- What Is Direct Deposit?
- How Does Direct Deposit Work?
- Who Offers Direct Deposit?
- How to Set Up Direct Deposit
- How Long Does Direct Deposit Take?
- Uses and Benefits of Direct Deposit
- Independent Contractors
- Social Security Benefits
- Child Support
- Tax Refunds
- Paying Bills
- Is Direct Deposit Safe?
- Direct Deposit vs. Check
- Reasons to Make the Switch
- Frequently Asked Questions (FAQs)
Over the past 20 years, direct deposit has gone from being a perk to the default for most workers. But just because direct deposit is ubiquitous doesn’t mean everyone knows all the ins and outs of this payment method. So it’s a good idea to make sure you understand just what you can expect and how you can get the most out of it.
Here’s everything you need to know about using direct deposit.
What Is Direct Deposit?
Direct deposit is a fully automated method of handling transactions. When receiving a direct deposit, the payer issues an electronic payment that is automatically transferred into the payee’s checking account. There is no need for a physical check or for either party to visit the bank for the money to transfer.
This payment method has become very common in recent years, with nearly 94% of U.S. workers receiving their paychecks via direct deposit, according to the American Payroll Association’s 2020 Getting Paid in America Survey. Since direct deposit occurs automatically, it is more convenient for the employee, who can count on their paycheck arriving on payday without having to lift a finger, and more economical for the employer, who does not have to spend money to print and distribute paper checks.
How Does Direct Deposit Work?
Here’s how the direct deposit process works:
An employer starts by collecting the banking information—including bank account number and bank routing number—of its employees and vendors. This is part of the information that your employer likely gathered from you during your onboarding process after you were hired.
Let’s say this employer makes payroll payments on the 15th and last day of every month. Generally, one or more business days prior to payday, the company will send its payroll instructions to its bank, which then passes that information to the Automated Clearing House (ACH). The ACH operator sorts the ACH entries and ensures that each instruction is routed to the correct financial institution for each employee’s paycheck.
Upon receiving the ACH instructions, the employees’ banks then process the payment and credit the employees’ accounts with the necessary funds.
Who Offers Direct Deposit?
Many people associate direct deposit with payroll. After all, switching over to an all-electronic system saves employers both money and time, so that is where most people first see direct deposit offerings. However, you can sign up for direct deposit payments from more than just your employer.
In particular, the U.S. government prefers to pay citizens via direct deposit rather than paper checks. Since 2013, all Social Security benefits have been paid via direct deposit or a prepaid debit card. Similarly, you can choose to have your tax refund electronically deposited into your bank account rather than wait for a paper check, which can take up to six weeks to arrive.
In addition, many private companies, independent vendors, utilities, leasing agents, charities and other organizations offer direct deposit both as payers and payees. It is entirely possible that you can eliminate nearly all paper checks from your financial life by using direct deposit.
How to Set Up Direct Deposit
The process for setting up direct deposit is basically the same, no matter the payer. Here’s the process you will follow to get your own direct deposit payments:
- Fill out the direct deposit form. Your employer (or other payer) will ask you to complete a direct deposit form that will ask for several personal details, including your name, address, Social Security number and signature for authorization of the direct deposit.
- Include your account information. In addition to the above information, the most important data on the direct deposit form is your bank or credit union account information. Specifically, you will need to provide your bank or credit union routing number and account number, or else your employer will not be able to initiate the direct deposit.
- Deposit amount. Usually, the deposit amount equals the amount of your check. However, you may have the option—for example, with a paycheck—to deposit a percentage into your checking account and a percentage into your savings.
- Attach a voided check or deposit slip. Though you generally provide your account information on the direct deposit form, you will also often need to attach a voided check or deposit slip to ensure that the payer is connecting to your correct bank account.
- Submit the form. Considering how much sensitive information is included on a direct deposit form, it’s important to take care when submitting the form. If you work in a traditional office, it’s a good idea to hand this form directly to your payroll department. If you are submitting such a form remotely, use a secure file transfer service, rather than simply emailing it.
How Long Does Direct Deposit Take?
The big selling point of direct deposit is the time it saves you. This process means you don’t have to make a trip to the bank every time you get paid.
But exactly how fast is this kind of payment? The actual time frame for the money to hit your account depends somewhat on where the money is coming from.
To start, the ACH transfer process can sometimes take up to four business days. However, employers will generally initiate the ACH transfer far enough in advance to ensure that the money shows up in the employee’s bank account on payday.
Many employees can expect payroll direct deposit to arrive in their account at midnight the day before the pay date. You may receive your money well before you arrive at work on payday. This is true even if you are out of town or otherwise unable to get to work on payday, since the direct deposit is automatic and requires no input on your part.
