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As a small business owner, you are responsible for many different elements of your operation. In addition to taking care of the ins and outs of managing your business, you also have to manage your employees, which includes paying them. If you’ve ever been employed at another company, you’re probably familiar with direct deposit. Direct deposit is a great way to make payday easier for both you and your employees.
When you set up direct deposit for your employees, your payroll process becomes fluid, simple, and you know that your employees will get paid on time. If you’re investigating the process as a business owner, you may not know exactly how to set up direct deposit for employees. Although it may seem daunting on the surface, it’s actually something that you can set up pretty quickly and easily. This step-by-step guide will not only show you how to set up direct deposit for your employees, but also explain the practice and the benefits it will provide for everyone involved in your business.
What is direct deposit?
At the most basic level, direct deposit is an electronic payment of funds from one bank account to another. As an employer, this means you’re transferring the appropriate funds from your business bank account to your employee’s bank account. On the other end of that transfer, therefore, direct deposit for your employee means they’re receiving an electronic payment (their paycheck), directly from your bank account to theirs.
Breaking it down even further, direct deposit is an ACH payment. ACH is short for Automated Clearing House, which is the U.S. financial network that oversees these types of transactions. The term ACH is the classification banks use to categorize these types of payments. An ACH payment, therefore, means that it is an electronic, automatic transfer of deposits between banks that are managed by the ACH. As you might imagine, in setting up direct deposit to pay your employees, you are automating the process, making it electronic, and removing the process of cutting physical checks or paying in cash.
How does direct deposit work?
If we look into the specifics of the direct deposit process even further, the steps involved look like this:
You, as the employer, initiate the direct deposit with your bank (we’ll explain more on exactly how to do this later).
Your bank will take any and all direct deposits, package them together, and send them in batches to the ACH, at regular, predetermined intervals.
The ACH will receive the direct deposit orders, and send them along to the banks of all of your employees.
Those banks will receive the orders and credit the accounts of your employees accordingly. When your employees account is credited, yours is then debited the corresponding amount.
This process generally takes one to two business days, according to the National Automated Clearing House Association (NACHA).
An important thing to note about this process is the exact timing can also depend on your bank, your employee's bank, which payroll software you use, and any national holidays that affect bank operations. Don’t worry though, your payroll software or bank will be able to help you plan out the payroll schedule and corresponding direct deposit schedule that works best for you.
Direct deposit cost
After going through the basics of how direct deposit works, you may be wondering how much it’s going to cost your business. This is an important consideration because as a small business, you have to create a business budget and pay close attention to your finances—especially where you’re spending your money.
The amount it will cost your business to use direct deposit depends on a few different factors. For example, one factor at play is who you use as your direct deposit provider. If you use a bank, the cost will depend on your individual bank.
Generally, banks charge a setup fee for direct deposit, ranging from $50 to $149 on average, according to the National Federation of Independent Business (NFIB). Some banks charge ongoing monthly fees for direct deposit, but most do not. Additionally, some banks charge various transaction fees. Your bank might charge a transaction fee each time your account is affected, which would be every pay period. They also might charge you for each employee’s deposit when you run your payroll. These fees range depending on the bank, the size of your business, and your direct deposit agreement. Again, the NFIB averages the fee range to about $1.50 to $1.90 per individual deposit.
If you use a payroll software as your direct deposit provider, or other software with payroll capabilities, any fees will depend on the individual software. Many software programs like Gusto payroll, Intuit payroll, and others, offer direct deposit services at no additional cost. With these platforms, the direct deposit service is included in the price, along with all the other benefits of the software.
How to set up direct deposit for employees: A step-by-step guide
Now that we’ve gone through what direct deposit is and exactly how it works, let’s go through, step by step, how you can set it up for your employees.
Step 1: Decide on a direct deposit provider.
The first thing you need to do when setting up direct deposit for employees is decide who is going to provide your direct deposit services. Essentially, this is the entity that will handle and house all of the information for both your business and your employees and will ultimately be the one taking the funds through the direct deposit process that we outlined above.
