5 Steps to Setting up Direct Deposit for Employees

Direct deposit is a method of paying workers where money is transferred electronically from a company bank account to an employee bank account. This method has become the standard in many countries due to its convenience, security, and efficiency—it's known as direct credit in the UK and Single Euro Payments Area (or SEPA) in the EU.

With Deel, running direct deposits for employees (in countries that allow it) is a simple task that saves money and time compared to traditional forms of payment like cutting physical checks. For modern companies looking to attract top talent and streamline their payroll process, setting up direct deposit is a clear next step.

Prerequisites for setting up direct deposit

All you need to set up direct deposit is a company bank account to transfer money from and employee routing numbers to send paychecks to. Most companies opt for a payroll service or bank partnership to oversee the process of mass payments and distribution.

The exact process differs by country. Oftentimes, the differences are primarily in terminology, while other times the banking infrastructure is notably different.

• Direct deposit is managed by the Automated Clearing House (ACH network) in the US
• SEPA regulations allow for international wage payments throughout the EU
• Companies like Nium are emerging to process digital payments in APAC

Banks may charge transaction fees or a flat fee per pay period to process payroll, and there could be an initial cost to set up a direct deposit account.

Step-by-step guide: How to set up direct deposit for employees

Setting up direct deposit is a relatively easy process. By enrolling in a direct deposit service, you can save time and resources every pay period, making it well worth the effort. Simply follow the steps below:

Step 1: Choose a payroll provider or bank

There are two routes you can take to set up direct deposits for employees: Route one involves a payroll provider who will handle most of the process for you. Route two involves working directly with your bank to manage direct deposits.

Many companies, especially larger ones, opt to use a payroll service to outsource the direct deposit process to experts. This is often a good option but incurs extra expenses. You can minimize the cost by managing direct deposits directly with your banking entity, especially if your HR team is able to handle the process or your workforce is small.

The best option for you, and which bank or provider you choose, will depend on individual factors such as your business location(s) and your technical needs. Many payroll providers can integrate with your business software making paying employees effortless.

Processes for working directly with banks will vary, depending on their software and the financial institutions in your region. Most banking entities offer direct deposit.

Step 2: Collect employee bank information

To accurately send wages to your employees, you'll need to gather their banking information. This typically includes account and routing numbers. Depending on the situation, you might also need their home address, bank name, and branch code. Your bank or payroll provider should be able to provide you with a deposit authorization form for employees to complete.

You may opt for paper forms, digital submissions, or self-serve accounts via a payroll provider to manage payroll. Make sure your forms and security measures are compliant with your worker’s local compliance requirements and protect the sensitive information of your employees.

Educating yourself on data protection laws and secure transmission practices is crucial for safeguarding sensitive company and employee information. Regulations like the GDPR and CCPA provide essential frameworks that companies must adhere to for compliance and data security.

Step 3: Enroll in a direct deposit program

Enrolling in a direct deposit program is straightforward, and most banks provide this service. To begin, visit your bank's website or contact them directly for guidance. If you have an existing business bank account, the process may be as simple as logging in through an app or online portal and locating the payroll section.

You may need to provide additional information about your business to be accepted into the direct deposit system. There may also be some fees for signing up. Be sure any agreements regarding fee schedules and limitations are agreeable before investing your time and energy in enrolling.

Step 4: Testing the direct deposit system

During the enrollment process, a test deposit is often conducted to verify that the system is functioning properly. To further ensure accuracy, consider performing a trial run before fully implementing direct deposit across the company.

For instance, you could ask a small group of employees to volunteer for direct deposit for one or two pay periods while continuing the existing payment method for everyone else. Taking these precautionary steps can help prevent issues during a company-wide rollout.

Announcing a transition to direct deposit only to encounter delays in payroll due to unexpected complications could lead to frustration among employees.

