Direct deposit can be a huge convenience. Think of how easy it can be to get paid this way, for instance. No more running around with paper checks and waiting for them to clear. That’s because direct deposit is an electronic transfer of a paycheck right into a payee’s bank account. A direct deposit uses an ACH (automated clearing house) network, an electronic alternative to paper checks that’s been around since the 1970s.
There are plenty of reasons to love direct deposit: It’s fast, simple, and easy to set up. If you’re not already using it or could just use a little more info about how it works, read on.
In this guide, you’ll learn:
• What is direct deposit?
• How does direct deposit work?
• What are the pros and cons of direct deposit?
• What are common uses of direct deposit?
What Is Direct Deposit?
Direct deposit is an automated way of transferring money. The payer, or person sending the funds (such as your employer), arranges for money to be electronically moved from their account to the recipient’s account. This happens without the need to write a check or for the payee to take that check and deposit and then wait for it to clear. Instead, the funds are immediately available.
This is one of the reasons why almost 94% of American workers chose to get paid that way, according to a recent survey by the American Payroll Association. Direct deposit can also be used for other payments, such as Social Security.
How Does Direct Deposit Work?
Here’s an overview of how direct deposit works:
• If you sign up for direct deposit, the payer will need your banking details, such as your routing number and account number. They may request a voided check for direct deposit as well.
• Then, a couple of days before the payment is due in your account, the payer will send instructions to the bank about how much money to transfer and when.
• The bank then forwards this information to ACH, which makes sure the money routes properly to you.
• Lastly, your bank will get the information it needs to move the payment into your account.
Recommended: Routing Number vs. Account Number: How to Find
Pros and Cons of Direct Deposit
After the set-up process, using direct deposit can have more benefits than drawbacks for many people. Some benefits of direct deposit include:
• Convenience. Direct deposit means getting paid on payday whether or not an employee is in the office. A person using direct deposit could be at work, on vacation, or out sick, and their paycheck will still appear in their account.
• Time-saving. Employees don’t need to head to the bank or ATM or even use their banking app to upload a paycheck. Also, in terms of how long direct deposit takes, it’s usually instantaneous, and the payee doesn’t need to do anything on their end.
• Environmentally friendly. Using direct deposit can help reduce a payee’s carbon footprint on payday since there’s no physical check to print out and no need for a postal service to deliver it.
• Secure. An automatic direct deposit means no keeping track of a paper paycheck. If an employee has signed the check and for some reason can’t cash it immediately, a scary scenario could result if the check is lost. What’s more, for those who might be paid in cash, you don’t need to walk around with all that money in your pocket en route to depositing cash into your account.
• More control of the flow of money. Depending on how a person sets up their direct deposit, they can designate where the money goes each payday. That could mean sending a portion of the deposit directly into savings or multiple savings accounts for different goals. That could also help a person save more in the long run.
Quick Money Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.
All these benefits come from the one-time setup that comes with filling out a form and learning where to find a few bank account numbers.
But with the benefit of direct deposit come a few drawbacks. If enrolling in direct deposit, you may want to consider the following:
• Security. As with sharing any sensitive account information, people enrolling in direct deposit should understand the risks of communicating their account number and banking information. Share via secure link or in person, if possible.
• Changing banks. Any time a person wants to switch banks or have their paychecks deposited into a new account, they’ll have to go through the enrollment process again with their employer.
• It can be easy to miss errors. Because the money is automatically deposited into bank accounts, it can be easy to miss errors in paycheck amounts or a completely missing paycheck.
Since direct deposit comes with both positives and negatives, it might not be the best fit for everyone. The decision is best left to personal financial preferences, if you have a choice. However, employers in some states may be allowed to require their employees to accept payment via direct deposit.
What Do You Need to Set Up Direct Deposit?
Wondering how to set up direct deposit? While most employers offer direct deposit, the process and requirements to sign up might vary from place to place. Expect to need some or all of the following intel in order to register:
• Employer’s direct deposit form. Many employers have their own version of a direct deposit form for employees to fill out. If they don’t, employees can request a direct deposit form from their bank or credit union to give to their employer once completed.
• Bank’s mailing address. Employees will possibly need to provide the mailing address of their bank. This information can be found on a bank statement or on a banking institution’s website. This may not always be needed, but it could be good to have this information on hand just in case.
• Checking or savings account number. This step in direct deposit setup is usually simple. It’s easy to find a checking or savings account number on a monthly bank statement or in a bank’s online portal. A checking account number will usually be between 10 and 12 digits long.
• Bank routing number. A routing number is a nine-digit transfer number that identifies a payee’s bank. Unlike an account number, routing numbers for banking institutions are publicly known and can easily be looked up online through the American Bankers Association (ABA) database.
