Direct deposit is a popular and convenient option, but you may be wondering, how does it work? For direct deposit, employers require the payee’s bank account information or a void check in order to start making deposits. Direct deposit is most commonly used to transfer an employee’s salary; however, it may also be used for things like tax refunds, investment dividends, retirement account payments, and government benefits like Social Security or unemployment payments.
Companies send their payroll information to financial institutions, and it then gets shared with the Automated Clearing House (ACH). This all happens a couple of days before payday, so the ACH has time to sort and route the information to each employee’s bank. Once the money gets transferred from your company to your bank, you see it in your account.
Notes on direct deposit for federal benefits (tax refunds and credits)
Since federal law requires that benefit payments be made electronically, direct deposit is the fastest and most secure option for receiving your funds. Taxpayers have the option to receive their tax refunds from either a physical check or using direct deposit. However, according to the IRS, “8 out of 10 taxpayers get their refunds by using Direct Deposit.”
Government refunds and stimulus checks are typically made immediately to the payee when enrolled in direct deposit. Wondering if you’re eligible to receive your funds this way? As a citizen, you’re eligible for direct deposit if you have government benefit payments due to you and if you have an open and active bank account with a financial institution.
Individuals with children who are eligible for the monthly Child Tax Credit for 2021 can also take advantage of direct deposit. The IRS actually highly encourages the use of direct deposit to receive these payments faster each month.
The IRS has also improved the Child Tax Credit Update Portal to let families update their bank account information online, so they can receive their monthly Child Tax Credit payment on time. If you don’t enroll in direct deposit to receive these funds, you’re looking at a longer waiting period between when the payments are made and being able to use the money since you will then be receiving a check in the mail.
