ACH (Automated Clearing House) payments are a fast, secure way to move money between bank accounts—including paying employees, contractors, and freelancers by direct deposit. You can send ACH payments to vendors, request payment from a customer, and pay your team.
Using ACH transactions for payroll can be a great way to improve employee satisfaction. An American Payroll Association (APA) survey revealed that direct deposit is how most workers prefer to get paid. But the benefits of using ACH transactions for payroll don't stop there.
What is ACH payroll?
ACH payroll means paying your employees and contractors through the Automated Clearing House network instead of by paper check—the electronic direct deposits that land in their bank accounts on payday. Technically, payroll runs as an ACH credit: you instruct your bank to push funds from your business account to each worker's account. It's the same rails behind most direct deposit, and it typically settles in 1–2 business days (or the same day with same-day ACH).
What is ACH?
The ACH network is a national system that individuals, companies, and government agencies use to electronically transfer funds from one bank or financial institution to another. For example, the IRS may send tax returns via direct deposit using the ACH network. The National Automated Clearinghouse Association (NACHA) governs and manages this payment network.
A few years back, NACHA increased the daily electronic funds transfer limit and rolled out same-day ACH payments. As a result, the ACH network is thriving, and it processed 30 billion payments in 2022 alone. Considering the convenience and security of ACH payments, it's not surprising that businesses are choosing ACH direct deposit over outdated payment methods like paper checks.
Having faster options for receiving funds or sending bill payments can save you time and money. It can also improve cash flow and, in turn, improve your cash flow forecasting.
How does ACH work?
You can use the ACH network to make two different types of ACH transactions:
ACH credit
Say you need to pay an employee. You could instruct the ACH network to move money from your business bank account to your employee's account through your banking platform. This type of ACH transaction is called an ACH credit payment.
ACH debit
ACH debit transactions are helpful when you need to request payment from a client or customer. That's because the person receiving the funds initiates this type of ACH payment request.
Businesses can use both ACH credits and ACH debits. But when we talk about payroll, we're mainly talking about ACH credit transactions.
Can I use ACH payment processing for payroll?
Yes, you can use the ACH payment system to process payroll. This type of payment is used to process direct deposits for employees. ACH electronic payments are a fast, safe, and cost-effective way to transfer funds from your business bank account to an employee's bank account.
If you want to use ACH payments for payroll, you'll need the right business banking partner. Relay (that's us!) is an online business banking platform that lets small business owners send and receive standard ACH payments with no per-transaction fee.
Relay also helps small business owners streamline accounts payable—including payments to employees, contractors, and freelancers—with batch payments, approval workflows, and same-day ACH (the Scale plan includes unlimited free same-day transfers). Learn more here.
Pros and cons of using ACH payments for payroll
The payroll process has many moving parts. From navigating tax laws across states to tracking withholdings, it's easy for small business owners to get bogged down in the details.
The last thing busy business owners want to do is spend time printing checks or manually filling out payment forms. That's why many business owners consider ACH payments as a fast and simple way to pay their employees and contractors.
However, like any other type of payment, there are always some pros and cons. Here's what to consider before using ACH for payroll.
Benefits of using ACH for payroll
It saves time: You can use ACH to automate payments, freeing up the time you'd otherwise spend manually entering payroll information. ACH processing times for this type of transaction typically only take 1-2 business days.
It's more secure: Paper paychecks can get lost in the mail or stolen. But NACHA's strict ACH protocols encrypt ACH transfers so your information doesn't fall into the wrong hands. The ACH network is automated, meaning you must verify the payment information and authorize the transaction before it's processed. These extra layers of security give you more control over your cash flow.
It's convenient: Many employees prefer the convenience of ACH payments over other payment forms. They can access their money with a direct deposit once funds hit their account. ACH direct payments are convenient for business owners, too.
