Set Up Direct Deposit

Direct deposit of payroll is a method of paying employees where an employee's pay is electronically "delivered" to an indicated bank on or before each payday. The employees receive a stub listing the gross amount of pay, any withholding or deductions, and the net amount of the check. Many businesses offer employees the option of direct pay deposit that automatically deposits paychecks into an employee's checking and/or savings account in participating banks.

Why use direct deposit? Automatic deposit of employees' wages directly into their bank accounts can streamline payroll operations, increase productivity and save money for your business. A direct deposit transaction can cost as little as four or five cents to process, versus 30 to 50 cents for a check. In a direct deposit program, employee pay is deposited right into the employees' personal accounts, eliminating costly steps in the payroll process, including the need to stop payment on and reissue lost or stolen checks. Direct deposit means fewer check processing charges and reconcilement maintenance fees from the employer's financial institution.

How do I set up direct deposit? First, determine what the state laws are where you employ individuals. Most states require that direct deposit be voluntary and prohibit you from barring individual employees from participating in direct deposit programs. Some also require that you provide a statement of wages so employees can see what was deposited in their accounts and what deductions were made. You may set up a direct deposit relationship with a bank of your choice or the employee's choice. Call those institutions that you are interested in dealing with and have them spend some time telling you about their program. Some may require a certain number of participants and some may require that you have electronic capability with the Automated Clearing House (ACH).

If you don't have ACH access, some institutions will allow you to send in one deposit check and then they will deposit the various pay amounts into various accounts as you specify. Be sure to ask about this option if it interests you.

Communicating the direct deposit program. When you communicate your direct deposit program to your employees, be sure to highlight the benefits of direct deposit for them and have a form available for employees to elect direct deposit or to modify their choice.

In order for your company to offer Direct Deposit to your employees, they must sign an authorization form. You should keep this form in your permanent employee records. A voided check (not a deposit slip!) should be attached to the authorization form. From the voided check, you will need to use two sets of numbers; the Routing/Transit number and the bank account number. You will also need to know if the account is a checking or a savings account.

When an employee begins to use Direct Deposit for the first time or if a bank or bank account changes, a prenote needs to be generated. A prenote is a zero dollar amount transaction that goes through the banking system to make sure that everything is correct. Prenotes are required by Federal regulation.