What Is Direct Deposit, and How Does it Work?

Direct deposit is a modern convenience that has become almost ubiquitous. The popularity of direct deposit has been largely responsible for the decline of paper paychecks. Direct deposits allow employers to send salaries directly to employee’s bank accounts, rather than issuing them a paycheck to cash.

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The majority of Americans are paid via direct deposit, and it is also used everywhere to transfer money between banks. Despite its ubiquity, however, many people are unsure about how exactly direct deposit works.

In this article, we’ll discuss in depth how exactly direct deposit works, how to set it up, and its many uses.

What is direct deposit?

Direct deposit refers to electronic movement of funds from one bank account to another. This is in contrast to moving money via a physical, paper check.

Direct deposits have become the most common payment method within the past decade or more. According to a 2022 survey conducted by the American Payroll Association, around 93% of U.S. workers receive their salary via direct deposit.

Because direct deposit is an automatic payment, it is significantly more convenient for employees. This allows them to reliably expect their paycheck to arrive without having to get to the bank to cash a check.

It is also better for employers, as they don’t have to spend the money needed to print and distribute paper checks.

How does direct deposit work?

To allow money to move between banks, direct deposit relies on an electronic network known as ACH (automated clearing house). The major benefit of direct deposits is that the recipient’s account is created immediately. This is because the funds are transferred via an electronic payment, and don’t require any extra work to clear or confirm the transfer.

To begin with, and employer will collect the basic banking information of its employees and vendors. Chances are that you will have supplied this information to your employer as part of your onboarding process, upon being hired.

Let’s take the example of an employer who makes payroll payments on the 15th of each month. In most cases, the company will send its payroll instructions to its bank a day or two before payment is due. The bank then sends that information to the Automated Clearing House. In turn, the ACH will ensure that each payment instruction is routed to each employees’ respective financial institution.

Once the employees’ banks receive confirmation from the ACH, they can process the payment and send the funds to their account.

How to Set Up Direct Deposit

If you’ve never set up direct deposit before, naturally you might be wondering how it’s done. Rest assured, the set-up process for direct deposit follows the same straightforward steps, no matter the details.

Here is the process you will follow to get your own direct deposit payments:

1. Request a Direct Deposit Form

You can request a direct deposit form from your employer. This will require you to provide personal details, including your name, address, Social Security number and a signature. Your signature is an important part of authorizing the direct deposits.

2. Include Banking Information

When completing the direct deposit form, you’ll also have to provide relevant banking information. In fact, the most significant details on this form are your bank or credit union account information.

Your employer will need you to provide your bank account number and bank routing number.

3. Deposit Amount

In most cases, the amount of your paycheck will be the same as the deposit amount. However, you may also have the option to deposit a percentage into your checking account, and a certain percentage into your savings account.

4. Attach a Voided Check or Deposit Slip

In addition to providing your account information on the direct deposit form, generally you will also be required to attach a deposit slip, or a voided check.

5. Submit Form

When submitting a direct deposit form, it’s a good idea to put your documents in an enclosed and addressed envelope. With that much sensitive information contained within, you’ll want to hand it directly to your payroll department.

If sending the form remotely, consider using a secure courier service to provide extra protection.

Uses and Benefits of Direct Deposit

Most people are familiar with direct deposit as a way of getting paid and sending money. However, there are several other uses which we can benefit from in our daily lives.

Paying Independent Contractors

Independent contractors are traditionally paid via check, but many today will much prefer to be paid by direct deposit.

Sending a direct deposit to contractors can be beneficial for both parties. For example, it ensures the contractor receives payment directly. This is often appreciated, as payment can traditionally be irregular for independent contractors.

In a business context, this can also help to reduce an employer’s payroll costs, as it further reduces the need to issue checks for payment.

Receiving Social Security Benefits

Social Security benefits have been paid via direct deposit since 2013. Switching to a direct deposit system allowed the Social Security Administration to save somewhere around $120 million per year.

Direct deposits allow Social Security beneficiaries to receive their benefits in a way that is both secure, fast and reliable. For those without a bank account, benefits are instead received through a prepaid debit card.

Child Support

Direct deposit also provides a convenient and secure way for parents to receive child support payments. Usually, parents who receive court-mandated child support can choose to sign up for direct deposit through their state.

This option means that parents don’t have to wait for paper checks in the mail, and the overall fees are reduced. Furthermore, by using direct deposit to a bank account, people can easily track their payment history online.

