What is a direct deposit in payroll?

What is a direct deposit in payroll?

In the context of payroll, direct deposit is a payment method where the employer electronically transfers an employee's wages directly into their bank account.

Instead of issuing a physical paycheck that the employee then needs to deposit or cash, the employer initiates a transfer of funds that arrives directly into the employee's designated bank account. This process usually occurs on a set schedule (i.e. monthly, bi-weekly, or weekly), depending on the employment agreement.

Direct deposit is fast, secure, and reliable, and makes the payroll process easier and more efficient. It can also be more cost-effective for your business. For employees, it is generally more convenient, saving time and ensuring prompt delivery of funds even during busy periods such as holidays. 

How does direct deposit work?

Your employee will usually provide their bank account information during the onboarding process, including the bank's name, account number, IBAN, and SWIFT code. Once this information is embedded into your payroll system, you can submit payroll instructions to your bank.

During payroll, your bank will then electronically transfer the specified net pay into your employee's bank account. The transfer occurs through a network known as an automated clearing house (ACH), which facilitates the movement of funds between banks.

What do you need for direct deposit?

The main thing you need for direct deposit is buy-in from your team members across the globe. Although it is generally safer, faster, and more convenient, not everyone may prefer this method — for various reasons. If an employee in a particular country wishes to be paid a different way, lay out the benefits of direct deposit and encourage them to adopt this method.

After this, all you need is the employee’s bank details, as described above. If you have employees dispersed across multiple countries, you may also want to consider using a global employment platform — like Remote — to streamline and simplify the process. This ensures that all your payment calculations are correct, that all taxes and social contributions have been withheld accordingly, and that team members are paid quickly and easily in their local currency.