You might already be familiar with ACH payments, but you might not know it because of the unfamiliar terms. Find out what ACH means and how you can use the payments with your payroll.
What is ACH?
ACH is an electronic funds transfer system that moves money between bank accounts. There is an ACH withdrawal from one account and an ACH deposit to another. What does ACH stand for? The abbreviation stands for Automated Clearing House. The ACH system is run by the National Automated Clearing House Association (NACHA).
You can use an ACH transfer for many business tasks, including paying vendors, receiving payments from customers, and paying employees. For the purposes of this article, let’s focus on how you can use an ACH transaction for payroll.
How to use an ACH payment for your payroll
ACH payments are what make direct deposit for employees work. Money is transferred from your business bank account and deposited into your employees’ bank accounts.
Direct deposit works well as an alternative to paper checks. You don’t have to print, write, or distribute checks. And, employees don’t have to take a trip to the bank every payday.
You need a payment processor to use direct deposit. The processor will remove the funds from your account and place them in your employees’ accounts. Your payment processor can be a bank, an electronic funds transfer company, or your payroll provider.
How long does an ACH deposit take?
So, when does direct deposit go through? It depends. ACH payment processing time can take several business days. Business days are Monday through Friday, excluding bank holidays.
The total amount of time to process direct deposit depends on your provider. Some providers will take longer to complete the transfer. You might be able to pay more to speed up the process.
Your direct deposit provider will be able to tell you exactly how much time you need for ACH payment processing.
Let’s say your ACH direct deposit provider takes four business days to process the payment. You want to pay your employees on Friday. So, count back four business days. You will need to submit your direct deposit request on Monday.
There are often cut-off times to submit your direct deposit. This means if you submit your direct deposit request after a certain time, the ACH transfer won’t happen until the next business day.
For example, if the cut-off time is 9 p.m. every business day, you must start your ACH transfer before 9 p.m. If you start the transfer after 9 p.m., your transfer won’t actually begin until the next business day. Missing the cut-off time can cause your employees to receive their payments late.
How much do ACH payments cost?
There is a fee to use ACH payments for direct deposit. The cost will depend on your provider.
Generally, the cost is per transaction. So, if you pay five employees through direct deposit, you will be charged for five ACH transactions.
You can often speed up your ACH processing time by paying a larger fee. For example, you might speed up the processing time from four days to two days by paying an increased fee.
If there is not enough money in your business bank account, you might have to pay an insufficient funds fee.
When you use Patriot’s payroll software, you have access to free direct deposit. Just select that you want to pay your employees with direct deposit, and the ACH transaction will begin when you finish your payroll. Get a free trial of the software, complete with direct deposit. Sign up today.
This article is updated from its original publication date of July 10, 2012.This is not intended as legal advice; for more information, please click here.