Direct Deposit: What It Is, How To Set It Up And Its Benefits

In the past, you had to wait for your employer to give you a physical check on payday. Once you received the check, you had to drive to your bank, deposit the money and wait for it to clear your account.

This used to be the way millions of people got paid. Fortunately, direct deposit changed all of that. Once you enroll in direct deposit, the money is put electronically into your account with minimal effort on your part. Let’s look at how direct deposit works and how to set it up.

What Is Direct Deposit?

Direct deposit allows you to receive payment electronically to your bank account without needing to deposit a paper check. Many people receive their paycheck, tax refund or government benefit payments through direct deposit. Direct deposits go through the Automated Clearing House (ACH), which is the system agencies use to send payments.

How Does Direct Deposit Work?

To sign up for direct deposit, you’ll provide your employer with your banking information, including your bank’s routing number and your checking or savings account number. Before your scheduled pay date, your employer will initiate your direct deposit electronically through a payroll servicer or bank, and the money will show up in your account on your scheduled payday.

Direct deposit allows you to automate your finances — it saves you time since you don’t have to deposit a paper check at the bank. Since the funds are deposited electronically, you also don’t have to wait for the money to clear your account. Some financial institutions even offer access to your paycheck up to 2 days early.

How To Set Up Direct Deposit

If you’re getting ready to start a new job, your employer will likely want you to set up direct deposit. Fortunately, this is a fairly easy process — here are the steps you’ll take to make it happen.

1. Sign Up For An Account

If your employer is using a payroll service, you may need to sign up for an employee account with that payroll company. Once you set up an account, you’ll log in using your email address and the password you’ve created. You can use this account to see previous and upcoming payments and access and print pay stubs or your W-2.

2. Fill Out Personal Information

You may need to provide certain personal information when setting up your account, like your name, home address and Social Security number.

3. Provide Bank Information

You’ll also have to provide details about your bank and your account to set up direct deposit. For example, you’ll need to provide the name of your bank, the mailing address and the bank’s routing number. You’ll also need to provide your account number and the type of account. Some payroll providers will also ask for a voided copy of a check. 

4. Double Check And Submit

Double check that any information you provided is correct before submitting the form. If the routing or account information is incorrect, this could hold up your direct deposit and cause financial problems.

Benefits Of Direct Deposit

Direct deposit changed the way employees get paid, making the process more flexible and convenient. Here are the biggest benefits of direct deposit:

• Quick access to the money: Direct deposit provides faster access to your paycheck, so you don’t have to deal with paper checks. The bank gives you immediate access to the money, and you don’t have to wait for the funds to clear your account.
• Minimize account fees: Setting up direct deposit means you have a consistent source of money coming into your bank account. This can help you avoid common bank fees like monthly maintenance or overdraft fees.
• Secure payments: ACH payments are more secure than carrying around a paper check or cash in your wallet.
• Save time: Direct deposit saves you time since you don’t have to visit a physical branch location to deposit your check each week.
• Allocate the funds to different accounts: You could have your entire paycheck deposited to your checking account, but it’s also possible to allocate the funds to different accounts. For example, you could have 80% of your paycheck go to checking and 20% put in long-term savings.

Drawbacks Of Direct Deposit

Overall, direct deposit has been a net benefit for employees and employers alike, but there are a few downsides to consider:

• Setup fee: Some banks charge a setup fee for direct deposit, which ranges from $50 – $149.
• Requires a bank account: You need a bank account to set up direct deposit, so it’s not an option for unbanked individuals. If you fall into this category, you might ask your employer if they offer payroll cards.
• Electronic information: Once you set up direct deposit, you’ll receive your pay stubs and W-2 electronically, which some people may not like.

Direct Deposit FAQs

Let’s look at some frequently asked questions about setting up direct deposit.

How long will it take for my direct deposit to process?

Once your employer has initiated direct deposit, the transfer of funds is immediate, but it may take one to three days for your bank to verify and clear the funds. If payday falls on a weekend or holiday, this can slow down the direct deposit process.

What happens if I don’t get my direct deposit?

If you haven’t received your direct deposit you should contact your employer and payroll provider immediately. They should be able to tell you when the payment was processed and when the funds should clear your account.

Can I direct deposit money into savings?

Yes, many payroll providers will let you split your paycheck between different checking and savings accounts. When you set up direct deposit, you’ll need to provide the different routing numbers, account numbers and account types. From there, you can specify what percentage of your paycheck should be deposited into each account.

Can my employer force me to use direct deposit?

Federal law allows employers to require direct deposit, but state law might not. If you don’t want to set up direct deposit for some reason, research the laws in your state to determine your options.

The Bottom Line

Direct deposit is a popular way to receive your paycheck, tax refund or unemployment benefits. It’s easy to set up and allows you to receive the funds quickly without having to wait on a paper check. If you’re looking for ways to track your finances and manage your money, download the Rocket Money^SM app today.