How to Set Up Direct Deposit for Employees (5 Easy Steps)

Today's employees have choices when it comes to receiving wages, but there's a clear frontrunner. A survey by the American Payroll Association found that 93% of employees prefer direct deposit, compared to the 3.6% who opt for paper checks.

If your business hasn’t gone digital yet, you may want to consider switching to deliver the convenience an overwhelming majority of the workforce wants. On top of that, streamlining payday can reduce errors, giving you and your employees greater peace of mind.

The same survey found that it would be hard for 72% of employees to meet their financial obligations if their paycheck was delayed a week. What’s more, leaving your team to manually monitor payroll for multiple employees prevents them from focusing on more strategic tasks.


If you want paydays to run like clockwork, let payroll software do the heavy lifting for you. With BambooHR® Payroll, you can unlock easy-to-understand pay stubs, seamless payroll runs, and instant access to reports, making it a win-win for employees and HR alike. Here, we'll explore how direct deposit works and what you need to do to set it up for your business.

What Is Direct Deposit?

Direct deposit is an electronic funds transfer from one bank account to another. The Automated Clearing House (ACH) system is a nationwide network governed by Nacha that makes credit transfers like direct deposits possible.


An employer uses direct deposit to transfer funds from their business checking account to their employees’ or contractors’ personal bank accounts. Depending on the organization’s pay period, employees automatically receive their earnings on the same day each cycle.

How Long Does Direct Deposit Take?

The initial direct deposit setup for a new employee can take one to two pay cycles. Once in place, it usually takes one to three business days for payroll direct deposits to clear in an employee’s account. While the funds transfer almost instantaneously, their bank may need a few days to verify the amount and make it available. Most businesses factor in a little lead time, so the money clears on their regularly scheduled payday.

Additional delays may occur during weekends or federal holidays. Other factors that may affect the process include the type of payroll software used, when payroll data is submitted, and more.

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Can an Employer Require Direct Deposit?

Under the Electronic Fund Transfer Act (EFTA), federal law allows employers to require direct deposit as long as the employee can select the bank or credit union. Alternatively, the employer can limit mandatory direct deposit to one financial institution if they provide their employees with at least one other method for receiving their salary, such as a paper check or prepaid debit card.

However, state wage laws may restrict direct deposit practices. For example, Colorado employers can only issue direct deposits if the employee voluntarily consents and chooses the financial institution. Be sure to stay up to date with your state’s direct deposit compliance requirements.

What Are the Benefits of Using Direct Deposit?

There are many advantages of direct deposit for employers, such as convenience and enhanced security. Your payroll team no longer has to print checks, stuff envelopes, and mail them, which saves valuable time and money. Plus, digitizing payday reduces the risk of incorrect amounts, lost payments, and fraud.

An advantage of direct deposit for the employee is that they’ll have faster access to their hard-earned income. Rather than picking up a paper check, finding time to stop by the bank to deposit it, and waiting a few days for it to clear, the money is already there. Similar to employers, employees enjoy the peace of mind that comes with knowing their funds are less likely to be lost or stolen. Employees can even choose to automatically transfer a portion of each paycheck into a savings account to help them budget and reach their financial goals.

All in all, the efficiency and security that direct deposit provides is an upgrade for both employers and employees. And thanks to the reduced paper usage, it's even beneficial for the environment, making direct deposit a win-win-win!

How to Set Up Direct Deposit for Employees

Here's a step-by-step overview of how to set up direct deposit for your business:

1. Select Your Provider and Begin the Direct Deposit Setup Process

In terms of providers, you can work with the bank that runs your business checking account. Many employers also use direct deposit payroll software, or an accounting or HR software solution with payroll capabilities. Comparing their services, features, and costs will help you make an informed decision.

If you select your existing bank as your provider, you can typically set up direct deposit through your business account’s online banking portal and sign an ACH terms and conditions form. Payroll software usually has most of what you need to get set up integrated into the platform. You’ll enter your business account information, verify your identity, and allow your provider to do a test direct deposit to confirm if it's working correctly.

2. Gather Employee Direct Deposit Information

Next, you’ll need to collect personal and banking details from your team. Employees need to submit correct direct deposit information, so errors don't cause pay delays.

Provide a secure way for employees to send you their direct deposit form with the following information:

The employee may also need to attach a voided check to ensure accuracy and sign the authorization form to confirm consent. If they'd like money to go into multiple accounts, they'll need to allocate specific amounts or percentages for each.

3. Add Employee Information to Your Payroll Software

If your HRIS software lets employees submit their direct deposit information themselves and automatically syncs with payroll, you can skip this step. If not, input their data into your payroll system and review it for errors or missing information. Check with your provider to see if you can upload this information to their platform in bulk using a Nacha-formatted ACH file exported from your accounting software or a spreadsheet to speed up the process.

If you don’t have payroll software, you can typically also upload a Nacha file through your bank’s online system. Otherwise, you can enter employee information manually to establish payroll batches.

4. Set Up a Payroll and Direct Deposit Schedule

Once your provider has all the necessary information, you’ll then choose a payroll and deposit schedule. What works best for your business depends on your expected cash flow and processing time. As mentioned, direct deposits usually take one to three business days to clear, but delays can happen. Payroll software can help streamline this process and ensure your employees get paid on time.

In terms of pay periods, most businesses have a payroll calendar that runs on a weekly, bi-weekly, semi-monthly (with two specific pay dates), or monthly schedule. Make sure to establish a cutoff date for employees to submit their time cards since you’ll need to review and process payroll several days before payday.

5. Run Payroll with Confidence

Now, you’re ready to kick off your first direct deposit! Using payroll software, you can begin the deposit process in a matter of clicks. If you’re working with your bank, you’ll create a new ACH file in your accounting system and upload it through your bank’s online portal.

While setting up direct deposit is fairly simple, no process is foolproof. Common issues include payment delays or funds sent to the wrong recipient due to incorrect or incomplete employee information. Payroll data errors in withholdings, overtime, and hours worked can also lead to discrepancies. And as with any electronic method, it's important to have strong cybersecurity safeguards in place.

Your employees depend on their income, so it’s crucial to manage direct deposits correctly to ensure they get paid on time, every time. Leveraging payroll software can save your team the headache by automatically tracking and calculating figures, helping you avoid those pesky errors. With BambooHR® Payroll, centralized data means time tracking, PTO accrual, benefits, and tax information all flow directly into your payroll system—creating happier paydays for all.

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