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How Does Direct Deposit Work?

September 21, 2010 | PrimePay Business and Experts Blog | 10 Comments

how direct deposit worksDid you know that 3 out of 4 employees who are offered direct deposit use it as the way to receive their payroll funds?  Ninety-seven percent of those that use direct deposit are very satisfied with it.  Direct deposit is an easy, secure and convenient way for employees to receive their money. 

Direct deposit also benefits the environment since employees won’t receive a paper check to cash.  According to the NACHA sponsored website... electronicpayments.org... each year, checks use more than 674 million gallons of fuel and add 3.6 million tons of carbon dioxide to the environment as they travel through the payment cycle.

5 Steps for Implementing a Direct Deposit Program
In just 5 simple steps, you can set up your employees to receive their paychecks through direct deposit.  When you work with a payroll services provider, most of these steps are handled for you.  In this example, we’ll assume you are working with a payroll company for your payroll processing.

  1. Sign Up for Direct Deposit:  Your employees will need to fill out a Direct Deposit Authorization form which your payroll company will send to you.  This form gives your employees the opportunity to have all their payroll funds deposited into one bank account or to have their money spread out into multiple accounts.  These accounts can be checking, savings or another type of account such as a money market account.  Employees will need to attach a copy of a voided check so the bank’s routing number and the employee’s account number can be verified.
  2. Send a Test File:  Your payroll provider may send a test deposit through to make sure the routing and account numbers have been entered correctly.  This test is called a ‘pre-note’ and is sent through with a zero dollar amount.  If there are any problems with the test, the employee’s financial institution will contact the employer about any necessary changes.  Those changes will need to be submitted to your payroll company.
  3. ACH File is Sent:  Each pay period, when you submit your data to your payroll provider for processing, they will send an ACH file to your company’s financial institution for the amount of the direct deposit.  This ACH transmission is usually processed at least 2 days prior to the payday or payment date.
  4. Payroll Funds are Available:  On payday, the company’s financial institution will debit the business’s payroll account for the total dollar amount of direct deposit transactions that were on the ACH file.  Simultaneously, the financial institutions that receive the transactions for your employees will credit their accounts and accept the direct deposit funds.  Employees who receive their pay through direct deposit have immediate access to their funds on payday.
  5. Pay Statements are Provided:  Since employees are receiving their payroll checks electronically, you may still need to provide them with a paper or electronic pay statement.  The rules on this vary by state.  This was discussed in one of our previous blog postings… What States Require Printed Pay Statements?

    To stay with a paperless and eco-friendly payroll, you can provide your employees with online pay statements.  An online pay statement provides employees with the same information normally seen on a paper statement such as gross and net pay, taxes withheld, year-to-date totals and accruals for vacation and personal time.  Check out our blog posting from earlier this year… Reduce Identity Theft with Online Pay Statements.

Download the White Paper… Direct Deposit: A Simple, Safe, and Smart Solution for Small and Medium-Sized Businesses

Download a Checklist for Implementing & Executing Your Direct Deposit Plan


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If my payday is Saturday and it gets process on Friday,will funds be available on payday or until Monday?

Cecy... it depends on a number of factors including which banks are handling the transactions... meaning your bank, your employer’s bank and/or the processing bank if your employer uses a payroll service. If the check is dated for a Saturday, the funds would most likely not post to your account until Monday at the earliest. And it could even be Tuesday depending on the bank. It is best to check with your employer as well as with your personal bank to see when the funds would be available.   

We get paid twice a month and we just implanted a plan to got to direct deposit. So we got paid before DD on the 15th and the 31st of the month. How would DD work with twice a month?

Stephanie... assuming your employer continues to pay you on the 15th and the 31st of the month, nothing would change with the dates that you receive your paycheck. The only difference with direct deposit would be that instead of you receiving a paper paycheck on the 15th and the 31st, the amount of your paycheck would be electronically deposited into your bank account. That way you don't have to go to the bank to deposit your check. The funds are already there. If you have any additional questions on direct deposit, please let us know.

Lets say I have a chase high school checking account, to have no fees, one of the options is to have a direct deposit monthly. If I put in, let's say $50 a month, does that count as direct deposit? Does it have to be a deposit from work ? I have no job, so idk if it would work for me

I get paid on the 15th and the last day of the month. When our payday falls on a Saturday or Sunday, funds become available as of midnight the Friday prior.    I am wondering about the very few times when payday is Monday. With the schedule I mentioned above, when do you think the "Monday" funds will post?

just curious if payday is on a sunday what day will we get paid

If the payday, meaning the actual check date is a Sunday, the funds will not be posted until Monday. Depending on the bank and the size of their ACH department (the department at the bank that handles electronic money transfers), it could be as early as 12:01 am on Monday when the funds are posted, but that is controlled by the employee’s bank. If the employer always has pay dates on a Sunday, then the employee will always have the funds Monday.    It is best to remember that when funds are posted to a bank account, there is a difference between seeing the funds in the account and actually having access to them where some banks are concerned. So an employee may see the credit on Sunday in some cases, but not have access to the money until Monday.     If the pay date happens to fall on a Sunday at different times throughout the year, the employer can elect to move the pay date back to the last business day (Friday). That date change is an employer’s call. Depending on state laws, some employers could even move the pay date to Monday.    

My question is, will my company give me a card of some kind?

Kimberly,    If you have a bank account and your company uses direct deposit, they won't need to issue you a paycard since your pay would be deposited into your account at the bank. If you don't have a bank account and your company wants to stay with an electronic payroll (like with direct deposit) versus printing checks, then they would issue you a paycard which you could use the same way you would use a credit or debit card. Your employer would transfer the money you would normally receive through a paper check on payday to the paycard instead.

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