How to Set Up Direct Deposit

Image by Emily Newman © The Balance 2019 

When sending or receiving payments, you have several options. You can use cash, checks, or electronic payments, and most organizations prefer that you use direct deposit. In fact, sometimes you’re required to use direct deposit. Fortunately, it’s a safe and inexpensive payment option for all involved parties.

What is Direct Deposit?

Direct deposit is an electronic payment from one bank account to another. For example, money moves from an employer’s bank account to an employee’s bank account, although there are several other ways to use direct deposit. To make transfers, banks use the Automated Clearing House (ACH) network, which coordinates these payments among financial institutions. Here's a look at how these work.

Automatic transactions: When you receive funds via a direct deposit, your account balance will automatically increase when the payment arrives. You don’t need to accept the payment or deposit funds to your account, which would be required if you received cash or a check. Likewise, when you pay with direct deposit, your checking account balance will automatically decrease when the payment leaves your bank.

Frequently used: Direct deposit has become increasingly popular because it does away with unnecessary paperwork, and billions of ACH payments take place every year. For example, some branches of government, such as the Social Security Administration, no longer print checks. Instead, they require that you receive funds electronically (either through direct deposit or via a reloadable debit card). Even small employers enjoy the ease of making payments to not just employees but vendors.

Reasons to Make the Switch

There are several reasons for both businesses and consumers to use direct deposit including:

  1. Automated deposits: When receiving funds by direct deposit, the funds are added to your account without any action required on your part. Whether you’re out of town or too busy to make it to the bank, your account will be credited.
  2. No mail or paper: With electronic payments, you don’t need to print checks or pay to mail them. Payees don’t need to keep checking their mailbox. Also, payments don’t get lost as long as you set up the process up correctly the first time.
  3. Electronic records: Everybody has a record of the payment, and it’s easy to see what happened in your checking account’s transaction history. You don’t need to manually write down details about a payment.
  4. Security: Nobody can steal a check, alter it, or attempt to cash it. The funds seamlessly move from one checking account to another.
  5. Cost: It’s generally free to receive payments, and sending funds by ACH is often less expensive than other options—including paying accountants. Also, you don’t go through checks, envelopes, or postage as quickly.
  6. Faster pay: Sometimes payees get paid sooner, with deposits arriving in a person's checking account a day or two earlier than a paper check arrives in the mail. Plus, the funds are available for spending immediately, and there’s no need to deposit the check and wait for it to clear.

Setting up Direct Deposit to Receive Payments

To receive payments electronically, you need to provide bank account information to the organization that is paying you. They may require that you use a particular form (such as a direct deposit form) or you may be able to just provide a voided check. In some cases, you'll need to provide your account information online.

To receive payments, you’ll need to provide the details below to the organization that will be paying you.

  1. Bank account number
  2. Routing number
  3. Type of account (typically a checking account)
  4. Bank name and address—you can use any branch of the bank or credit union you use
  5. Name(s) of account holders listed on the account

You can find most of that information on any personal check. The routing number usually appears on the front of the check at the bottom left side. The account number will be just to its right. Alternatively, you can call your bank and ask for direct deposit information. Details are often available online as well, but it's best to log in to your account for accurate information.

It's worth noting that your bank routing and account numbers are sensitive information, so don’t provide those numbers to anybody unless you truly trust them.

Setting up direct deposit can take anywhere between a few days and a few weeks. Ask your employer what to expect so that you don't look for your payments in the wrong place.

Once everything is set up, your payments will arrive in your bank account automatically. Be sure to check your available balance in your checking account before you try to spend any of that money. Government payments like tax refunds and Social Security benefits are typically available immediately. Other payments might be held for a few days, but payments from employers are generally available immediately.

To Send Payments

To send payments electronically, you need a relationship with a financial institution that provides ACH payments. Business bank accounts, popular bookkeeping services, and payroll providers may offer that service—so ask the vendors you’re already working with. Next, gather information about your payee, and include disclosures relevant to local and federal laws. If you're unsure about the regulations check with your accountant.

Other Types of Payments

Direct deposit is not just for paying employee wages, as is evidenced by the following uses:

  • Independent contractors: Your business can pay independent contractors with direct deposit. Your bookkeeping software or current payroll provider should be able to accommodate those payments fairly easily, although the cost may be higher than the cost to pay W-2 employees.
  • Social Security Benefits: Starting in 2013, the Social Security Administration required that beneficiaries receive payments electronically. To sign up for electronic payments, visit the U.S. Treasury’s Go Direct website. You can also change existing direct deposit instructions at
  • Child support and maintenance: To receive child support and maintenance payments electronically, contact your state’s department responsible for handling those payments.
  • Tax refunds: You’ll get your money faster if you use direct deposit for tax refunds. Tell your tax preparer that you prefer direct deposit, or provide your bank account information to the government when you file your returns. You can even split your refund so that the money goes into several accounts, making it easier to save some of your refund money. To provide direct deposit instructions, use the Refund section on Form 1040 Line 20b-d.

Consumers Can Use the Same Technology

Now that you know how easy it is to receive payments electronically, you might want to start sending payments the same way. As a consumer, you can use the same technology to avoid using checks, paying for postage, and getting bills into the mail on time.

To do that you can either set up online bill payment with your bank or set up ACH payments with whoever you need to pay.

It's also a good idea to set up alerts so you can receive an email or text message whenever there's a deposit or withdrawal in any of your accounts.

It’s always a good idea to check your bank accounts periodically to find errors and signs of identity theft before starting the process. Also, as you start sending and receiving electronic payments, it’s wise to review your bank accounts more frequently—at least until you figure out how everything works. If you’re switching from a paper-based check register, you'll have to adjust to the change of seeing everything online, but there's no reason you can't continue to balance your accounts as you’ve done in the past. 

Article Sources

  1. Nacha. "What Is ACH?" Accessed Jan. 9, 2020.

  2. Nacha. "ACH Network Volume Statistics." Accessed Jan. 9, 2020.

  3. Social Security Administration. "Social Security Direct Deposit." Accessed Jan. 9, 2020.

  4. Consumer Financial Protection Bureau (CFPB). "Should I Enroll in Direct Deposit?" Accessed Jan. 9, 2020.

  5. Citizens Bank. "How to Set Up Direct Deposit." Accessed Jan. 9, 2020.

  6. Consumer Financial Protection Bureau (CFPB). "I Get My Paycheck by Direct Deposit. When Can I Withdraw the Funds?" Accessed Jan. 9, 2020.

  7. Commonwealth of Massachusetts. "Learn About Your Options for Receiving Your Child Support Payment." Accessed Jan. 9, 2020.

  8. The Attorney General of Texas. "Direct Deposit." Accessed Jan. 9, 2020.

  9. Internal Revenue Service (IRS). "Get Your Refund Faster: Tell IRS to Direct Deposit Your Refund to One, Two, or Three Accounts." Accessed Jan. 9, 2020.

  10. Internal Revenue Service (IRS). "Form 1040." Accessed Jan. 9, 2020.

  11. Consumer Financial Protection Bureau (CFPB). "How Do Automatic Debit Payments From My Bank Account Work?" Accessed Jan. 9, 2020.