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The benefits of direct deposit go beyond merely saving your employees a trip to the bank. Today, direct deposit is a fast, reliable, and safe method for paying workers, making it a popular choice for employers and their teams.
That said, employers launching a business might need more information on whether this payment method makes sense for their company, and how it simplifies payday compensation.
Key takeaways about direct deposit’s benefits
- Direct deposit is an eco-friendly and secure payment method, which provides immediate fund availability and convenience for employers and employees
- Employees benefit from automatic paycheck deposits, eliminating bank trips and simplifying income tracking
- With its user-friendly setup and cost-effectiveness, direct deposit provides a modern solution to traditional payment methods
If you’re still on the fence about offering direct deposit to your employees, this guide details how distributing wages this way works, pros and cons, and why so many employers go this route when paying their employees.
What is direct deposit used for?
In simple terms, using direct deposit payroll allows employers to automatically pay employees by depositing their paychecks directly into their bank account using an electronic network called the Automated Clearing House (though many are more likely familiar with the term ACH). In the US it is one of the more popular ways that people get paid. In fact, a 2022 survey by the American Payroll Association found that 95% of employees said they received their pay via direct deposit.
How does it work?
- When employees sign up for direct deposit, they provide their employer with their bank account and routing numbers
- Once active, the employee’s paycheck is deposited directly into their bank account at no cost to them using this electronic network
- ACH transfers are a safe, effective way to move funds from one banking or financial institution to another. It’s also quick! Most ACH transfers arrive in one to two business days
Although this is a brief overview on how it works, we have a comprehensive guide to setting up direct deposit that you may find helpful after learning about the benefits.
ACH assortment
We need to point out that while direct deposit is part of the ACH network of transactions, it’s only one type of transaction that uses the network.
Why do we bring this up? Because there are an assortment of ACH transactions that impact your day-to-day life beyond electronically moving wages. For example, online bill payments, a claims reimbursement from your insurance company, and your federal tax refund all use ACH transfers. In other words, a direct deposit is an ACH transfer, but an ACH transfer is not always a direct deposit.
Though direct deposit continues to grow in popularity, employers still pay employees in other ways.
Why do employers prefer direct deposit?
Employers prefer direct deposit because it is a more efficient, cost-effective and environmentally-friendly way to pay employees than via physical checks. It reduces the administrative burden of printing, endorsing, and distributing paper checks, and it ensures employees receive their pay in a timely fashion with a minimal degree of risk.
— Tom Brock, CPA and financial professional
Is direct deposit the only way to pay employees?
Aside from direct deposit, there are a variety of ways that you can pay your employees including paper checks, paycards, and cash. Below, we touch on each.
Paper checks
Before direct deposit became widespread, one of the more traditional ways employees were paid was with a paper check. Though it’s still perfectly acceptable, when given the opportunity most employees happily switch over to a direct deposit option. For employees, direct deposit offers several benefits, including the fact that funds are safely transmitted to their bank and available for withdrawal on their pay date. Direct deposit also eliminates the need to go to the bank to deposit their check (whether to wait in line to give to a teller or use a machine). This means even if an employee is out of the office during payday, they will still be paid on time.
Paycards
Another way to pay employees is by paycard. Paycard funds are electronically deposited onto the card, making it a good option for employees that don’t have or are unable to open a bank account. That said, there are some drawbacks to paycards for employees, such as usage fees and ATM fees. The card can also be lost or stolen, making direct deposit the more attractive option for those with an existing bank account.
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Why is direct deposit considered better than a payroll card?
A payroll card is a prepaid debit card that allows an employee to receive wages via the card, rather than via paper check or direct deposit. Unfortunately, these cards usually entail processing fees eat into your paycheck. Direct deposit is a much more cost-effective way to get paid. Direct deposit is also faster and more convenient.
Cash
There are still employers that pay employees in cash, though the drawbacks for employers — including an increased risk of an audit — make this option rare. While some employees may appreciate having cash readily available, most prefer not to carry a large amount of money for safety reasons, which means a trip to the bank. It’s also more difficult for employees to keep track of necessary payroll deductions.
Now that we know some other ways that employers compensate their workforce, let’s explore more specifics about why direct deposit tends to be a top choice.
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Direct deposit suits millennial workers
In 2022, the National Automated Clearing House Association (NACHA) found that 97% of workers between the ages of 22 and 34 have a bank or credit union account, and 83% receive payment by direct deposit.
What are the advantages of direct deposit?
Direct deposit offers plenty of advantages for both employers and employees.
