Direct Deposit Explained: How It Works and Benefits (2024)

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• Direct deposits are a faster and more convenient way to access your money than paper checks.
• When you sign up for direct deposits, paychecks go directly into your bank account every payday.
• You can get direct deposits for paychecks, unemployment checks, tax refunds, and stimulus checks.

You may be used to receiving a check on payday, then going to a bank to deposit the money into your account. But you don't have to keep track of a check or find time to visit a bank or ATM if you have direct deposit set up.

Here's how direct deposit works and how to enroll.

Understanding direct deposit

Definition and overview

Direct deposit is a service you can use to send money you receive, such as your paycheck from your employer or tax refunds from the government, directly into your bank account. Almost every savings and checking account allows you to set up direct deposit.

Direct deposit is commonly used for your paychecks. But you can also set up direct deposit to receive your tax refunds, government stimulus checks, unemployment checks, and other types of payments.

The process of direct deposit

When you set up direct deposit, money automatically goes into your account digitally when it's time to get paid. You don't need to take any extra steps on payday, like approving the funds with your bank first.

In many cases (especially for your company paycheck), you can choose to split your direct deposit into multiple accounts. For example, you may tell your employer to automatically deposit 80% of each paycheck into your checking account and 20% into savings. This can make planning for savings goals easier.

Advantages of direct deposit

Convenience and speed

Convenience and speed are the most important benefits of using direct deposit for payroll.

Once you've enrolled in direct deposits with your employer, the state, or the IRS, you shouldn't have to take any other steps to receive your money. You don't even have to approve an incoming deposit on payday — it just shows up in your account.

This can be much easier than driving to a bank to deposit your check, and even easier than depositing a check with your mobile banking app.

Direct deposit is quicker, too — which saves you more than just time.

You can save days using direct deposit versus paper checks for wages. Depending on your work schedule, it could take a few days before you have time to deposit a paper check at a bank. Then you'll have to wait until the following business day for the money to show up in your account. With direct deposit, you don't have to do any of that.

If you deposit checks into a high-yield savings account, receiving your funds sooner means you can start earning and compounding interest sooner.

Safety and security

With direct deposits, everything is digital. This way, you don't have to worry about losing your check or about someone stealing it.

You're also limiting the number of steps in the process, so there are fewer places where someone could make a mistake and end up losing your money.

Setting up direct deposit

Setting up direct deposit for employees is simple. To start with, you should request a direct deposit form from your employer. If you just started a new job, your employer might request more information than just what you need for direct deposits, such as your tax withholdings.

Once you have your form, you'll likely need the following information:

• Bank name and address. If you use an online bank or large brick-and-mortar bank, you can probably Google the name of the bank and find the address of the corporate headquarters. Otherwise, contact a customer service representative to ask what address you should use.
• Bank account number. Providing your number ensures your money goes into the right account. You can find your bank account number on your checks or on your bank's online banking website.
• Bank routing number. A routing number is a nine-digit code that indicates which branch you visited to open your account. You can also find your routing number on your checks or on your bank's website.
• Names of people on the account. If you have a joint account, you might need to provide the names of all people who are on the account, like a spouse or a parent.
• Voided check. Not all companies will request a voided check, but some might. A voided check is a paper check from your bank with the word "VOID" written across it. This way, the business can verify your banking information on your check, but no one can actually use it. If you already have paper checks, you can create a voided check yourself. Otherwise, request one from your bank.

If you have trouble finding the necessary information to fill out a direct deposit form, contact your bank for assistance.

Direct deposit for various payments

Payroll

Receiving your paycheck is the most common reason you'll need to set up direct deposit. Most likely, your employer will help you set up direct deposit when you start a new job.

Generally, direct deposits from payroll will be ongoing. Once you have direct deposit set up, you don't need to set it up again for as long as you're with the same company, unless your banking information changes.

Government benefits

Setting up direct deposit for government benefits, such as Social Security, is the best way to get your funds.

The only other way to get your benefits is to have them placed on a prepaid debit card.

Tax refunds

If you receive a tax refund, you'll have the option receiving your refund through a one-time direct deposit. This is generally the fastest way to receive your tax refund, although the IRS does offer other ways to get your refund.

If you're wondering where your tax refund is, you can check its status with the IRS or with your state. It can take a while for your deposit to show up, even after you're approved.

Common questions about direct deposits

Timeframe for direct deposit processing

Once you set up direct deposits through your employer, it could take one or two pay cycles for your company to process your direct deposit form. In this case, you'll still receive your next paycheck or two as a physical check.

But once everything is good to go, your direct deposit should appear in your account on payday, the same day you'd normally receive a paper check.

If you're receiving unemployment, your cash should show up in your account a few business days after you claim your benefits. But the exact number of days depends on the state.

With a paper check, the money wouldn't show up in your account until the business day after you deposited it. But with direct deposit, you have immediate access to your cash.

Some banks even allow you to receive your direct deposit early, including paychecks and unemployment checks. Kate Wauck, Chief Communications Officer for Wealthfront, told Business Insider that almost any institution has the ability to get your paycheck to you sooner, but many don't because they earn interest on deposits. So the longer a bank holds onto your money, the more it earns.

But there are a handful of banks that allow early direct deposits. Find out if your bank participates and whether you can get your paycheck up to two days early.

What to do if a direct deposit fails

When solving common direct deposit issues, the first thing you should do is contact the institution that was supposed to direct deposit your money. Check to see if the information you gave it is correct; it's possible you didn't get your money because your information is wrong and needs to be updated.

Also, check with your bank to see if it has any information about your direct deposit that it can share. For example, it might be able to tell you if they've received the direct deposit, but not deposited it yet. If your bank has 24/7 customer support, you might even want to call it first if you're having issues with your direct deposit after business hours.

Direct Deposit FAQs