When sending or receiving payments, you have several options. Among those options, you can use cash, checks, or electronic payments. Most organizations prefer that last choice—otherwise known as a direct deposit. In fact, you’re sometimes 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 may move from an employer’s bank account to an employee’s bank account, although there are several other ways to use direct deposit. To complete transfers, banks use the Automated Clearing House (ACH) network, which coordinates these payments among financial institutions.
Fully 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.
Common Payment Method
Direct deposit has become increasingly popular because it does away with unnecessary paperwork. Billions of ACH payments take place every year. For example, branches of government like the Social Security Administration, no longer print checks. Instead, they require that you receive funds electronically—either through a direct deposit to your checking account or through a reloadable debit card. Employers of all sizes enjoy the ease of making payments to both employees and vendors through direct deposits.
Reasons to Make the Switch
There are several reasons for both businesses and consumers to use direct deposit.
Automated Deposits Are Convenient
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.
Going Digital Saves Money and Resources
With electronic payments, you don’t need to print checks or pay to mail them. This saves the business money while preserving resources associated with printing checks and transporting them. It’s generally free to receive payments, and sending funds by ACH is often less expensive than other options.
Electronic Records Won't Fill File Cabinets
With a direct deposit transaction, everyone has a record of the payment. It’s easy to see what happened in your checking account’s transaction history. That transaction will be there whenever you need to reference it. You don’t need to manually write down details about payments, save pay stubs in a file cabinet, or otherwise keep track of paperwork.
Digital Payments Are More Secure
Nobody can steal a check, alter it, or attempt to cash it when the payment is delivered digitally. The funds seamlessly move from one checking account to another. When it comes to getting the money from one bank account into another, direct deposits are among the most secure ways to complete the transaction.
Direct Deposits Quickly Complete Transactions
Those getting paid via direct deposit often receive their payment before those getting paid via paper check. The direct deposit may arrive in one payee's account before another payee receives a paper check in the mail. Even if they do arrive at the same time, the paper check payee will have to take the extra step of depositing the check and waiting for those funds 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 they may ask you to 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.
- Bank account number
- Routing number
- Type of account (typically a checking account)
- Bank name and address—you can use any branch of the bank or credit union you use
- 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.
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 the 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, as are payments from employers, though it depends on your bank. Other payments might be held for a few days.
Sending Payments With Direct Deposit
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 before you search for new resources.
Once you have a way to send ACH payments, you simply need to gather information about your employees. Include any disclosures required by local and federal laws in your communication with payees. If you're unsure about the regulations for your area, check with your accountant.
Other Uses for Direct Deposit
There are many uses for direct deposit, aside from receiving paychecks or paying employees.
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 www.SSA.gov.
Child Support and Maintenance
To receive or send child support and maintenance payments electronically, contact your state’s department responsible for handling those payments.
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 (Line 21b-d) on Form 1040. You can also split up your direct deposit among multiple accounts by using Form 8888.
It's 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.
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.
Check on Your Direct Deposits Periodically
Even after you've successfully received or sent direct deposits, it’s worthwhile to periodically check your bank accounts. That way, you'll catch any errors or signs of identity theft. 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.