Direct deposit is a cost effective and secure way of paying employees. But what makes this modern convenience possible for payroll and banking? An electronic transfer system known as the Automated Clearing House (ACH) Network. 

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What is ACH?

The ACH Network allows companies, government agencies and individuals to electronically transfer money between bank accounts. It is capable of pushing and pulling funds, unlike some other payment networks that can only do one or the other. Same-day and future-dated transactions are both available.

What is an ACH payment?

There are many types of online payments possible through the ACH network, but those most relevant to employers managing payroll include the following deposits:

  • Wages and salaries
  • Travel and expense reimbursements
  • Disbursements from retirement savings plans
  • Dividend and interest payments

ACH transaction categories

ACH transactions fall into one of the following categories:

  • ACH credits – Funds are pushed from the account of the transaction originator to the account of the receiver.
  • ACH debits – Funds are pulled from the receiver’s account and sent to the originator’s account.
  • Entries – Depending on the receiver’s account type, an ACH entry can either be a consumer payment or a non-consumer payment.
  • Account validation – Validations verify that an account is open and accepting transactions.
  • Prenotification – ACH entries with no monetary value may be issued before the first live entry to validate an account.

How to use the ACH payment method for payroll

In most states, employees must agree to direct deposit before an employer can begin using ACH payments for payroll. Employees must also provide their employers with the following information:

  • Account type (checking or savings)
  • Bank name
  • Routing number (ABA/transit number)
  • Bank account number
  • Amount or percentage to be deposited each pay period

Employers give these details to their payroll service provider, who then processes the ACH payments on their behalf.

The benefits of ACH payroll payment processing

Using ACH payments for payroll offers employers the following advantages:

  • Direct deposit is usually cheaper than the cost of printing and mailing checks.
  • Employees appreciate the speed and convenience of direct deposit.
  • Electronic payment is more secure than paychecks, which can be lost or stolen.

The drawbacks of ACH payroll payment processing

The benefits of using ACH payments when running payroll usually outweigh the cons, of which there are a few:

  • Transactions can take one to three days to process, though same-day payments may be available.
  • Some financial institutions prohibit international ACH payments, in which case, wire transfers may be needed.
  • There are daily cutoff times, which if missed, can delay transactions.
  • Banks may have a daily or monthly limit on how much money can be transferred.

The process of making ACH payments

ACH payments for payroll generally work as follows:

  1. After receiving authorization via a signed direct deposit form and all relevant banking information from the employee (receiver), the employer (originator) may initiate a transaction.
  2. The originating depository financial institution (ODFI) or bank receives payment instructions from the employer and sends ACH entries to the ACH operator.
  3. The ACH operator, a central clearing facility that performs settlement functions for financial institutions, forwards the ACH entries to the employee’s bank.
  4. The receiving depository financial institution (RDFI) or bank posts the ACH entries to the employee’s account or pay card.
  5. The employer’s account is debited and the employee’s account is credited.

These steps typically are not necessary for businesses working with a payroll provider, like ADP, who handles all ACH transactions on the employer’ behalf.

Frequently asked questions about ACH payroll

How long does an ACH deposit take?

Employees who agree to direct deposit generally have access to their earned wages by 9:00am on the scheduled payday. In some cases, the money may even be available prior to payday if the bank or credit union advances their own funds before settlement occurs.

How much do ACH payments cost?

ACH payments are usually free. However, some banks may charge a nominal fee for certain types of transactions.

How long does an ACH payment take to process?

Although same-day payments are available, ACH transfers can sometimes take one to three days to process.

What's the difference between ACH payments, wire transfers and EFT payments?

ACH payments and wire transfers are two types of electronic fund transfers (EFT). ACH payments are limited to domestic transactions, are generally free and may take one to three business days to process. Wire transfers, in contrast, can be used for international transactions, albeit with fees, and usually process within the same business day.

Are there any penalty fees with ACH payments?

Over drafting an account to make an ACH payment or exceeding the number of transactions permissible per month, if any, may result in penalty fees.

This guide is intended to be used as a starting point in analyzing the ACH meaning and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.