When it comes to compensating employees, direct deposit has become so prevalent for many businesses that it’s practically a given—and for good reason. Payroll direct deposits are faster, cheaper, and more secure than checks, which are nearly obsolete in many parts of the world.
If your business hasn't yet adopted direct deposits but is considering it, the good news is that setting them up has never been easier. In this guide, we’ll explain the simple steps to ensure your employees receive their payments quickly, accurately, and on time.
What is a direct deposit?
Direct deposits are payments that go directly into the payee's bank account via electronic fund transfers (EFTs), which are also commonly used for government benefits like Social Security and Medicare, as well as tax refunds. This method is faster, less costly, and more secure than physical checks, making it more convenient for payees.
Direct deposit practices for employee paychecks can vary across the United States and globally. Some U.S. states allow employers to mandate direct deposits, while others preserve the right for workers to receive physical checks if they prefer. Direct deposits also simplify compliance with local wage and tax regulations, making them an efficient solution for both domestic and global payroll operations.
Setting up a direct deposit system can take anywhere from a few days to a few weeks and can be done manually or by partnering with a payroll provider. You'll need to gather substantial information from your employees first, but a comprehensive provider like Oyster can offer a portal to streamline the process.
How do direct deposits work?
An automated payroll system will execute the transfer of direct deposit funds between the sender's and receiver's financial institutions on a set schedule, such as biweekly or semimonthly. The sender's account is debited, and the receiver's account is credited with the same amount.
Several steps ensure funds are transferred securely, and while delays can occur, affecting how long the direct deposit takes, the process usually runs smoothly. Here’s a breakdown:
- Authorization: The recipient provides their routing and bank account numbers to authorize the transfer.
- Initiation: The payer enters the account information and payment amount into their payroll system.
- Transmission: The payment information is sent to the Automated Clearing House (ACH), a U.S.-based network that handles large volumes of transactions.
- Processing: Within one to two days, the ACH typically routes domestic payments from the payer to the payee. For international payments, the process may involve the local equivalent of the ACH in the payee's country and may be facilitated by an employer of record (EOR).
- Transfer: The payee's bank receives the funds, credits the appropriate account, and makes them available for use.
- Notification: Optionally, the bank notifies the payee that the funds have been received.
For example, let's say an employee opts to receive compensation via direct deposit:
- The employee provides their bank account details to their employer via a direct deposit form.
- On payday, the employer processes payroll and sends the payment information to their bank.
- The bank forwards the payment details to the ACH.
- The ACH processes the transaction within one to two business days and routes it to the employee's bank, possibly via another network for international transactions.
- The employee's bank credits the employee’s account upon receiving the transaction.
- The bank notifies the employee via email or mobile alert to confirm the deposit.
Payroll deductions
An efficient payroll system will automatically manage direct deposit transactions and various other aspects of employee compensation.
For example, salaried employees' wages in the U.S. are subject to standard payroll deductions, which can vary by state. In addition to mandatory deductions, employees can choose optional deductions, such as additional retirement contributions and various health insurance plans. A robust payroll system will balance all these aspects, saving time that would otherwise be spent manually handling the information.
Benefits of direct deposit for employers
Employers in many countries already use direct deposits for payroll due to its numerous advantages over paper checks, including:
- It helps avoid fraud: Paper checks can be stolen or lost in the mail. Direct deposits eliminate this risk by avoiding physical handling.
- It's cheaper: Direct deposits save on ink, paper, and postage costs.
- It optimizes resources: A quality automated payroll system processes direct deposits efficiently, reducing manual workload.
- It streamlines record keeping: Digital records are more accessible to search and maintain and require less physical storage space than paper records.
- It's faster: Physical checks need to be printed, transported, and deposited, and sometimes they take days to clear. Direct deposits eliminate these steps, saving time for both employers and employees.
How to set up direct deposit in 6 steps
1. Choose a direct deposit provider
Select a reliable service provider, just as you would a doctor or bank. They’ll handle important transactions, so research thoroughly to find a trustworthy partner. If you don't already have one, now’s the time to set up a business bank account.
2. Set up the process
Sign your bank's terms and conditions and provide the necessary information, which typically includes banking details, company information, and previous financial statements.
3. Gather information from employees
If your system supports an employee portal, send the link; otherwise, distribute deposit forms. Collect the following information:
- Full name and address
- Bank account information, including routing and account numbers and account type
- Any optional breakdowns (e.g., 5% in savings and 95% in checking)
- Signature for authorization
4. Enter information into your system
Treat this sensitive information with care. Verify that all employee details are accurate. If the data was collected manually, send it to your payroll provider. If it was collected automatically, your system has already saved you time.
5. Create and distribute a schedule
Determine your payroll schedule, whether biweekly, semimonthly, or monthly, and notify all parties. Allow ample time for adjustments, especially if they differ from the previous schedule. Account for holidays and other events that might affect pay dates.
6. Run payroll with direct deposit
Ensure sufficient funds are in your account to cover all payroll expenditures. Execute the payroll transfers and confirm success. Double-check that all information is accurate and up-to-date. If possible, run a test transfer to ensure everything works smoothly.
Payroll is more efficient with Oyster
Oyster's comprehensive platform streamlines the complexities of hiring, onboarding, calculating salaries globally, and administering payroll, ensuring compliance in over 180 countries. With payouts in more than 140 currencies and over 99% accuracy, Oyster delivers seamless and reliable payroll operations, giving you peace of mind and more time to focus on growing your business.
Discover how Oyster can revolutionize your payroll process, no matter where you operate.
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About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.