Payroll ACH: How does it help, and how do you set it up?

If you want to reliably and efficiently pay your US-based employees, the Automated Clearing House (ACH) network is a robust and widely-used solution. This system allows you to make direct deposits into your employees’ accounts, and reduces administrative costs.

In this article, we’ll explain what exactly payroll ACH is, how to use it, and how it can make life easier — for both you and your employees.

What is ACH?

ACH is an electronic network that facilitates payments between bank accounts across the US. It is run by Nacha (formally NACHA, or the National Automated Clearing House Association).

The ACH network plays a key role in the US banking system, with 31.5 billion payments — valued at $80.1 trillion — processed in 2023 alone.

What is an ACH payment?

ACH payments are the transactions made over the ACH network, and are also known as ACH transfers or transactions. They typically take one to three business days to process.

There are two types of ACH payment:

• Direct payments: Direct payments are authorized payments, such as payments for utility bills.

• Direct deposits: Direct deposits are made from a business or government agency to a consumer, such as payroll deposits.

ACH payments differ from other payment methods in the following ways:

ACH vs direct deposit

Direct deposits are a type of electronic funds transfer (ETF) that are made through the ACH network. However, while ACH transfers are bank-to-bank, direct deposits are transferred into a specific account, like payroll or tax refunds. ACH transfers can be a credit or debit transaction, but direct deposits are always a credit in which funds are pushed into an account.

ACH vs wire transfer

ACH transfers are done through a clearing house, while wire transfers go through a bank. Wire transfers are also often completed within the same day, although they cost more per transaction.

Another key difference is that wire transfers can be issued domestically and internationally, whereas you can only use ACH for domestic payments.

ACH vs eCheck

eChecks tend to be used for one-off payments, whereas ACH payments are typically recurring. eChecks also take longer to process.

ACH is a good choice if you’re looking for a secure and cost-effective way to process transactions like payroll. But if you need to make international transfers or one-off payments, then wire transfers or eChecks may better suit your needs.

What are the advantages of ACH for payroll?

Using ACH for payroll provides several advantages to both businesses and employees, as follows:

It’s more cost-effective

ACH payments are a more cost-effective alternative to traditional payment methods.

For instance, the median transaction cost for paper checks is $2.01 to $4.00, according to AFP. As a result, even a small company with 25 employees can spend as much as $200 per month issuing checks.

In contrast, the median cost to initiate and receive ACH transactions (including internal and external costs, such as personnel and banking fees) is $0.26 to $0.50. Using the example above, the same company would spend approximately $25 per month on payroll processing — around eight times less.

Processing times are faster

ACH payroll processing times are significantly faster than traditional methods.

Paper checks can take two business days to clear or longer, depending on the financial institution’s policy. In contrast, employers can have ACH payments processed on the same day — even if you make the transfer on a Friday.

It’s more secure

All ACH transactions are encrypted to protect sensitive data, making them more secure than physical paper checks. Each transaction is also traceable, so you can follow a clear audit trail if any issues arise.

It’s more flexible

With the ACH network, you can remit other types of payments — including expense reimbursements, accrued leave, bonuses, and overtime — to employees.

What are the disadvantages of ACH for payroll?

That said, there are some downsides, as follows:

Initial setup is tedious

Setting up ACH payroll requires some initial setup, and the process can be confusing if you’re not familiar with it. You also need to collect and verify your employees’ bank account information, which can be an administrative burden.

There can be processing delays

Nacha estimates that around 80% of ACH transfers settle within one banking day. However, if you miss the cutoff time, the transfer isn’t initiated until the following day. As a result, you need to schedule payroll in advance to ensure your employees get paid on time.

Fraud risk

ACH is, as mentioned, a secure payment option — but it’s not totally immune to fraud. According to JP Morgan, 30% of companies reported instances of fraud via ACH debits in 2022.

How to use ACH payments for payroll

To set up and make ACH payments for payroll, follow these steps:

1. Set up ACH payments with your bank

Reach out to your bank to ask about setting up ACH payments. The exact process can vary from institution to institution, but it typically involves making an in-person appointment and filling out an application form. You also need to agree to the bank’s terms and conditions.

2. Have your employees fill out a direct deposit authorization form

Next, get authorization from your employees to deposit their pay into their bank accounts. These forms usually request the following data:

• Both your and your employee’s contact information

• The employee’s bank account information (i.e., account type, account number, and routing number)

• An authorization statement for you to deposit wages

Have your employees sign the forms and keep them on file.

3. Input your employees’ banking details into your payroll system

Enter your employees’ banking information into your payroll software, and double-check that you’ve entered everything correctly to avoid any issues.

Remote’s Payroll software makes it quick and easy to set up ACH direct debits and centralize payroll management for your team. Simply tell us your bank, and we’ll make two small deposits to verify your account.

You can also use Remote to set up other payment methods, such as Single Euro Payments Area (SEPA) if you have a Euro-based account, or Bankers’ Automated Clearing System (BACS) for bank-to-bank transfers in the UK.

4. Initiate payments for each pay cycle

The last step is to initiate the ACH transfer. Select ACH credit to have funds deducted from your business account and deposited into your employees’ accounts. You may also want to initiate the transfer a few days before payday, in case there are any unforeseen delays.

Is ACH payroll suitable for your business?

To determine if ACH payroll is the right approach for your company, consider the following:

• Do you spend a lot of time on admin work to process payroll?

• Do you have a large number of employees? 

• Does your business process payroll frequently?

• Does your bank or payroll provider offer easy ACH setup?

If you answered yes to any of these, then ACH payroll could be the right choice for your business.

ACH payroll processing with Remote

As mentioned, you can quickly and easily set up ACH payroll processing with Remote. With our automated software, you can also streamline your entire payroll operation, enabling you to run each payroll cycle in minutes — wherever your people are based.

To learn more about how Remote Payroll can help your business and save you time, resources, and money, speak to one of our friendly experts today.

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