Reasons to Switch Your Payroll to Direct Deposit

by Thom Tracy

3 min read

While some accounting or payroll practices may favor either employers or employees, direct deposit is one practice that conveys multiple benefits to both parties. Therefore, as a small business employer, switching to direct deposit offers you the opportunity to do your employees a favor while also obtaining significant cost savings and simplifying payroll bookkeeping.

Direct Deposit Costs

Before exploring the potential benefits of using direct deposit, first examine the cost and operational procedure. There is generally a modest one-time setup fee to establish direct deposit with the bank. There are also transaction, or “payroll processing,” fees charged to the employer each time the employer makes a deposit, or transfers payroll money into its direct deposit account, and fees whenever there is activity in the account. Both setup and transaction fees vary from bank to bank and depend on the relationship the employer has with the selected bank.The costs of direct deposit may be more than offset by cost savings for the employer. Figuring in both material costs and time, it is estimated that each traditional “hard copy” cheque costs US employers approximately $3. The savings realized from dispensing with hard copy payroll cheques may be more than sufficient to cover the usual direct deposit transaction fees, especially for companies with a large number of employees.The mechanics of direct deposit payroll are fairly simple. Employees provide the employer with the account information where they want their cheque deposited; the employer establishes a direct deposit account to transfer the necessary payroll funds; and on payday, the employee’s wages or salary pay is electronically transmitted directly into the employee’s designated account.Using an online accounting software program such as QuickBooks Online simplifies the process for your bookkeeping department. Direct deposit can be set up using QuickBooks by going to the Gear icon, “Payroll Settings.” Under “Payroll and Services,” select “Direct Deposit,” and follow the simple instructions to enter the necessary information. One day prior to payday, your direct deposit payroll is electronically transmitted to Intuit’s Automatic Clearing House (ACH) for processing. Funds are then transmitted to employee bank accounts on payday.

Direct Deposit Benefits for Employers

The benefits of using direct deposit include reduced and simplified bookkeeping. Direct deposit is a more time-efficient process than printing out individual cheques for each employee, and there is a monetary savings realized by purchasing fewer paper cheques. A mutual benefit to both employer and employee is realized by virtue of the fact that direct deposit basically eliminates the risk of cheque fraud or theft. With direct deposit, no time, materials, or expense is wasted by having to reissue lost or stolen cheques.The workload related to payroll issues is reduced for bookkeepers, and overall accounting is made easier since bookkeepers do not have to worry about being able to reconcile records due to cheques not being cashed by employees in a timely fashion. Since using direct deposit provides you with immediate transaction reports through QuickBooks, related financial reports can also be generated immediately following the transfer of payroll funds.One other employer benefit arises from the fact that direct deposit is beneficial to employees. By offering the courtesy of direct deposit, it may be easier to hire and retain good employees. Also, less work time is lost due to employees going to the bank to cash or deposit cheques.

Direct Deposit Benefits for Employees

When a company pays by direct deposit, this can also provide significant benefits for employees. Their pay funds are available to them sooner; usually funds are credited to an employee’s bank account at 12:01 a.m. on payday. Employees are saved the hassle, and travel expense, of taking their cheque to the bank. Employees benefit along with employers from not having to worry about cheques being lost or stolen. This gives employees added protection against identity theft, since stolen cheques are a major source of identity theft.Direct deposit also offers employees convenience and easier management of their money since they can designate direct deposit funds to be paid into various accounts, such as a retirement or a regular savings account. Having their salary or wages directly deposited into their bank account also means that employees do not have to be present at work on payday to receive their pay. This can be a major convenience if, for example, employees are out sick that day, it is a regular day off, they are out of town travelling on business, or they are on vacation.Employees may even realize a direct financial benefit from using direct deposit, as a number of banks offer free banking services when a customer has direct deposit.

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