Pros employers should know about
- Increased safety and security – Using direct deposit eliminates the possibility of lost or stolen checks. It also helps keep bank account information secure, reducing the possibility of fraud
- Saves time – Printing and distributing checks takes time. There’s also additional work involved with issuing paper checks, such as processing stop payments or reissuing lost checks. Direct deposit eliminates these issues, since the funds are deposited directly into the employee’s account
- Ensures timely payment – Issues such as vacation and sick time can wreak havoc with your pay schedule. Direct deposit immediately gives employees access to their paychecks, whether they’re in the office or taking paid time off (PTO)
- Reduces costs – If you’re issuing paper checks, you’re paying for check stock, printer ink, envelopes, and sometimes even postage. Direct deposit eliminates these costs
- Environmentally responsible – Using direct deposit instead of paper checks helps reduce your carbon footprint and the amount of paper your business uses
- Many providers available – This payment type is fairly standard for many financial institutions and can be synced up with almost all in-house payroll software that small businesses use
We touched on how direct deposit can prevent funds from getting into the wrong hands and once more we spoke with Tom Brock, who says safety factors are important for both employees and employers.
“An important advantage that should not be overlooked is that direct deposit is a safer way to get paid because it utilizes the Automated Clearing House (ACH) network to execute secure electronic transfers. This reduces instances of fraud, theft and lost checks. It also eliminates the human errors associated with processing physical checks — which should provide peace of mind for employers.”
— Tom Brock, CPA and financial professional
Pros that employees should know about
For employees, the advantages are just as strong. These include:
- Faster access to their cash – No one wants to wait a day or more to have access to their paycheck. When using direct deposit, in most cases funds are available for use the same day they are deposited
- Convenience – With direct deposit, employees can forgo the lunchtime trip to the bank to deposit their check. It also means that on payday if an employee is sick or on vacation, they will still be paid on time
- Better control of where funds go – Employees have the option to choose where their paycheck goes. While workers can choose to have their entire check deposited into a checking account, they can also have funds deposited into several different accounts, giving them better control over their money
- No more lost checks – There’s nothing worse than getting paid and then losing the check on the way to the bank. With direct deposit, employees won’t have to worry about getting another check reissued
Though there’s much to like about this payment method, businesses may want to consider a few things about direct deposit before setting it up.
Why do employees prefer having direct deposit for their paychecks?
“Employees value direct deposit because it is a convenient and effortless way to receive funds. With direct deposit, there is no need to safeguard physical checks and spend the time and effort cashing or depositing them at a bank or credit union. It’s just a quick, hassle-free way for individuals to get access to their money.”
— Tom Brock, CPA and financial professional
Are there any disadvantages to direct deposit?
While the advantages are numerous, offering direct deposit has some drawbacks that employers should be aware of.
- Additional costs – There are costs involved in offering direct deposit. These costs can include setup fees, which range between $50 to $149. There may also be per transaction fees which will vary depending on the financial institution you work with. That said, it could be thought of as an investment because you’ll likely free up time spent on administrative tasks generating paper checks (and save money on the materials that need to be printed)
- The need for increased security – In our always-connected world there’s always the possibility that digital evil-doers will get in the way. Before you set up and electronically transmit employee payroll information, you’ll want to make sure that your system’s security is bulletproof
- Personal choice -No matter how convenient direct deposit may be, some employees prefer a paper check. Their reasons may vary and include safety concerns, or some may simply not have a bank account where an employer can deposit their funds. Before starting direct deposit, you may want to check with employees to see what their preference is
Now that we have what some may think of the downside to paying employees this way, let’s find out if there are rules that need to be followed.
Can you require employees to get paid by direct deposit?
In some cases, the answer is “yes.” For instance, 31 U.S.C. 3332 requires that all federal payments to employees be delivered by direct deposit. This includes both paychecks and any related benefits, with the exception of IRS tax refunds.
In addition to federal employees, there are several states that allow employers to make direct deposit mandatory. While some states allow employers to make direct deposit mandatory, there are some noted exemptions to this rule.
Direct deposit benefits your employees and your bottom line
Using direct deposit gets your employees paid faster and on time, eliminating time-consuming check runs and check distribution. In addition, outstanding checks will no longer need to be tracked, nor will stop payments or manual checks have to be issued. Direct deposit can also have a positive effect on employee productivity, since it cuts down on visits to the bank to deposit checks.
On the flip side, direct deposit can also save employers money, since purchases such as check stock, printer ink, and envelopes will no longer be needed. Using direct deposit also allows better money management for employers. It’s always clear exactly when funds will be withdrawn, rather than waiting for money to clear the bank as checks are deposited.
If you have questions about setting up direct deposit or how it works, our team is here to help.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.