What Is Payroll EFT and How Does It Work?

Payroll Electronic Funds Transfer (EFT) has become a standard method for modern compensation. This digital method for wage disbursement offers a streamlined alternative to traditional paper checks, integrating seamlessly into the financial routines of both businesses and their employees. Its widespread adoption reflects a broader shift towards more efficient and secure electronic transactions across various financial sectors.

What Payroll EFT Is

Payroll Electronic Funds Transfer (EFT), commonly known as direct deposit, is the electronic transfer of an employee’s net pay directly into their designated bank account. This method eliminates physical paychecks. The Automated Clearing House (ACH) network facilitates this movement, processing financial transactions across the United States. Unlike wire transfers, which move money immediately, ACH transactions are grouped and processed at specific times, making them a cost-effective choice for recurring payments like salaries.

Key Details for Setting Up Payroll EFT

To establish direct deposit, an employee must furnish their employer with specific banking details. This includes the bank’s name, nine-digit routing number, and personal bank account number. Employees also specify the account type, such as checking or savings. Employers often collect this information through a direct deposit authorization form, and may request a voided check or deposit slip for verification. This helps ensure accurate electronic transfers to the correct account.

How Payroll EFT Functions

Once an employer has gathered banking information, the payroll EFT process begins with the employer submitting data to their bank, the Originating Depository Financial Institution (ODFI). The ODFI transmits an ACH file with payment instructions to an ACH operator, such as the Federal Reserve or The Clearing House. This operator sorts and distributes the payment information to the employee’s bank, the Receiving Depository Financial Institution (RDFI). The RDFI posts funds to the employee’s account, usually making them available within one to three business days. This automated flow ensures a predictable payment schedule for employees.

Advantages of Payroll EFT

Payroll EFT offers benefits for both employees and employers. Employees gain faster access to their funds, often on payday, eliminating bank trips and the need to wait for checks to clear. This method enhances security through reliable, automated deposits, reducing the risk of lost or stolen paper checks. Employees can also allocate portions of their pay to different accounts, such as savings, promoting better financial management.

For employers, payroll EFT reduces administrative costs associated with printing, signing, and distributing physical checks. Businesses can save an estimated $0.10 to $2 per paper check compared to direct deposit, translating to annual savings. This electronic system improves efficiency by streamlining payroll processing and offers greater predictability for cash flow management. Direct deposit is also an environmentally conscious choice, as it reduces paper waste and the carbon footprint.