Generally, you have two options for direct deposit providers. You can work with the bank that houses your business bank account or work with a payroll software that has direct deposit functionality, as well as any other business, accounting, or HR software that has payroll and direct deposit capabilities. Either of these options will give you the ability to send payments electronically through direct deposit.
Step 2: Initiate the direct deposit setup process.
If you decide to set up direct deposit through your bank, you can talk to them directly for options, pricing information, and specifics for getting started. You can also set up direct deposit through your account’s online banking portal. Your bank will have you sign their ACH terms and conditions form, which means you’re agreeing to only send these payments to people who have given you approval to do so. We’ll talk about doing this in our next section. Your bank may also ask for recent financial statements, just to verify that you have the necessary finances in place to be setting up this process.
If you’re using a payroll software, on the other hand, much of what you need to get started will be integrated into the platform, and the information you provided when you started your account with that software will help. If you’re setting up in your payroll software for the first time and initiating direct deposit, then you’ll need to put in your business bank account information. This will be the account that your direct deposits will pull from.
Next, you’ll have to go through some sort of verification process (the exact nature of which will depend on your particular software). Essentially, this process could be something as simple as a verification email, just to confirm that you in fact, are the administrator setting this up.
Finally, your provider will do a test direct deposit and withdraw a small amount of money from your account. You will then verify this transaction with them to confirm the process is working.
Step 3: Collect information from your employees.
After initializing the direct deposit process with your chosen provider, your next course of action is to collect information from your employees. Whether you have 10 employees or 100, you’ll need them all to give you the same pieces of information to continue to set up direct deposit.
From your employees you will need:
Their bank account number
The bank account type (checking, savings)
The bank’s routing number
The bank’s name
In addition to these pieces of information, you’ll need your employees to sign an authorization form that says they give you access to transfer them funds (their paycheck) electronically. There are forms available that you can customize to your business and that allow your employees to provide all of these necessary pieces of information in one form.
If you use HR software that has employee logins, your employees can log in themselves and fill in the relevant information and give the direct deposit authorization directly in the software. In this case, the information will automatically connect to your payroll.
Step 4: Enter the employee information into your system.
Now that you’ve collected all the necessary information from your employees, you need to add it to your payroll. If your employees were able to enter the information themselves, as we discussed above, you don’t have to worry about this step.
You’ll input the information provided by your employees into your business accounting or other payroll software. The individual software you use should have documentation specific to this process, but essentially, you’ll be adding everything from the direct deposit authorization form into the system.
If you’re working through your bank, you will have to input the information into your bank’s online system. There are two ways you can do this:
First, you can upload a NACHA file. A NACHA file can be exported from your accounting software (with all of the relevant information) and uploaded through your bank’s online system. Your bank’s system will be able to read the file for all the information you need to start using direct deposit.
The second method is manual entry. If you have a small amount of employees or don’t have accounting software or software with a NACHA export, you can set up payroll batches in your bank’s online system. You’ll input all of the information for your employees given on their direct deposit authorization form and save it in the system. With this batch created, you’ll be able to send your payroll to them through direct deposit.
Step 5: Create a direct deposit and payroll schedule.
Once all the relevant information is in the system with your direct deposit provider and you’ve been through the authorization process, you should be ready to get started with direct deposit. You should know that direct deposit can take 7-10 days to get set up officially with your provider, so you should take this into account when deciding when to start direct deposit. You wouldn’t then want to start setting up direct deposit a few days before you intend to pay your employees.
Along the same lines, you should make sure that you’ve come up with a pay schedule and worked that schedule into your direct deposit plans. You may already have had a pay schedule set up, but you’ll want to double check with your bank or payroll services to make sure that your current schedule will be on track once you’ve set up direct deposit.
Don’t forget to communicate the schedule with your employees and payroll administrators. You’ll want to set a cut off date for your employees to submit hours or time cards so that you have enough time to review and then process payroll to go through direct deposit. Your payroll provider might have a cut off date for when your information needs to be submitted in order to run direct deposit.
