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The Ins and Outs of Direct Deposit

Direct deposit has become a staple payment method. Nearly 94% of U.S. workers receive their paychecks via direct deposit, according to the American Payroll Association’s 2020 Getting Paid in America Survey. To learn more about what direct deposit is and how it works, keep reading.

Defining Direct Deposit

Direct deposit is the electronic transfer of funds to a credit union or bank account rather than through a physical, paper check. Direct deposit generally reduces costs for employers and increases convenience for employees. Employees can choose the financial institution the funds go to and the type of account such as a checking or savings account. Direct deposit is often used for payroll, as well as Social Security benefits, child support, tax refunds, paying rent and other bills, paying vendors or independent contractors, adding dividends to financial accounts, commissions, and more.

How Direct Deposit Works

Direct deposit starts with an employer or company acquiring financial information from the payee such as their credit union or bank account number and routing number. This is often a part of the onboarding process when someone starts a new job if direct deposit is used to pay employees. Typically, one or two days prior to payday, the employer or company will send its payment instructions to its financial institution. That information is then passed to the Automated Clearing House (ACH). The ACH operator ensures that payment information is routed to the correct financial institution for each payee. Upon receiving the instructions, the payee’s financial institution processes the payment and adds the funds to the payee’s designated account.

How to Establish a Direct Deposit

1. Get a direct deposit form. There are physical and virtual direct deposit form options. The forms typically ask for personal details including your name, address, Social Security number and signature for authorization of the direct deposit.

2. Fill in your financial account information. It’s critical to include accurate credit union or bank account information for your financial institution. You will need your routing number and account number. You may need to attach a voided check or deposit slip as well. If you don’t have either of those, simply reach out to your financial institution and they can help.

3. Confirm the deposit amount. Determine if you want to transfer the entire amount to one account, such as a checking account, or if you want to transfer a percentage of your funds to one account and a percentage of your funds to another account like a savings account.

4. Submit the form. It’s important to complete the direct deposit form and submit it in a timely manner so you can receive payments. The form includes a lot of confidential information, so it’s ideal to submit it using a secure method.

Direct Deposit FAQ

How long does direct deposit take?

Normally, direct deposit takes one to three days to clear. The actual transfer of funds is almost instantaneous, but it can take some time for your financial institution to verify funds and make them available to you. Often, the employer or company paying you will factor this timeline into their process to ensure you’re paid on the date you are supposed to be.

How can I check my direct deposit status?

You can do this by logging into your online financial institution account to see if your money’s arrived or if there’s a pending amount listed. Your financial institution also will typically offer different notification settings that can be set up for deposits into your account.

Is direct deposit safe?

Yes, direct deposit is one of the safest methods of receiving payment. According to Forbes, the Social Security Administration boasts that not a single payment via direct deposit has been lost since 1976, when beneficiaries were first offered the option to receive direct deposit. The biggest safety concern with direct deposit is when you’re setting it up. It’s imperative to ensure your financial information goes to the correct party via a secure channel to help ensure the safety of your direct deposit.

Direct deposit can be a convenient and secure payment option. Knowing how it works is a great first step toward feeling comfortable if you choose to enroll or are required to by a future employer. Take the information you learned in this article and make an informed decision about what will work best for you.

Sources:

https://www.forbes.com/advisor/banking/your-complete-guide-to-direct-deposit/

https://www.investopedia.com/terms/d/directdeposit.asp