you’ll need to complete to begin paying your employees with direct deposit. If you’re manually running payroll, collect timecards, pay rates, and tax schedules. If you’re using software, you can automate payroll functions to save time and reduce errors. 

After payroll has been tabulated, input the information into the direct deposit system, keep more than enough money to pay your employees in the proper account, and get ready for the next pay period.

Benefits of direct deposit

Direct deposit comes with several outstanding benefits that make it easy to understand why it’s become such a popular modern payment method. 

Let’s look at a few benefits of direct deposit for employers.

• Money-saving: By not writing, printing, and mailing paychecks, employers can significantly reduce costs. And by opting for direct deposit, you can also avoid costs associated with reissuing lost or stolen checks and stopping payments.
• Time-saving: Switching to direct deposit is an excellent way to optimize time spent on payroll duties. Writing, signing, and delivering employee paychecks can be time-consuming and labor-intensive. Direct deposit eliminates all these painstaking steps by automatically transferring funds to your workforce ahead of payday.
• Increased security: Lost or stolen paper checks are among the most common sources of identity theft and fraud. Direct deposit protects you and your employees from the risks that come along with stolen checks and forged signatures.
• Automated pay scheduling: You’ll never have to worry about missing payroll and leaving your employees high and dry on payday. Modern technologies like same-day ACH payments make it easy to automate transfer schedules that ensure that paychecks clear on time, every time.

In addition to the benefits listed above, some payroll providers may have other features that add even more value to the cost of their services.   

Drawbacks of direct deposit

Direct depositing employee pay isn’t always easy or cheap. Here are some potential drawbacks to direct deposits that you should consider. 

• Overdraft fees are expensive: If your account doesn’t have enough money in it, you run the risk of having to pay overdraft fees for every deposit that goes beyond available funds. If you have a lot of employees, those fees can add up fast.
• You have limited stop-payment options: Most ACH transfers can’t be easily stopped or reversed. To stop a direct deposit transfer, most banks need three days' notice, so check with your payroll provider to see what options are available in case you make a mistake.
• Fees and costs add up: Setting up each employee in a direct deposit system can cost anywhere from $50 to $150, according to the National Federation of Independent Business. Every deposit costs money, too. Your payroll provider likely charges recurring fees on top of deposit and setup costs. If you are doing payroll in-house, add the cost of your payroll team’s labor.
• If an employee switches banks, they have to fill out new paperwork: Some providers will require you to pay another setup fee if an employee switches banks. If the employee doesn’t provide you with the information before the cutoff date for the next pay period, you’ll need to find another way to pay them—usually by physical check or through a one-time wire transfer. 
• Wrong account numbers can cause problems: Setting up an account number incorrectly can have a large, negative impact on your business. If you don’t pay your employees on time, you could face penalties from the government and frustration from your staff. 

As you decide on a direct deposit provider, it’s a good idea to ask them how to protect your company from unwanted fees or complications. They may have features that are designed to reduce those kinds of issues.

Next steps for streamlining your payroll process

Making your payroll process easier might take a little effort, but the time and cost savings can be huge. Start with regular payroll reconciliation to ensure that your employees are getting what they’re owed (and to check that you aren’t paying more than you should).

Payroll software can make reconciliation fast and accurate, allowing you to quickly update employee information for direct deposit and tax purposes. If you want to learn how to set up direct deposit for employees in QuickBooks, the software makes it easy.