Pros and Cons of Direct Deposit

There are a few different payment options you can offer your employees. Direct deposit is one popular choice for both employees and employers. Before implementing it at your business, weigh the pros and cons of direct deposit.

What is direct deposit?

Direct deposit is an electronic funds transfer (EFT), meaning money can be transferred from one account to another.

You can put your employees’ paychecks directly into their checking or savings account at their financial institution with direct deposit.

Pros and cons of direct deposit

Some states let employers implement mandatory direct deposit. In other states, employees decide whether they want to be paid this way. Regardless, choosing to offer direct deposit is up to you.

As with any decision, it’s important to consider direct deposit pros and cons. There are pros and cons of direct deposit for employers and employees.

Pros of direct deposit

Check out some of the reasons you might consider implementing direct deposit at your small business.

1. Safe

You’ve worked hard to build your small business. Small business owners don’t want to worry about dealing with payroll fraud schemes like check fraud. If an employee loses a paycheck, your business could be in danger.

Your business’s name and address, as well as your signature, are on checks. Worse, your bank’s account number, routing number, and name are on paychecks. One lost check ending up in the wrong hands can be detrimental to your business’s funds. The information on a check can give someone the means to get into your bank account.

Paying employees via direct deposit is safe and secure. Your employees don’t need to worry about losing a paper check or cash. The funds are transferred electronically into their bank accounts once the initial setup is complete.

With direct deposit, your employees don’t need to worry about losing their physical paycheck or cash payment. And, you don’t need to worry about a check getting lost and a thief accessing your bank account.

2. Convenient

Direct deposit gives you convenience unmatched by physically handing employees their wages. You can pay employees anytime, anywhere with direct deposit.

Your employees still receive their wages if you’re gone from the office on payday. Employees who are not at work on payday don’t need to stop in to pick up a check.

Using direct deposit is also convenient for employees who want instant access to their funds. They don’t need to go to the bank to deposit a check. Instead, they can use their wages instantly with a debit card.

Direct deposit is a convenient way for you to avoid extra errands. You don’t need to keep buying check stock, printing payroll checks, and distributing them by hand. This saves you both time and money.

3. Easy

Direct deposit isn’t difficult. If you use payroll software to run payroll, you can deposit wages into employee bank accounts in a few simple steps. Enter and approve payroll before sending it to their financial institution. Then, you’re done.

Using direct deposit is also easy for employees. They can choose to send part of their paycheck to their checking account and part to their savings account. Splitting up pay between accounts doesn’t have to cost them a trip to the bank.

Direct deposit also gives you a record of the wages you pay. That way, you can easily view paid wages.

Cons of direct deposit

Before setting up direct deposit, consider the following.

1. Preference

Unless you’re in a state that lets you make direct deposit mandatory and choose how to pay employees, some employees might want paper checks.

You might have some employees who do not have a bank account. You can only pay employees with direct deposit if they have an active bank account. Employees might need to open a bank account if you can make direct deposit mandatory.

As the employer, you also might prefer a different payment method to direct deposit.

2. Fees

Though direct deposit can save you money on supplies, you might be faced with fees. For example, some businesses must pay a fee for implementing direct deposit. Setup fees could range from $50-$149.

You might also be charged a transaction fee each time money is transferred from your account to an employee’s account. This could range from $1.50-$1.90 per transfer.

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3. Timeliness

Running direct deposit is time-sensitive. If you don’t collect your employees’ time and attendance records and run payroll by a certain day, direct deposit won’t be processed and available on payday. Employees do not want to receive late paychecks because of processing times.

When time sheets are not ready, you can choose to expedite the process, which costs you money.

How to set up direct deposit

In order to pay employees via direct deposit, you need to collect bank account information from them. And, you need to have direct deposit set up for your business. In some cases, you need a business bank account.

Collect the following information from each employee participating in direct deposit:

  • Employee name and signature
  • Name and routing number of the bank
  • Type of account (checking or savings)
  • Employee’s bank account number

Do you have some employees who want to be paid via direct deposit and some who want paper checks? No problem! Patriot’s online payroll services offer free direct deposit and the ability to print checks. And, our Full Service payroll will file and remit payroll taxes, so you can focus on revenue-generating activities. Try it for free today!

This article has been updated from its original publication date of April 26, 2012.

This is not intended as legal advice; for more information, please click here.

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