How To Set Up Direct Deposit Payroll

For today’s workforce, direct deposit isn’t just popular — it’s the standard. Nearly 92% of respondents in PayrollOrg's 2024 "Getting Paid in America" survey reported receiving their wages via direct deposit.

While some employees still prefer paper checks or cash, direct deposit caters to the fast-paced, digital-first world where many workers live paycheck to paycheck. It ensures employees have access to their funds exactly when they need them, without delays.

For employers, the benefits are equally compelling. Direct deposit streamlines payroll workflows, saving time and minimizing errors.

For any modern employer, direct deposit is now a non-negotiable amenity. But implementing a new payroll system or process can be difficult. Luckily, modern payroll platforms like Criterion HCM don’t just calculate pay. The best platforms also manage complex configurations like union rates, multiple work locations, and tax filing, making it easier than ever to implement direct deposit.

With this guide, you’ll be equipped to implement direct deposit smoothly and efficiently. Let’s take a look at how you can get started.

What Is Direct Deposit?

Direct deposit is an electronic payroll method that seamlessly transfers a paycheck directly from an employer's bank account into an employee's bank account. Direct deposit eliminates the need for a tangible paycheck. This makes it faster and more efficient than paper checks.

Advantages of Direct Deposit

Direct deposit is the preferred method for good reason. It offers numerous advantages (beyond convenience) to both employees and employers:

Reduces Waste: No paper checks means less waste and a smaller environmental impact.
Saves Time and Cost: Employers save on printing, distributing, and mailing costs, while employees avoid trips to the bank.
Simplifies Payroll Admin: Automated payroll systems reduce manual work, saving HR teams valuable time and minimizing errors.
Improves Cash Flow Management: Employers can schedule payments precisely, securing predictable cash flow for the organization and remaining compliant with payroll timelines.
Easy Access to Pay Stubs: With the right payroll system, employees can view or print their pay records online anytime, often without anyone’s assistance.
Improved Security: Direct deposit is generally more secure than paper checks, which can be lost or stolen.

How Does Direct Deposit Work?

The process behind direct deposit is straightforward but relies on precise coordination between employers, employees, and payroll providers. The process typically looks like this:

The employer sets up a direct deposit system through their payroll provider or software, linking it to the company’s bank account.
Employees provide their bank account details, often using a secure online form or by submitting a direct deposit authorization form.
On payday, the payroll system calculates the correct amounts and transmits the funds directly to each employee’s account.

While employees receive their pay electronically, pay stubs are still generated and accessible online. This way, you can maintain the same record-keeping and compliance standards as paper checks.

Direct deposit doesn’t just make payroll faster — it makes it smarter, reducing errors and improving efficiency for businesses of all sizes.

How To Set Up Direct Deposit in 5 Steps

Step 1: Choose a Payroll Provider

The first step in setting up direct deposit is selecting the right payroll provider for your company's size, payroll complexity, and in-house resources.

Types of Payroll Solutions

No matter how you look at it, modern businesses need software. Managing payroll manually in spreadsheets and still offering direct deposit is more inefficient than it’s worth. Here's a quick breakdown of your options for payroll tools:

Payroll Service Providers: These third-party companies handle payroll for you. It’s like outsourcing your entire payroll process to a trusted partner. It is a good choice for some small businesses without a dedicated payroll team. The provider manages calculations, payments, and compliance, freeing up time for small teams to focus on growth. However, the benefits don’t typically scale. As you grow and your payroll process becomes more complicated, your reporting needs will also grow. But outsourcing payroll makes custom reports harder to access. Taking the process in-house will likely be required for financial growth and compliance.
Payroll Software: This option offers more control, with tools that allow you manage payroll in-house. It’s ideal for companies with specialized needs, such as unique reporting, pay structures, or multi-location operations, where customization is essential. But payroll-specific software may not account for unique factors in employee data like union affiliation, tax status, or variable wages. To achieve that level of streamlined processing, you would need to integrate payroll with other systems that may or may not work well together.
HCM Platforms: HCM (Human Capital Management) solutions offer a seamless experience that integrates payroll, HR, and other employee-centric processes. This approach connects payroll data directly to employee records, simplifying workflows and reducing errors. A unified system makes tax filings, benefits management, and compliance much easier. The best HCM systems will calculate payroll automatically using data from time tracking, location information, employee records (certified rates, union affiliation), and more. Direct deposit will also be automated with zero payment delays.

While each option has its strengths, HCM platforms provide the most comprehensive solution, combining payroll, HR, and talent management in a single system. It is perfect for businesses looking to streamline operations and maintain complete control over employee data.

How To Choose the Right Tool

When choosing a payroll provider, treat the decision as a partnership, not a quick solution. Consider the following factors:

Business Needs: Does the solution meet your payroll and compliance requirements?
Comfort with Technology: How user-friendly is the system, and does it suit your team’s tech capabilities?
Budget: Does it fit with your financial goals while offering the features you need?
User Reviews: Do customers give high ratings for the provider’s reliability and performance?
Customer Support: Does the system include a responsive support team, essential for resolving payroll issues quickly and efficiently?
Integrations: Will the solution integrate with your existing systems, such as ERP software, accounting tools, or HR platforms, to streamline data flow?

