If you’re like most Americans, your paycheck turns up in your bank account automatically, without any check to sign or wad of cash to pocket and then get to the bank.
With direct deposit, funds are electronically transferred out of one bank account and (ka-ching!) deposited into another. It’s a convenient way to automate one’s finances, and it’s not limited to paychecks. It can streamline other financial transactions as well.
Here, you’ll learn more about this process, the pros and cons of direct deposit, and ways you might want to put it to work for you.
Key Points
• Direct deposit is an electronic transfer of funds from one bank account to another, commonly used for payroll.
• It was introduced in 1972 with the formation of the first Automated Clearing House (ACH) network.
• Nearly 93% of employed Americans receive their salaries via direct deposit.
• The process involves employers sending an electronic file to the bank, which then distributes funds to employees’ accounts.
• Direct deposit is also utilized for government benefits, tax refunds, and other payments.
What Is Direct Deposit?
As mentioned above, direct deposit is a way of electronically transferring funds between bank accounts.
It was pioneered more than 50 years ago. In 1972, the first automated clearing house (ACH) network formed to manage electronic payments, with other networks quickly following. In 1975, the Social Security Administration (SSA) decided to test the system of direct deposit for payments they issued. Today, 99% of SSA’s payments are directly deposited.
Today, nearly 93% of employed people in the United States receive their salaries or wages this way.
What’s more, these automatic bank transfers are used today in ways beyond having paychecks directly deposited, including bill pay, retirement account contributions, and more.
💡 Quick Tip: Did you know online banking can help you get paid sooner? Feel the magic of payday up to two days earlier when you set up direct deposit with SoFi.
How Does Direct Deposit Work?
You’ve now learned a bit about what direct deposit is and how the ACH system facilitates direct deposit, allowing funds to flow seamlessly and quickly from one account to another.
Here, a bit more intel on how this process can be put to work for you and how to set up direct deposit.
Direct Deposit for Payroll
Let’s say that someone is ready to start a new job. The human resources department explains how the company either requires direct deposit or offers the option.
• If that employee wants to set up direct deposit, they would need to share bank information with their new employer, including the bank’s name, the routing number that identifies the financial institution, and the employee’s bank account number. Sometimes, a voided check is requested.
• This information would then be entered into the company’s payroll system and, whenever payroll rolls around, the company would send an electronic file to this employee’s financial institute. This file would share how much money should be transferred from the company’s (the “originator’s”) bank account to accounts for each of the employees whose direct deposit accounts are located at that particular financial institution.
• If, for example, three employees of a company all share Bank A, then let’s say this bank receives an electronic transfer of $4,345. Bank A would then distribute the money appropriately into the proper bank accounts, perhaps:
◦ $2,000 in Person A’s checking account and $500 into their savings account
◦ $1,350 in Person B’s account
◦ $445 in Person C’s checking account and $50 into their savings account.
• Then, if the employees (known as “receivers”) check their bank balances, they’ll see the deposits made through this direct deposit process. As noted in this example, money may be directly deposited to a checking account or into a savings account. Or some money can be put into a savings account with the rest in a checking account.
• How long does direct deposit take? Typically, the funds go through like clockwork and are there waiting on payday. Some banks may offer the ability to access your direct deposit up to two days sooner.
What Are the Uses of Direct Deposit?
There are several uses for direct deposit:
• Payroll. As noted, the vast majority of Americans get paid this way.
• Tax refund. This can be among the quickest ways to get your tax refund. The IRS can process a direct deposit refund for an electronically filed return in as little as seven to 10 days of receipt.
• Government benefits. Social Security and Supplemental Security Income benefits, VA, unemployment, and other benefits can be paid via direct deposit.
• Commissions, rental income, vendor payments and other earnings can be automated with direct deposit.
• Dividends. Shareholders may receive dividends by direct deposit.
• Child support. This may also be automated.
Benefits of Payroll Direct Deposits
Direct deposit has many benefits. Here’s a closer look:
• Convenience: With a direct deposit of their paycheck, employees can skip the step of physically depositing a paycheck into their accounts, which can be a timesaver.
This can be especially true if the employee telecommutes from home, is on vacation, or is otherwise out of the office when payday comes, because that employee doesn’t have to go into the office to retrieve the paper check.
• Speed: With direct deposit, the money is typically in an employee’s bank account at the start of the designated payment date, which gives them access to the funds that day. No waiting for checks to clear.
• Security: With paper checks, there’s always the possibility that they will get lost or stolen. So, payroll direct deposit can add a layer of security to the process.
Many times banks will waive fees for customers who have direct deposits set up.
• Savings: Many times banks will waive fees for customers who have direct deposits set up, although there may be a minimum deposit amount required for this to happen.
• Better money management: If an employee puts a percentage of each paycheck automatically into a savings account, this can get them into a regular savings habit.
Downsides of Payroll Direct Deposit
Now, for the other side of the coin, the cons of direct deposit:
• Inconvenience: When people receiving direct deposits decide to change banks, it may be a hassle. It may take workplaces a period of time to change where paychecks are sent, which means that the old account might need to be kept open longer to make sure all paychecks are received.
