How to Set Up Direct Deposit
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 everybody.
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.
Automatic transactions: When you receive funds via 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 goes out.
Frequently used: Direct deposit is increasingly popular, and tens of billions of ACH payments take place every year. 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). Employers may also make it difficult to receive wages by check.
Why Use Direct Deposit?
There are several reasons for both businesses and consumers to use direct deposit:
- 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.
- No mail or paper. With electronic payments, you don’t need to print checks or pay to mail them. Payees don’t need to wait on the mail or get checks to the bank (although remote deposit makes depositing checks easier). Payments don’t get lost as long as you set them up correctly the first time.
- 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.
- Security. Nobody can steal a check, alter it, and attempt to cash it. The funds move from one checking account to another.
- Cost. It’s generally free to receive payments, and sending funds by ACH is often less expensive than other options. You won’t go through checks, envelopes, or postage as quickly.
- Faster pay. Sometimes payees get paid sooner by direct deposit, with deposits arriving in checking accounts a day or two earlier than paper checks arrive at other employees’ homes. Plus, the funds are available for spending, and there’s no need to deposit the check and wait for it to clear.
How to set up Direct Deposit
To receive payments electronically, you’ll need to provide bank account information to the organization that is paying you.
They may require that you use a particular form (ask for a "direct deposit form") or you might be able to just provide a voided check. In some cases, you'll provide your account information online.
To send payments electronically, you’ll 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 using. Gather information about your payees, and include disclosures relevant to local and federal laws while setting up direct deposit.
To receive payments, you’ll need to provide the details below to the organization that will pay 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 — it doesn’t have to be your local branch)
- Name(s) of account holders listed on the account
You can find most of that information on any personal check, or 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. Note that your bank routing and account numbers are sensitive information. 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.
Other types of payments: Direct deposit isn’t just for wages.
- 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: After 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 ww.SSA.gov.
- 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 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 that money. To provide direct deposit instructions, use the Refund section on Form 1040 Line 76, or Form 1040EZ Line 13.
Now that you know how easy it is to receive payments electronically, you might want to start sending payments the same way. You, as a consumer, can use the same technology to avoid using checks, paying for postage, and getting bills into the mail on time.
It’s always a good idea to check your accounts periodically to find errors and signs of identity theft. As you start sending and receiving electronic payments, it’s wise to check in on your accounts more often – at least until you figure out how everything works. If you’re switching from a paper-based check register, it’ll take some getting used to, but you can continue to balance your accounts as you’ve done in the past.
It's also a great idea to set up alerts so you can receive an email or text message when something happens in your account. For example, you can get notified whenever there's a deposit or withdrawal, so you’ll know when payments arrive.