It’s also vital to evaluate the structure of the payroll software. Many platforms boast a ton of helpful features, but do they all work together seamlessly on a unified system? Or is it a patchwork of acquired solutions with data syncing issues between modules that could affect accuracy?

Modern, growing businesses benefit most from solutions built for integration and efficiency, with the flexibility to account for unique payroll calculations.

Step 2: Get Organized With a Payroll Solution

Once you’ve selected a payroll provider, the next step is to gather and organize the information needed to set up direct deposit. This process requires some serious attention to detail and a strong emphasis on security, since you’ll be handling sensitive data.

What You’ll Need To Provide

Business and Banking Information: Your payroll provider will require details about your company’s financial setup, including bank account numbers and authorization forms.
Employee Information: Collect employees’ bank account details and direct deposit authorization forms. These forms grant legal consent to transfer their pay electronically.

Data Protection Is Key

When managing confidential information, security should be a top priority. Opt for a payroll solution with a proven track record of protecting sensitive data. Avoid those with a history of data breaches. Even a single breach may lead to serious legal complications and destroy employee trust.

To keep this process smooth, clearly communicate the steps of direct deposit to employees. Securely store all employee authorization forms and update them as needed. It’s also a good idea to share with employees how their data will be protected.

Anticipate common questions or issues and address them proactively with documentation or standard operating procedures (SOPs). This will also help manage resistance when implementing a new system.

Step 3: Enter Data and Configure Payroll

Once you’ve gathered all necessary details, it’s time to enter all that information into your payroll system and set up the necessary configurations. The right software can make this process fast, accurate, and reliable, but manual data entry will require extra care to avoid errors.

Start entering account and routing numbers provided by employees. Then, consider the unique configurations you’ll need to automate payroll. You may need to consult a payroll specialist with your software’s implementation team to set things up properly. Here are some aspects to consider:

Union Rules: Account for certified rates, variable wages, and union dues. Employees working in different union locals may have different wages for each location. This can get complicated fast, even for a single employee.
Taxes: Ensure accurate tax withholdings, including state and federal requirements. The best payroll and HCM platforms will handle this for you.
Benefits: Benefits are standard compensation for modern employers. You’ll need to account for these voluntary deductions before submitting payment each cycle.
Other Deductions: Every paycheck will have voluntary or involuntary deductions. Plus, each employee may require different deductions. Be sure you have clear records for what to deduct from each employee’s paycheck.
Commissions and Multi-State Work: You may need to configure your process for diverse roles, commission-based pay, and multi-state compliance. With Criterion HCM, many of these calculations are automatically built in, but you may want to edit them specifically for your reporting requirements.
GL Mapping: Set up general ledger mapping and integrate payroll data into your accounting system. This makes it easier to do complex labor cost allocation and generate powerful financial reports to share with stakeholders.

Step 4: Set Up the Payroll Schedule

Your payroll schedule (or payroll cycle) is a key component of managing direct deposit effectively. First, you’ll need to determine when employees are paid. However, this is not an arbitrary choice. Many states require businesses to pay employees at a certain minimum frequency, which may also vary by the type of employee.

Choosing the right payroll cycle requires careful consideration of both employee needs and organizational logistics.

Common Payroll Schedules

The most common payroll cycles are:

Biweekly: The most popular option, providing consistent pay every two weeks.
Weekly: Ideal for hourly workers or industries where paychecks depend on variable hours.
Monthly: Less common but often used for salaried positions in specific industries.

Key Considerations

Transparency With Employees: Clearly communicate the schedule so employees know exactly when to expect their pay. Make sure they understand the difference between payroll initiation (when you process the payment) and payday (the day funds are available).
Bank Holidays: If a scheduled payday falls on a bank holiday, adjust to pay employees a day earlier to avoid delays. If you know your payroll process takes five business days, you’ll likely need to start that process a day early to initiate the payment a day early as well.
Timesheet Deadlines: Set clear timelines for when employees must submit timesheets to keep everything on track. Be clear about what happens when an employee fails to submit time properly, and create a process for fixing that error quickly.

Payroll schedules impact cash flow, employee satisfaction, and overall efficiency. So, taking the time to establish a reliable system will pay off in the long run.

Step 5: Process Your First Direct Deposit

Processing your first direct deposit can feel intimidating, but once completed correctly, you’ll likely have an automated system moving forward.

Key Metrics to Monitor

The first run is also your chance to fine-tune the process. After you initiate the first payment, collect more information, such as:

Employee Satisfaction: Gather feedback on their experience with direct deposit. Were there any hiccups?
Processing Issues: Check for delays, errors, or discrepancies in timing.
Efficiency Metrics: Evaluate the payroll team’s efficiency. How much time was spent processing payroll? Can you identify any unnecessary steps that could be automated?

