What Is Direct Deposit: How It Works and How You Can Set It Up

Learn how direct deposit can save you time and headaches.

Direct deposit is a payment option in which your funds are electronically transferred to your checking or savings account, eliminating the need for physical checks. Once upon a time, direct deposit was an added benefit that employers offered their employees. Now, it has evolved into the default payment method for the majority of workers. In fact, according to the National Automatic Clearing House Association, 93% of American workers use direct deposit.

Direct deposit has several advantages, with convenience being one of the major factors, but it does also come with drawbacks. Understanding how direct deposit works can save you time and headaches.

Explore what direct deposit is, how to set it up and some of the benefits it can provide:

What Is Direct Deposit and How Does It Work?

Direct deposit is essentially an electronic payment that payors issue to go from their bank account, through the Automated Clearing House network.

After the payment is processed, it’s routed into a payee’s bank account. The Automated Clearing House is a program of the Bureau of the Fiscal Service and is the primary system that agencies use for electronic funds transfer.

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Traditionally, the predominant means of paying employees was to issue them a payroll check. However, this requires additional time, labor and other processing costs. Additionally, paper checks require employees to deposit or cash their checks at a local retail bank branch or through mobile deposits.

As electronic payments became increasingly more efficient, companies began offering direct deposit as an option to employees as an alternative way to receive their paychecks. According to NACHA, 95% of Americans receiving direct deposit are highly satisfied with the process.

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Types of Direct Deposit Payments

Direct deposit is commonly associated with these types of payments:

  • Paychecks
  • Tax refunds
  • Social Security and government benefits
  • Employee expense reimbursements
  • Annuities and interest payments

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How To Set Up Direct Deposit

There are various ways to set up direct deposit, and therefore, procedures and requirements may fluctuate depending on which option you choose. Your employer, your employer’s financial institution and your financial institution all have roles that can impact how you can set up direct deposit.

Steps To Set Up Direct Deposit

Here are a few typical steps you will want to take to set up direct deposit:

  1. Verify that your financial institution can accept ACH payments.
  2. Ask your employer if it offers employees the ability to receive paychecks via direct deposit.
  3. If your employer offers direct deposit, ask for a direct deposit authorization form.
  4. Complete and return the direct deposit authorization form to your employer.
  5. Monitor your bank account to make sure you are successfully receiving your payments.

Read More: How Long Does Direct Deposit Take?

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Required Information Needed To Set Up Direct Deposit

In all cases, you’ll need two key pieces of information to set up direct deposit:

  1. Your bank’s routing number: The routing number is the nine-digit sequence on the bottom left corner of your checks. On some checks, it might be the middle number, coming after the individual check number at the far left. You can also call your bank or look on your bank’s website to get the routing number.
  2. Your bank account number: The account number is on the bottom of your check to the right of the routing number. It’s a common misconception that direct deposits can only go into a checking account. In fact, many banks allow direct deposits into savings accounts as well. In some circumstances, you can split your direct deposit to go between two accounts, such as checking and savings.

Depending on the direct deposit option you want to set up, other information may be required. You may also need your bank’s address from the branch you frequent most often. Some employers may also require a voided check, which validates how your account is titled (who the primary owners are), as well as the account and routing numbers of the financial institution.

See Next: What Is a Routing Number and How Do You Find It?

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What Are Some Examples of Direct Deposit?

Direct deposit isn’t only for receiving your paycheck from your employer. You can also set it up to receive benefits and tax refunds. Here’s an explanation of each.

Payroll Payments

If you want to set up direct deposit with your employer, start by reaching out to your human resources or payroll department, who can confirm if the employer offers this service. If the service is available, request and complete a direct deposit authorization form and return it to your designated HR or payroll representative.

A direct deposit authorization allows your company to initiate your payroll check as an electronic payment. If you want your direct deposit split among multiple accounts, ask your employer if you need to complete a separate authorization form for each account.

Sometimes, it can take a pay cycle or two before you receive your first direct deposit. It is important to monitor your bank account and mail in the interim in case you don’t see your deposits or continue to receive a paper check.

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Tax Refunds

Filing your taxes has never been easier. Several sophisticated online, self-prepared programs allow you to file your taxes electronically. In many cases, you can also designate to receive your refund, if applicable, via direct deposit.

You will need to provide your account information, including your bank routing and account numbers. You may need to electronically agree to an authorization. It is also important that your name is listed on the account you provide. If it isn’t, the IRS or receiving bank could reject the funds, forcing you to wait weeks while your refund is in limbo.

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Social Security and Government Benefits

The Social Security Administration used to regularly issue paper checks to beneficiaries. Due to increasing check fraud and identity theft, security became a significant concern, which led many agencies to adopt and require beneficiaries to receive payments via direct deposit.

You can set up direct deposit on the SSA’s website by creating or logging into your Social Security account, navigating to “Benefits and Payment Details” and selecting the “Update Direct Deposit” function.

You will need your Social Security number, bank routing and account number, and account type, such as checking or savings. In some cases, your financial institution may also be able to assist you in setting up direct deposit with the SSA so that you can receive your Social Security benefits.

Other government benefits may allow direct deposit as well. Make sure to reach out to the appropriate contacts over the phone or through their secure web portals to change your payment preferences.

More: How To Apply For Social Security 

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Benefits of Direct Deposit

In 2018, the ACH network volume reached nearly 23 billion payments, which is nearly 70 payments for every U.S. citizen. Direct deposit was also up 4.4% to 6.8 billion, a total value of $9.7 trillion for 2018. Direct deposit is certainly a popular choice among consumers for multiple reasons. Here are a few to consider.

Faster Receipt of Money

One of the main benefits of direct deposit is that you receive your money faster. In the case of paper checks, it can take days waiting for a check to clear your bank account. In contrast, direct deposit payments can often be received by the same or next business day.

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Less Waste

Direct deposit also benefits you by clearing the clutter and providing peace of mind. You no longer have to manage paper. Instead, everything is electronic and automated, meaning less work on your part.

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Less Risk

Direct deposit also helps reduce identity theft and fraud, as no physical paper trail is associated with the payments. No one can steal your paycheck out of the mail or obtain your information if you misplace it.

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Less Expense

Lastly, direct deposits are cheaper for companies to issue and require fewer resources to process. Direct deposit is free to recipients. Plus, many financial institutions, like Wells Fargo, waive fees associated with banking services if you participate in direct deposit.

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This article has been updated with additional reporting since its original publication.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street’s investment community in New York City.