Step 6: Run payroll.
Once you’ve got everything set up, and you’ve verified the direct deposit activation with your bank or payroll software, you’re ready to go. You can run payroll on the schedule you’ve determined, and your employees will receive their paychecks via direct deposit. From now on, every time you run payroll, your employees will automatically be paid by direct deposit. If any issues arise when you run your payroll or through the final steps of the process, your payroll provider should be able to help.
The benefits of direct deposit
As a small business owner with a long to-do list on a daily basis, you may be asking yourself why you should pay your employees through direct deposit. This is a great, valid question. There are benefits of setting up direct deposit for both you and your employees that will ultimately help your business in the long run.
Benefits of direct deposit for employees
One of the reasons that so many businesses, small and large, use direct deposit is because it’s not only beneficial for the business itself, but it’s also great for their employees. Here are a few of the benefits of direct deposit specifically for your employees.
Direct deposit is easy and timely.
For your employees, it only takes filling out some basic information for them to get set up into direct deposit. Every pay period, they’ll know the money will be coming directly into their bank account and they’ll know when it’s coming. With this predictability, they can better plan their own personal finances and they also don’t have to worry about going to the bank to cash a physical check.
Direct deposit is safe and reliable.
NACHA has processes and rules in place to ensure that the direct deposit process is as safe as possible. Furthermore, not only are the electronic payments safe going through ACH, but they also eliminate safety risks that would be associated with paper checks. Where your employees could lose or have their paper check stolen (which is a security risk for both of you), direct deposit eliminates this possibility. Additionally, since the payments are sent electronically, your employees (and you, as well) have a record of transaction. They can see their pay stubs online and access them at any time. If there ever is a problem, either party can easily refer to this record.
Ultimately, your employees can rely on direct deposit and know that their paycheck will be delivered safely, accurately, and on time.
Benefits of direct deposit for small business owners
As a small business owner, many of the benefits direct deposit offers you are very similar to the benefits for your employees. It’s a win-win for you both. Let’s check out some of the specifics.
Direct deposit gives you better control over your finances.
Finances are incredibly important as a small business owner, and even the smallest problem can cause a ripple effect for your business. With direct deposit, you’re given better control over your business finances in many ways. First, you know exactly when money is going to be taken out of your account every pay period. You don’t have to worry about a bunch of employees cashing their paychecks at random intervals. Using direct deposit, there is a system in place, so you can plan your finances around payment schedules.
In the same vein, just as it’s safe, convenient, and efficient for your employees, it’s the same for you as well. The payments themselves are safe for your business—you don’t have to worry about security issues like someone stealing or finding a lost paycheck from your employee that has important information about your business on it. This way, your finances are better protected with direct deposit.
Direct deposit saves you time, money, and hassle.
At the end of the day, direct deposit takes a load off of a lot of elements associated with being a small business owner. First, more than likely, you’ll be saving time and money (both of which are precious) when you use direct deposit instead of physical checks. Cutting physical checks is expensive and time-consuming, where after you set up direct deposit, the cost and time needed to run your payroll are relatively small.
In addition, you can very easily control your payroll system with direct deposit, and paying your employees becomes an automatic process of just clicking a few buttons. Even if you’re not in the office, or your office is closed, your employees will still get paid and you’ll have the financial predictability associated with that process. As your employees do, you’ll have easy access to payment and transaction records, which can certainly help with your financial processes. Just like it’s easy, convenient, safe, and efficient for your employees, these benefits extend to you as well—and your employees are happier, which is always a good thing for you.
Setting up direct deposit for your employees
Ultimately, whether you go through your bank or through a payroll software, setting up direct deposit for your employees is safe, relatively simple, and—in the long run will be extremely beneficial for your business. Once you’ve completed the steps in the process and got everything up and running, we’ll wager a guess that you won’t ever go back.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.