Tax Refunds

If you are eligible to receive tax refunds, direct deposit is the best option. Filing electronically and opting for direct deposit is the fastest way to receive tax refunds, according to the IRS. Refunds that are filed for direct deposit are often paid within 21 days, while paper checks can take much longer.

In addition to receiving your tax refunds quickly, the IRS also gives taxpayers the chance to have their refunds sent directly into several bank accounts.

Automatic Bill Pay

Recurring bills, such as rent, utilities and other subscriptions, can be paid via direct deposit. This is often offered through bill pay, and can be a really useful way of streamlining your financial obligations. Setting up automatic payments also helps to keep your bills organized and tracked.

Direct Deposit Perks

Your bank may offer certain perks for setting up and regularly using direct deposit with your checking account. For example, a bank may waive your monthly maintenance fee if you deposit a certain amount into your account each month.

Some banks also offer higher interest rates on checking or savings accounts if certain requirements can be met. Typically, this includes receiving direct deposits to a certain value, among other requirements.

Another popular benefit of direct deposit is early access to your paycheck. Certain banks, such as Capital One, Chime, and Current, can actually release your paycheck a day or two earlier than normal if you sign up for this direct deposit feature.

See also: How to Get Direct Deposit without a Bank Account

Frequently Asked Questions

How long does it take to set up direct deposit?

Once a direct deposit has been set up, it usually takes a few days to become active. However, in some cases it may take several weeks, if there are any complications with the information given, or the banks involved.

If your need for direct deposits is time-sensitive, you can always discuss the issue with your manager or HR representative. You may need to continue receiving physical checks for a short time while a new direct deposit is established.

How fast is direct deposit?

Usually, direct deposits arrive to your bank account in one to three business days. That goes for personal transfers and your salary. When it comes to employers, and also government payments such as tax refunds or benefits, direct deposit transfers are typically timed.

However, any international transfers made via direct deposit can take longer.

Is direct deposit safe?

Safety is always a primary concern when it comes to money transfers. Rest assured that direct deposits are a safe way to send and receive money.

In comparison to cash or a paper check, for example, direct deposit is a relatively safer method of transfer. Either cash or a paper check can easily be lost, misplaced or stolen. Furthermore, it’s possible that someone could commit fraud by cashing a check not intended for them.

Losing a paper check means you’ll be charged a fee for replacement, and recovering a stolen check can be time-consuming and expensive.

Direct deposit, on the other hand, doesn’t carry any of these potential security issues. Because your money is transferred immediately from the payer’s account to yours, it can’t be lost.

In theory, the only potential safety issue with direct deposit is the information included on the form to set it up. This is why it’s important to ensure your bank account information goes directly to the person responsible for submitting your application.

What time does direct deposit hit?

The exact time direct deposit hits varies based on your bank. Many financial institutions deposit funds at midnight each business day. Then, you’ll typically have access to your direct deposit at the opening of business on your payday. However, this may not be the case for all banks, as each bank has different policies and procedures.

How do you check the status of a direct deposit?

Checking your direct deposit status simply requires you to check your bank account online to see if the money is there.

If you are seeing an unexpected delay with your salary, you might need to check with your employer or the payroll department.

Can you direct deposit into a savings account?

Yes, if you set up split deposit, you can send a percentage of direct deposits directly to a savings account.

Doing so is a great way to manage multiple accounts, and can avoid you spending money that you had intended to save. Automating your savings practice in this way is hugely beneficial, especially for those who struggle to stick to a budget. 

However, not all savings accounts are suitable for receiving direct deposit. Those with transaction limits or high fees may be more suited to transfers that are less frequent than direct deposit.

How long does it take to get unemployment via direct deposit?

Direct deposits are the fastest way to receive unemployment benefits. Generally, you will receive your payments within one to three working days if you opt for electronic payments. The exact length of time it takes will vary from state to state.

What is early direct deposit?

Early direct deposit is a feature offered by some banks, credit unions and financial institutions for savings and checking accounts. This allows the account holder to receive their deposit as soon as the payer releases the funds, when usually the funds would be held for an extra day or two by the bank.

Early direct deposit means that payday can come that much faster, which makes direct deposit an even more attractive payment method for employees.

Bottom Line

Direct deposit allows banking customers to receive funds without having to visit the bank and cash a check. When it comes to the electronic transfer of money, direct deposit is the new standard. Plus, it’s easy to set up direct deposit, and the benefits speak for themselves.

Steven Brennan
Meet the author

Steven Brennan is a freelance writer specializing in finance and cryptocurrency. He has an MA in Literature from Maynooth University in Ireland, and lives in the Pacific Northwest with his wife and young daughter.