Payments from the federal government are similarly systematized so that beneficiaries can know exactly when to expect their payments. For instance, Social Security benefits arrive in your account on the second, third, or fourth Wednesday of each month, depending on your birthday. (If a payment date falls on a national holiday, then your benefits are deposited the business day prior to the holiday.)
For other types of direct deposit, you can generally expect the funds to arrive within one business day of payment, although they can sometimes arrive the same day. And since direct deposit is not usually subject to a bank hold, you can begin using the money as soon as it arrives in your account.
Uses and Benefits of Direct Deposit
In addition to payroll, direct deposit can also be used for the following purposes.
An independent contractor is a self-employed individual who performs “work for hire” for a client. The client is not legally an employer and therefore is not required to withhold taxes from the contractor’s pay. Additionally, the client pays the contractor upon receiving an invoice, rather than on a regular payroll schedule.
Traditionally, independent contractors are paid via check, but setting up direct deposit for such workers can be mutually beneficial for the workplace and the contractor. It ensures that the contractor’s payments, which tend to be irregular, are at least transferred directly rather than requiring a wait for the check to arrive, be deposited and then cleared. Paying contractors via direct deposit also reduces payroll costs for the employer, as it reduces the need for cutting checks for payment.
Social Security Benefits
As of 2013, all Social Security benefits are paid to beneficiaries via direct deposit. By switching to a direct deposit system, the Social Security Administration estimated a savings of $120 million per year, adding up to $1 billion in savings to taxpayers over the past decade.
Unfortunately, the direct deposit system does not work for beneficiaries without a bank account. Such beneficiaries receive their payments through a prepaid debit card.
Direct deposit can be a simple, convenient and secure way to receive child support payments. Generally, parents receiving court-mandated child support will sign up for direct deposit through their state. With a direct deposit option, there is no waiting for paper checks in the mail, and there are no fees associated with receiving the payment. Direct deposit also makes it easy to track child support payments, as you can easily track and search for payments via your bank’s online portal.
According to the IRS, the fastest way to receive a tax refund is by filing electronically and opting for direct deposit. More than nine out of 10 refunds that combine e-file with direct deposit are processed within 21 days, while paper checks can take much longer. In addition, the IRS will allow taxpayers to direct deposit their refunds into upwards of three separate bank accounts, which means you can easily place your money exactly where you want it to go, without lifting a finger.
Some recurring bills, such as rent or utilities, can be paid via direct deposit. Generally, banking customers will set up this kind of direct deposit with their bank via the institution’s “bill pay” option. This is often the only way to set up such a direct deposit, since it may be difficult otherwise to get the direct banking information for your recurring bills.
Is Direct Deposit Safe?
Safety is a common concern with direct deposit. But this method of payment is generally one of the safest methods of receiving payment.
Direct Deposit vs. Check
Read more: Bank of America Checking Accounts | Bankrate
Unlike a direct deposit, cash or a paper check can be lost or stolen, and someone can fraudulently cash a check not made out to them. If you lose a paper check, the issuer will often charge you a fee to reissue it. If your check is stolen, the process to get your payer to issue a stop payment can be arduous and expensive.
Direct deposit does not have any of these potential safety issues. Since the money transfers automatically from the payer’s account to your account, it cannot be lost or stolen. In fact, the Social Security Administration boasts that not a single payment via direct deposit has been lost since 1976, when beneficiaries were first offered the option to receive direct deposit.
Ultimately, the biggest potential safety issue with direct deposit occurs when you are setting it up. Making certain that your bank account information goes to the correct party in an organization you trust—via a secure channel—can help ensure the safety of your direct deposit.
Reasons to Make the Switch
If you are still receiving paper checks as payment, there are a number of reasons to consider making direct deposit your payment method of choice.
Automated payments are much more convenient than paper checks. Even with mobile check deposit technology’s making a trip to the bank unnecessary for deposits, you are still stuck waiting for your paper check to arrive before you can put it in your account. In addition, a deposited paper check may need extra time before it clears your account. Your direct deposited funds will be available immediately.
Going digital by signing up for direct deposit also saves money and resources. The payer does not have to cut paper checks and mail them, which reduces payroll expenses and is better for the environment.
This reduction in paper waste is also beneficial for the payee. Rather than having to hold on to years’ worth of old paper pay stubs in an overflowing file cabinet, your electronic records can be digitally stored.
Digital payments are also more secure than paper, since they cannot get lost in the mail, misdelivered or fraudulently cashed. So long as you are cautious while initially setting up your direct deposit, you can trust that this method of payment will not go awry.
Finally, direct deposits quickly complete transactions. Rather than waiting for paper checks to arrive, be deposited and clear the bank, a direct deposit gets the money to the recipient quickly and efficiently, meaning transactions are cleared sooner.