How long that period of time may be can vary. But, before you close your old account, ensure that all direct deposits are being put into the new account. Also make sure that all withdrawals and checks have cleared at your old bank and that any automated payments are coming out of the new bank.
• Scheduling: With direct deposit, it’s important to make sure the correct deposit dates and amounts are recorded. Otherwise, account holders could write checks beyond what’s available, which could trigger overdraft or non-sufficient fund (NSF) fees — which can be costly, especially when they add up.
• Lack of access: Not everybody in the United States has a bank account. If someone doesn’t but their employer requires direct deposit (more about that next), then employees without a bank account would likely receive their paychecks through a prepaid debit card. These can come with fees and, like paper checks, can be lost or stolen.
Here are the pros and cons in chart form:
| Pros of Direct Deposit | Cons of Direct Deposit |
|---|---|
| Convenience receiving funds | Inconvenience if you change banks |
| Speed (no waiting for checks to clear) | Scheduling; must be sure funds arrive |
| Security (no carrying around cash or checks getting lost in the mail) | Lack of access for those who are unbanked |
| Savings; banks may offer discounts or bonuses if you receive qualifying direct deposits | |
| Better money management |
Employers Requiring Direct Deposit
Just as there are benefits to payroll direct deposit for employees, there are also benefits for employers. For instance, it’s cheaper to manage payroll payments this way, versus physical checks.
Plus, they have a record of accounts, which makes it easier for companies when they’re reviewing expenses — and they don’t have to reissue a check if an employee loses one.
And, after a person’s payroll information has been entered into the system, paying employees can be faster and easier with direct deposit.
Laws governing payroll direct deposit vary by state and, if a state has no specific laws on this subject, it defaults to federal regulations. Federal law states that employers must give each employee using direct deposit a summary of rights and liabilities and must get their signature on an authorization form along with relevant banking information.
Some states allow employers to actually require direct deposit for payroll, as long as the program is administered in a way that’s consistent with federal regulations. (In some cases, the rule only applies to public sector workers.) Most states, however, still give employees the choice between direct deposit and receiving a physical check.
A handful of states have laws that are unique to them, ones that don’t fit into any of the broad categories already described.
Automating Your Finances
The concept of electronic funds transfers is at the heart of payroll direct deposits, but goes beyond that. Here are additional ways to benefit from automating your finances.
• Automation is a tool that can also help people to build an emergency savings account. In general, traditional wisdom says this account should contain three to six months’ worth of living expenses.
That way, if an emergency arises (whether that’s a job loss, an unanticipated repair, or unexpected medical expenses), a financial cushion exists. By setting up a regular funds transfer to a savings account, this can make it easier to build up that emergency fund.
• Another way to streamline your financial life: paying bills through autopay. In some instances, lenders may offer a discounted interest rate for borrowers who use automated payments to pay their bills. Autopay can help borrowers make their payments on time, rather than forgetting them when life gets hectic. This can mean fewer or no late fees.
Autopay can help borrowers to make their payments on time, rather than forgetting them when life gets hectic.
• Because payment history plays a key role (35%) in a person’s FICO® Score, autopay can help you establish and maintain your credit score. By automating payments (as long as enough money is in their checking or savings account when the payment is due) you can optimize this aspect of your cash management.
• Autopay helps to reduce the number of paper bills that need to be sent out and the number of paper checks that may be written to pay those bills. This means that automated funds transfers can therefore be an eco-friendly choice to make.
• Whenever funds are electronically transferred, either in or out of a bank account, a digital record is automatically created. This can be helpful when balancing accounts, creating a budget, looking for tax deductible items, searching for ways to trim discretionary spending, and more.
• Autopay might also be a good strategy to use to contribute to a retirement account. Employers may automatically deduct an amount from employee paychecks to transfer it into a retirement account that’s set up by the company. That can make saving super easy.
Get up to $300 with eligible direct deposit when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 3.80% APY on savings balances.
Up to 2-day-early paycheck.
Up to $3M of additional FDIC insurance.
Types of Accounts for Direct Deposits
For people who decide to use forms of automated funds transfers, here are some options to consider for receiving direct deposit:
• Checking accounts
• Savings accounts
• Money market account
• Investment accounts
• Some prepaid debit cards
• Some payment apps, such as PayPal or Cash App.
Getting Direct Deposit With SoFi
If you’re interested in opening a bank account to receive direct deposits, take a look at what SoFI offers and see if SoFi direct deposit is a good fit for you.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is the meaning of direct deposit?
Direct deposit refers to the automated transfer of funds from one bank account to another. This means cash doesn’t need to change hands, nor does a check need to be written and then deposited.
How do you get direct deposit?
Typically, signing up for direct deposit involves sharing your bank account and routing number with, say, your employer or the government so they can direct deposit funds in your account. In some cases, you may be asked to share a voided check.
Is direct deposit only for paychecks?
Direct deposit is not only for paychecks. It can also be used for government benefits (such as Social Security), commissions, tax refunds, investment dividends, and other forms of payment.
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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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