Payroll: Using Direct Deposit

Traditionally, employees are paid by printing and hand-delivering or mailing a paycheck. Today, however, many employers choose to pay their employees using Direct Deposit. This is the process of electronically transferring money from the employer's bank account to the employee's bank account. The payroll module can help facilitate the transfer of these funds.

In order to accomplish this direct deposit transaction, the employer must supply their bank with information about each employee who will be paid. This includes the amount the employee will be paid and the employee's bank account information. The employer's bank usually provides software or a website where this information can be entered. The information can sometimes be entered by hand; however, the more efficient and accurate method for supplying this information to the bank is to have the accounting software generate a file that can be read by the bank software or website. This computer file is stored in an industry-standard format called Automated Clearing House (ACH).

The Payroll module can generate this ACH file during the paycheck printing process, provided some settings have been previously made in the software. This help topic will guide the user through all the steps necessary to generate an accurate ACH file for direct deposit of payroll amounts into individual employees' bank accounts.

General Direct Deposit Setup

Select Postings & Paychecks from the Setup > Accounting Options > Payroll Options menu. The following window will come into view:

Press the Direct Deposit button and the following screen comes into view.

Cash Account for Direct Deposits

Enter the account number of the General Ledger Cash Account from which money will be withdrawn to pay direct deposit employees.

Direct Deposit Employees

This list box displays employees for whom Direct Deposit settings have already been made.

Adding or Changing Employee Settings

Use the Insert or Change button to modify direct deposit settings for individual employees. If the Insert button is pressed, an employee selection screen is displayed. Pick the employee and the following window comes into view.

Use Direct Deposit for this Employee (check box)

Check this box if Direct Deposit is to be used for this employee.

Pre-Notification (check box)

Select this box to send a Pre-Notification test record to the bank. A real paycheck will still be printed for this employee. This is useful when Direct-Deposit is first set up for an employee. The ACH file created during check printing will include a test line item for this employee's pay. The bank software will check the information and report to you if there is something wrong in the employee setup. Once one paycheck run has been completed with this box checked, the box will automatically be unchecked from that time forward.

List of Accounts (list box)

This box will list all the accounts this employee uses for direct deposit. Usually the list will consist of at most two accounts, Checking and Savings.

Change Attributes of Direct Deposit Account

The list box will contain a list of all General Ledger Cash Accounts. If an account is to be used as a source for Direct Deposit transactions, edit those settings by highlighting the desired account and clicking the Change Attributes button. This window will appear.

IMPORTANT: The Bank Account and ABA Routing Number fields can be used for a special feature in the system-generated ACH file. If these two fields are filled, the resulting ACH file will contain a line item for the transaction relieving the company bank account of the appropriate amount of funds to cover the payments made to employees. If they are left blank, the resulting ACH file will only contain line items for payments to employees. Some banks prefer that the offsetting entry be included in the ACH file, some do not.

Bank Account Number

Enter the bank account number assigned to the account by the bank.

ABA Routing Number

Enter the routing number assigned by the American Banking Association (ABA). This is the same number entered above in the Miscellaneous Payroll Setup section.

Next Voucher #

The system can keep track of the last used Direct Deposit Voucher number. The next time Direct Deposit Vouchers are created during Paycheck Printing, the system will start at this number.

Print Order for ACH Line 101

These options refer to the ACH text file generated during paycheck printing. One of the first lines in the file is referred to as the 101 Line. The order of the information printed on this line varies from bank to bank. After consulting with the Direct Deposit specialist at the bank, the user can specify the order using these settings. As different options are selected, the Example ACH Header Lines at the bottom of the window will be modified to reflect the change.

Print Using ALL CAPS (check box)

Check this box to make all alphabetic characters in the file be generated in capital letters.

Include Line for Offset Amount (check box)

Some banks require an extra line item in the file that shows the total amount that will be withdrawn from the cash account to cover the transferred amounts. Check this box to make the system generate this line during check printing.

The remaining fields are not used by the Direct Deposit capability. The bank name and address fields are used on the printed check when using the "Magnetic" check format. The Next Available Check # field is used to keep track of physical check numbers.

The settings are now completed for directly depositing the employee's net pay amount into their bank account. When paychecks are printed, a normal paycheck will not be printed for this employee. Instead, a non-negotiable payment voucher will be printed at the end of the check run (optionally on plain paper) which can be presented to the employee as their record of payment.

Directly Depositing Deducted Amounts

Some employees may wish to receive their pay in the form of a paycheck, but have a portion of their pay deducted and directly deposited into a savings account. Even employees whose net pay is already being directly deposited into their checking account may wish for a portion to be deposited into savings.

Follow these instructions to set up direct deposit for deducted amounts.

First, select Standard Deductions from the Setup > Payroll Options menu. On the ensuing window, highlight the desired standard deduction and click the Change button. The following window will come into view:

If the Direct Deposit Deduction box is checked, this standard deduction will allow for amounts to be directly deposited into employee accounts.

Next, select Employees from the Payroll main menu. Select the desired employee and click the Change button. On the ensuing window, select the Deductions tab. Highlight the desired deduction and click the Change button or click the Insert button to create a new deduction for this employee. The following window comes into view:

If this deduction has been marked as a Direct Deposit deduction (using the instructions above), the selection field in the lower right hand will be enabled and pulling down the selection field will display the list of this employee's direct deposit accounts. Select the appropriate account for depositing amounts deducted using this standard deduction.

Paychecks, Direct Deposit Vouchers, and ACH Files

When paychecks are printed, standard paychecks will be printed first. The check printing process will then pause and the following window will come into view:

The program will now print Direct Deposit vouchers for those employees whose funds are going to be transferred directly into their bank accounts. These vouchers can be printed on check stock or on blank paper. Select which type of paper is desired. If Print on Blank Paper is selected, enter the number of the first voucher to be printed.

Click the Continue button and the vouchers will be printed.

At the end of the check run, one of the posting reports will show information stored in the newly-created ACH file. The information in the text file will look something like this:

This file is now ready to be imported into the bank's software or uploaded to their website.