Step 5: Schedule payroll and employee payments

Once your system is fully set up, the final steps are to enter employee banking information and submit or schedule their payments. It’s important to remind employees to review their first deposit carefully to catch any errors, such as typos in routing numbers, right away.

Depending on your business operations, you might be able to schedule and automate payroll in advance. For example, if all employees are salaried and receive the same payment every two weeks, direct deposits can be automated, significantly lowering HR operating costs.

For employees with variable hours or commission-based pay, payment amounts will need to be entered each pay period, or you may need to integrate your tracking system with your payroll provider.

Integrating time tracking, sales commission data, or other relevant software with your payroll system is often feasible and helps ensure accurate calculations. This method minimizes human error and offers a significant time-saving advantage through automated payroll processing.

By following these straightforward steps, you can move away from paper checks and save valuable time and resources in payroll processing. Direct deposit is often preferred by employees as well, sparing them the need to visit the bank to access their funds.

Compliance and legal considerations

Digitizing your payroll generally makes your finances more transparent to governing tax bodies like the IRS in the US, HMRC in the UK, ATO in Australia, or BZSt in Germany. For example, it would be a simple task for an IRS auditor to compare Form 941 to direct deposit records if they suspect a discrepancy or error.

In some countries, employees have the right to choose their payment method, including:

• The US (state laws may vary)
• Canada (laws vary by province)
• France
• Japan

Ideally, automating direct deposit payments for all employees enhances efficiency, but this may not always be feasible. However, transitioning the majority of your workforce to direct deposit is typically beneficial, even if some employees require alternative payments.

Ensuring data privacy when using direct deposit

Another major consideration with direct deposit, and payroll in general, is data privacy. If you are digitizing payroll, you must be confident in your cybersecurity to ensure the personal and financial information of employees is protected.

Cybersecurity and data protection laws help ensure sensitive financial information is kept safe for both the company and individuals. Privacy agreements provide best practices for keeping personal information secure and practicing good cybersecurity hygiene.

In the US, familiarize yourself with NACHA rules to protect confidential information and remain compliant with federal laws. In the EU, data protection laws and privacy agreements are governed under the GDPR.

Make sure to handle financial data only through appropriate portals, avoiding sending sensitive information through unsecured channels like email, especially internationally. A data breach involving employees' banking information could have serious consequences.

However, direct deposit is generally viewed as more secure than traditional payroll methods, where physical checks can be lost, stolen, or used fraudulently. With digital fund transfers, concerns about misplaced paystubs or check-related issues are significantly reduced.

See also: Payroll Security in 2024: How to Protect Your Company

Direct deposit best practices for employers

Any time companies make a big change in their operations, especially when it involves employee compensation, there will likely be some hesitance. However, direct deposit has quickly become the norm for payroll around the world.

The operational cost savings and added convenience for both employers and employees typically make direct deposit an easy choice. When informing your workforce of the transition, either via a meeting or memo, be sure to mention advantages like faster payments, no need for physical checks, and other benefits that might be available such as flexible paydays.

Depending on your payroll software or service, these features and more may be available. In addition to automated direct deposit payments, consider looking for:

• Currency conversion
• Budgeting analytics
• Automatic tax reporting
• Benefits tracking
• Offboarding calculations

An additional benefit of direct deposit is more accurate payments and data via easier tracking and monitoring. With a few clicks, you can pull up the entire history of payments for every employee. This saves on bookkeeping, reducing manual errors in your business accounting and ensuring perfect records.

Simplify workforce payments with Deel Payroll

Setting up direct deposit is typically a much more operationally efficient way to pay employees versus physical checks, especially for remote workers. Employees also receive their money faster, usually in one to three business days, with improved security.

Deel Global Payroll and Deel US Payroll enable you to pay employees around the world accurately, securely, and on time. Whether you’re a multinational conglomerate or a local startup, Deel scales to match your business needs, now and into the future.

Book a demo to see the Deel platform in action and speak with an expert.