How to Set Up Direct Deposit for Employees

Direct deposit is the most common way small businesses pay employees, and setting it up the right way keeps every paycheck on time. The setup comes down to collecting the right details from each employee, confirming them before the first run, and submitting the file with enough lead time.

This guide walks through how to set up direct deposit for employees, from the authorization form through the first deposit. If you are newer to payroll altogether, it helps to start with our guide on payroll processing basics before you set up direct deposit.

What Direct Deposit Setup Means

Setting up direct deposit means collecting each employee's bank account details and signed authorization, entering them into your payroll system, and confirming the first transfer before payday. Net pay is what is left of gross pay after all withholdings and deductions come out, and direct deposit is the method that delivers that net pay to the employee's account on the pay date.

When the account details are collected on a signed form and confirmed before the first transfer, the first deposit lands in the right account on the right day. For a fuller look at how the transfer moves from your bank to the employee's, see our guide on how direct deposit works.

What You Need Before You Start

Before you collect a single form, gather three things: a direct deposit authorization form, your bank or payroll provider's direct deposit setup details, and your payroll schedule. The authorization form captures the employee's bank name, routing number, account number, account type, and signature. Your bank or provider tells you whether a test transaction is required and how many business days of lead time the first transfer needs. Your payroll schedule tells you the pay date you are working toward.

Collecting the details on a signed form is what lets you deposit wages into an employee's account, and it is the first piece of your direct deposit records.

How to Set Up Direct Deposit for Employees

Setting up direct deposit comes down to collecting the right details from each employee and confirming them before the first run. Follow these steps in order and the setup stays clean.

• Give each employee a direct deposit authorization form at hire, before the first pay period they will work.
• Collect the employee's bank name, routing number, account number, and account type, such as checking or savings.
• Get the employee's signed authorization to deposit wages into the listed account or accounts.
• Collect the routing and account numbers for each account if the employee wants to split pay across more than one account, along with the amounts or percentages for each split.
• Enter the account details into your payroll system or share them with your payroll provider.
• Run a test transaction if your bank or provider requires one, and confirm the details with the employee.
• Confirm the first direct deposit amount and pay date before you submit the first file.

The First Direct Deposit Run

Direct deposit needs lead time. The file has to be submitted a set number of business days before payday so the bank or payroll provider can process it and the funds can settle on the pay date. The exact lead time can depend on your bank or provider, so confirm it before you build your schedule.

The first direct deposit after setup often needs more lead time than later runs, because the account details and the transfer are new. Build that extra lead time into the first run so the first deposit lands on time. For more on how the pay dates fit into the bigger schedule, see our guide on how to create a reliable payroll schedule.

Example: A Retail Shop Sets Up Direct Deposit

Consider a small retail shop with hourly employees paid biweekly. The owner gives each new hire a direct deposit authorization form at hire, collects the bank name, routing number, account number, and account type, and gets the employee's signature. The owner enters the details into the payroll system and keeps the signed form on file.

Before the first biweekly run, the owner confirms the account details with the employee and submits the first direct deposit file two business days before payday. On the pay date, the net pay settles in the employee's account. The example shows how a signed authorization at hire and a consistent lead time keep the first deposit on time.

Example: A Service Firm Adds a Split Deposit

Take a small service firm with a mix of hourly and salaried staff paid semimonthly. One salaried employee asks to split their net pay, sending a fixed amount to savings and the balance to checking. The employee provides the routing and account numbers for both accounts on the authorization form, along with the fixed amount for savings.

The firm enters both accounts and the split into the payroll system and confirms the setup before the next run. On payday, the fixed amount settles in savings and the balance settles in checking. The example shows how direct deposit handles splits across accounts when the details are collected and confirmed ahead of the run.

Direct Deposit Records to Keep

Direct deposit creates records you should keep alongside the rest of your payroll records. Keep the signed authorization for each employee, the account details on file, the direct deposit confirmation or file reference for each pay run, and any correction records if a deposit fails or is returned. For more on the full set of records to keep, see our guide on payroll records employers should keep.

Common Direct Deposit Setup Mistakes

• Not collecting a signed authorization. A signed authorization is what lets you deposit wages into an employee's account. Collect it at hire and keep it on file, not just the account numbers.
• Entering the routing or account number wrong. A transposed digit sends the deposit to the wrong account or causes it to fail. Confirm the routing and account numbers with the employee and through a test transaction before the first run.
• Skipping the test transaction. If your bank or provider requires a test transaction, skipping it means the first real deposit is the first time the account details are tried. Run the test first so the first deposit is not the trial run.
• Submitting the first file too late. The first direct deposit after setup often needs more lead time than later runs. Build extra lead time into the first run so the first deposit lands on time.
• Mixing up splits across accounts. When an employee splits pay across accounts, confirm the amounts and the account details before you run payroll. A wrong split sends the right total to the wrong accounts.
• Not keeping correction records. When a deposit fails or is returned, keep records of the correction so the payroll file stays accurate. A corrected deposit without a record leaves the payroll file incomplete.

Direct Deposit Setup Checklist

Use this checklist to set up direct deposit for each employee and to confirm the first run before you submit the file. Work through it in order so the setup stays clean and the first deposit lands on time.

Getting Started

Setting up direct deposit comes down to collecting the right details at hire, confirming them before the first run, and submitting the file with enough lead time. When you follow those steps for every employee, the net pay lands in the right account on the right day and your records stay clean.