Direct deposit

What is direct deposit?

One of the ways to deposit funds into a personal bank account is through a process called direct deposit. Direct deposit is an automatic deposit of wages or benefits to a customer’s bank account. Often, employers offer direct deposit as a quick, easy way to pay their employees without the need for paper checks. However, there are other uses for direct deposit besides payroll.

Deeper definition

When it’s time to make payment, the payer’s financial institution will electronically instruct the payee’s financial institution to credit the payee’s account for the amount owed. The payee’s bank then deposits this amount of money into the account and charges the payer’s account. An account with the payer’s bank is not necessary to use direct deposit.

To set up direct deposit, an employee, for example, needs to provide his or her employer with his checking account number and routing number. The routing number tells the employer which bank to send the money to, and the account number tells the employer into which account to deposit the funds. When it’s time to send payment, the payment goes electronically into the employee’s bank account. The employee does not need to go to the bank; funds show up in the bank account, ready for use.

For large organizations making payments to many people, direct deposit is more convenient. It saves time and money for both the organization and the payees.

Direct deposit is also safer than other payment methods for a number of reasons.

The Federal Reserve Board’s Regulation E and the operating rules of NACHA, the administrator of the Automatic Clearing House (ACH) network, regulate direct deposit. This means that all reputable financial institutions insured by the Federal Deposit Insurance Corp. must adhere to strict security regulations. Other forms of payment, such as paper checks, can pass through many hands before reaching their destination.

FDIC-insured banks operate over private, secure networks that feature the encryption of personal data, which is the scrambling information to prevent unauthorized access. This keeps private data out of the hands of those who could use it for detrimental purposes. Banks also must provide a copy of their privacy policy to customers, either by hard copy or via their website. This policy should tell customers how the bank treats and protects private information.

Direct deposit example

Direct deposit is not just from an employer to an employee. Taxpayers can receive their yearly tax refund in the form of a direct deposit. During the filing process, the taxpayer provides his bank information, account number and routing number.

Individuals receiving Social Security payments or other federal benefits payments also benefit from direct deposit. Since March 1, 2013, the U.S. Treasury has required that all individuals receiving benefits set up direct deposit.

Use our calculator to determine which tax bracket you’re in.

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