• Voided personal check. In some instances, an employee might have to provide a voided personal check along with the direct deposit form to verify the account and routing numbers. To void a check, simply write “VOID” in ink across the front of the check so that the check can’t be used for any other purpose than setting up the direct deposit.
Depending on when a person submits their request, they could start receiving paychecks via direct deposit the next pay period. However, it may take one or two pay periods in some cases.
Once you’ve gone through the steps of how to set up direct deposit, you may want to ask payroll or HR to confirm when it will take effect and you can expect automatic paychecks.
How to Send Direct Payments
Automating a banking process can work the other way, too. You can set up regular payments from a personal bank account for recurring charges. For example, you might choose to set up direct payments for utilities, mortgage, or rent.
The benefit of using direct payments is its ease. After providing the information once, withdrawals are automatic. There is no need to go into a payment portal each month or write a paper check to pay a bill.
Sending a direct payment from one bank account to another is an ACH transfer and often won’t require the same paperwork as an employer’s direct deposit form. You might also see direct payments called bank-to-bank transfers or automatic debit payments.
Here’s how the process typically works:
• You would enter your bank account number and routing number into a company’s payment platform.
• Next, you would confirm the amount to be transferred from your bank account for a single payment or on a recurring basis. If you choose to set up recurring payments, the money will be transferred from your bank account to the company you’re paying each month. Since the payments are automatic, they’ll be made on time and you won’t have to worry about late payments.
• It’s wise to make sure there’s sufficient money in the account to pay the bill; periodically checking on recurring direct payments is recommended as well. For instance, double-check that the amount withdrawn from your bank account every month correlates with the amount you owe.
Many banking institutions have a bill-pay feature to set up recurring payments for utility bills or mortgages, for example, which is different from direct payments. Setting up bill-pay means you are giving permission for your bank to send a payment, whereas setting up direct payment gives the company you’re paying permission to take payments from your bank account.
Common Uses for Direct Deposit
Direct deposit isn’t just for payday or recurring bills. It’s also commonly used for other transactions, such as these:
Social Security
Since 2013, electronic direct deposits have been required for people receiving Social Security or Supplemental Security Income. The process of setting up direct deposit for Social Security payments is all online and is similar to how to do direct deposit with an employer.
Tax Refunds
Eight out of 10 taxpayers opt to get their tax refund by direct deposit, which can speed up the process. On average, nine out of 10 taxpayers get their refunds within 21 days.
Taxpayers can also elect to have the refund deposited in up to three different accounts, including an IRA, making it easier to save on the spot. IRS Form 8888 is used to direct the funds where you want them.
Unemployment Benefits
If receiving unemployment benefits, you may be able to elect to receive the payments through direct deposit into your bank account. While unemployment insurance is governed under federal law, each state administers its own program, so it’s important to check the availability of direct deposit in your state.
Third-Party Payment Apps
More than 84% of Americans have used peer-to-peer payment apps like PayPal or Venmo. But what most of them probably don’t know is that these tools also use the ACH system for each transaction.
When a person sets up their payment methods on each of these apps, they have the option to connect it directly to their bank account, providing account and routing numbers, or to a credit card.
Banking With SoFi
Learning how to set up direct deposit can be a helpful way to automate your finances, and it might make it easier to meet your personal savings goals. Sending a portion of a direct deposit right into a savings account — or multiple accounts — can make saving an effortless experience.
With a SoFi Checking and Savings account, you can easily set up direct deposit. You’ll earn a competitive Annual Percentage Yield (APY) on your cash and pay no account fees, both of which can help your money grow faster. What’s more, qualifying accounts with direct deposit can get paycheck access up to two days early.
3 Great Benefits of Direct Deposit
- It’s Faster
- It’s Like Clockwork
- It’s Secure
As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.
Whether your check comes the first Wednesday of the month or every other Friday, if you sign up for direct deposit, you know when the money will hit your account. This is especially helpful for scheduling the payment of regular bills. No more guessing when you’ll have sufficient funds.
While checks can get lost in the mail — or even stolen, there is no chance of that happening with a direct deposit. Also, if it’s your paycheck, you won’t have to worry about your or your employer’s info ending up in the wrong hands.
FAQ
Can I set up direct deposit on my own?
When you set up direct deposit, you can access and fill out forms on your own, often online. You will likely need details such as your bank account routing and account numbers. However, a financial institution will have to be involved to actually arrange the payments and transfer funds. You need to allow time for that processing to take place.
Can you set up direct deposit online?
While policies vary, you can often fill out the forms needed for direct deposit online.
How do I direct deposit into someone else’s account?
In order to direct deposit into someone else’s account, you will need (in addition to their permission) such details as their name and address as it appears on the account and their routing and account numbers.
SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..
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