Generate reports with these metrics and share them with key stakeholders in your payroll process. From there, you can collaborate with everyone to make the process run smoother next time.

Addressing Errors

Mistakes happen, especially the first time you run a new process. If an employee is paid incorrectly or a delay occurs, handle the issue with transparency and try to resolve it quickly. Use these moments as opportunities to reinforce trust and improve your system.

With the right payroll solution (especially one designed for low-touch automation), errors with payroll processing, calculations, and timelines should be rare. By paying attention to details, collecting feedback, and learning from the first cycle, you’ll set a solid foundation for long-term payroll success.

Edge Cases and Troubleshooting

Implementing direct deposit is generally straightforward, but certain scenarios require special attention. Let's explore some common edge cases and how to address them effectively with your new payroll system.

Employees in Different Countries

Managing payroll for international employees introduces some complexities. Currency conversions, varying tax laws, and compliance with local regulations are all things you’ll need to consider. Here are some ways you can facilitate global payroll:

Choose a Global Payroll System: Opt for a payroll solution capable of handling international transactions, including automatic currency conversions and compliance with country-specific regulations. Some platforms offer features like global direct deposit, allowing for seamless payments to employees worldwide.
Establish Relationships With Local Banks: In some countries, having a local bank account is necessary to process transfers. But even if it isn’t required, it will still facilitate smoother transactions.
Stay Informed on Local Laws: Keep up to date on labor laws, tax obligations, and payroll regulations in each country where you employ people or operate to ensure compliance and avoid legal issues.

Criterion HCM is licensed for payroll in the United States, Canada, and the United Kingdom.

Employees Working Across Different States

For employees who work in multiple states, especially in the U.S., payroll processing must account for various state laws and tax regulations. Each state may have different income tax rates and withholding requirements. Ensure your payroll system can manage multi-state tax calculations accurately.

Some states like California have unique overtime rules. Your payroll configurations should also reflect these variations to remain compliant. For instance, California requires overtime pay for hours worked over eight in a day, which differs from federal standards.

Union workers may also have variable wage rates and benefits that change based on location. To make this easy, it’s a good idea to implement location tracking and remote clock-in systems to accurately record work hours and locations.

Employees Without Traditional Bank Accounts

Not all employees have access to traditional banking services, which can complicate direct deposit. To accommodate these individuals, you may consider offering:

Payroll Cards: Offer payroll cards as an alternative. These prepaid cards can be loaded with wages each payday, allowing employees to use them like debit cards. However, be mindful of potential fees associated with these cards.
Mobile Wallets: Consider using mobile payment platforms like PayPal, Venmo, or Cash App. These services enable employees to receive funds electronically without a traditional bank account. Employees can generally provide their account information to set up direct deposit with these platforms as well.

Employees Who Prefer Cash

While less common, some employees may prefer cash payments. However, the main concern here is security. Cash is susceptible to loss, theft, or mismanagement in ways that direct deposit is not. If you choose to offer cash as an option once setting up direct deposit, be sure to implement strict protocols to safeguard cash transactions. Always maintain meticulous records of all cash payments within your payroll system for accurate accounting and compliance.

At the same time, it’s a good idea to educate employees on the benefits of electronic payment methods, such as increased security and convenience. Offering options like physical checks, which can be cashed at local banks, may also be a viable alternative to cash.

Criterion: Your Direct Deposit Payroll Solution

Direct deposit is a game-changer for modern payroll. It simplifies processes, ensures timely payments, and provides employees with a secure and convenient way to access their earnings. But to truly unlock the benefits, you need the right payroll system — one that doesn’t just get the job done but also empowers your business to grow and thrive.

Outside payroll services can manage the basics. But the flexibility and control you gain from managing payroll in-house with powerful software far outweigh the benefits of outsourcing. If you’re already spending time configuring payroll with a third party, why not spend the same time configuring the system in-house?

A system like Criterion HCM makes payroll efficient, adaptable, and puts it all completely under your control. In addition to seamless direct deposit, Criterion helps you achieve:

Multi-Entity and Multi-Location Management: Criterion is designed for businesses with complex payroll needs, including those operating across multiple branches, states, or even internationally. It’s the ideal solution for companies that have outgrown basic payroll systems and need a robust, scalable platform.
Tax Automation: Managing multiple tax jurisdictions can be a headache — but not with Criterion. Our built-in tax calculations handle compliance automatically, so you can leave the guesswork (and stress) behind.
Reporting and Integrations: Payroll can be more than a back-office task. It should be a strategic advantage. Criterion turns payroll data into actionable insights with custom reports and integrations with any third-party software. Get a clearer picture of labor costs, spot trends over time, and make informed decisions to improve your operations.

Ready to see how Criterion can revolutionize your payroll process? Book a demo today and experience the difference for yourself.