Options for Direct Deposit

Direct Deposit (DD) these days is a common offering among employers but it is not uncommon for me to come across small businesses that still have not made that leap.  Business owners are concerned over the cost or the process involved.  I also hear that many employees still like to get a paycheck and may not have a bank account or be bankable.  To be bankable one must be able to provide government issued identifying documents, among other things.  One must also not have a derogatory record with past bank accounts – if a bank has ever closed your account due to improper handling (mainly overdrafts and/or chargeoffs), then don’t count on having another bank roll out the welcome mat.

The challenge with “unbankables” can be solved with a payroll card which I discussed in an earlier post.  For the rest of the staff, DD is a benefit which is appreciated.  With this service, their pay is already sitting in their account at the open of business on payday.  No more having to find time to get to the bank and stand in line or sit in the drive-through.

There are many ways in which a business can offer DD.  There are two schools of thought here:  In-house or outsource.  In an outsourcing scenario, a business will contract with a payroll provider to handle all of the payroll processing which includes the compilation of hours worked, calculation of taxes, payment of withholding and other taxes, and payment to the employees.  Large companies often use national firms like ADP or Ceridian, while smaller to mid-sized businesses will often use local payroll providers.  An example would be time & pay, a national company with local ownership, which can bring the resources of a national firm but offer a very high level of service at the local level.

The in-house scenario would mean sending your electronic payments to your employees through your bank.  Your bank has access to the Fed and can receive a file from you to pass on through the Fed’s clearinghouse.  That is why it is not necessary for your employees to bank where your company banks.  They can bank anywhere because the Fed is going to route that payment to them at the bank of their choice.  There are a couple of different options if your choose to process in-house. 1) You may be using an accounting software package like Peachtree, GreatPlains, or Timberline, depending on your industry.  Each of these should have a payroll module available which will produce a file (called a NACHA file – the standard electronic payment format) that can be exported from your system and uploaded to your bank, either via a direct transmission or by uploading it into your bank’s online banking service.  2) You should be able to access your bank’s online banking portal and create a “batch” for a consistent group of payees or 3) Use your online banking portal to create “single-item templates” which provides DD via single transactions for each employee.  The latter is typically used when there are less than a handful of employees.

The Fed’s settlement system, called the ACH (Automated Clearing House) System requires two days for settlement.  Translated this means that if you want your employees’ money sitting in their accounts on Friday, you will need to send your file or create it through online banking on Wednesday.  You actually have until about 8:30 pm EST to get the file to the bank.  Weekends and holidays are not counted so you must make allowances for these times.  If Monday is a federal holiday and payday is supposed to be Tuesday the 1st of the month, then you would need to send your file by the prior Thursday evening.

The least expensive option is going to be the in-house solution, but of course this requires you as the business owner to make all the calculations and withholdings and filings.  Definitely consult with your banker to decide what makes the most sense.  Even if you choose to work with a payroll provider, your banker should be able to refer you to both a local and national provider.


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