Benefits of direct deposit that all employers should know (plus frequently asked questions)

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.

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.

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.

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

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.

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.