It's cheaper: Printing checks, buying stamps, and mailing envelopes are expensive and time-consuming tasks. ACH direct payments eliminate the need for these costs and time constraints. Also, ACH payments typically charge lower processing fees than debit or credit card payments.
Possible downsides of ACH for payroll
Cash flow: Funds leave your account as soon as the ACH payment is processed. This processing time isn't necessarily a con, but you must have the correct amount of cash available for the scheduled payment.
Timing: ACH payment information has to be verified ahead of time. That means you need to submit payroll requests early to stay on schedule. This isn't always easy to remember, but with an automation tool like Relay's accounts payable, you can automate bill payments and stay on top of cash flow all the time.
International payments: ACH payments may not be available to employees, contractors, or freelancers who live overseas. If you employ digital nomads or international talent, you may have to send a wire transfer instead. You can check out the Federal Reserve's International Payments Resource Center for more information on how this works.
How to set up ACH payments for your company's payroll
Ready to get started? You can take the following steps to set up ACH payments for your team:
Step 1: Work with an ACH operator to set up direct deposit payroll. This operator can be an online banking platform, like Relay.
Step 2: Have your employees, contractors, and freelancers complete a direct deposit form. Employees must provide their bank's address, the routing number, and their account number. They'll also need to specify if the account is a savings account or a checking account.
Step 3: Next, you need to set a payment schedule. Many businesses offer biweekly pay cycles. Remember, the funds have to be in your account before you can complete an ACH payment.
Step 4: Once you have this information, you can send payment instructions to your bank. In this case, your bank or financial institution is the originating depository financial institution (ODFI). The ODFI will send the ACH transaction details to the ACH operator through the ACH system.
Step 5: The ACH operator then sends the ACH payment to the employee's bank or financial institution. In this case, the employee's bank is the receiving depository financial institution (RDFI). The RDFI will move the request to the employee's account.
Step 6: Once all these pieces of information are in place, the funds are withdrawn from your account and placed in the employee's account—and the ACH direct deposit is complete.
Tips for streamlining payroll with ACH
Before paying your team with ACH, you'll want to set up some clear processes. Think about when workers need to submit time cards or send invoices. Also, consider how they can securely send you their banking information and tax forms.
For example, you can easily manage contractors and payments with Relay. Instead of chasing down contractors for their payment information and tax forms, you can request them through Relay. This makes it incredibly easy to process payments on time, all the time.
You can also set single and multi-step approvals, automate payments, and sync your account activity log back to your accounting software. With Relay, you can spend less time worrying about accounts payable and more time on growing your business.
Managing ACH payroll payments with Relay
If you want to streamline your payroll process, Relay's same-day and next-business-day ACH services can help. You can use ACH to pay employees, contractors, and freelancers quickly and easily.
You can apply for a Relay account online in as little as 10 minutes: sign up here.
Frequently asked questions
How long does ACH payroll take?
Standard ACH direct deposits typically settle in 1–2 business days after you submit payroll, so you need to send the request ahead of payday. Same-day ACH can move funds the same business day if you submit before the day's processing window. Either way, the money has to be in your account when the payment is initiated.
Is ACH the same as direct deposit?
Direct deposit is the most common use of the ACH network. When you pay employees by direct deposit, you're sending an ACH credit—the ACH network is the underlying system, and direct deposit is the payroll application of it.
What's the difference between ACH payroll and a payroll provider?
ACH payroll is the payment method—moving wages to workers' bank accounts over the ACH network. A payroll provider is a service that also calculates gross-to-net pay, withholds and files payroll taxes, and produces pay stubs, then uses ACH to deliver the pay. You can run ACH payments directly through a business bank account for contractors and simple payrolls, or pair a payroll provider with your bank for full tax handling.
What's the difference between an ACH credit and an ACH debit in payroll?
An ACH credit pushes money from your account to someone else's—this is how payroll works, since you're sending wages out. An ACH debit pulls money into your account and is initiated by the recipient, which is more common when you're collecting payment from a customer.
