Charles Read, CPA, USTCP, IRSAC
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Payroll deadlines depend on a few things. I’ll explain what may impact their dates and why. How you pay your employees will make a difference.
Direct Deposit Payroll Deadline
If you process direct deposits with payroll, it’s impossible to guarantee direct deposit into an employee’s financial institution in less than two days. Here’s why!
The “Originating Depository Financial Institution” (ODFI) sends the direct deposit file and it must go through additional hands. The ODFI is normally the employer’s or payroll service bureau bank.
- First, it goes from the ODFI to the ACH (Automated Clearing House) system operator, which is the Federal Reserve system.
- Then, they process it there. The pieces going to the various “Receiving Depository Financial Institution” (RDFI) for each employee’s account are created. Other transactions going to that institution are also created.
- Lastly, the RDFI picks up the file electronically. It loads it into their internal system which makes the direct deposit available for the employee.
The ODFI has a schedule of when it sends and receives files to/from the system operator. This time slot is an old banking term called a “window.” The largest institutions have the most, as well as the latest in the day, “windows” to send/receive files.
If the employer or service bureau misses the ODFI’s last window, the file waits until the next day to go to the system operator. It takes the system operator as much as four hours (or more) to have the data assembled into the outbound file. The file “waits” for the RDFI’s next window to be picked up. Some RDFI’s only have one window late in the day.
Credit unions use a correspondent bank, not the system operator, to get their files because they are not a bank. Credit unions usually pick up from their RDFI correspondent bank once a day in the afternoon. If the direct deposit for the employee is not yet at the RDFI, it won’t be picked up that day and made available for the employee.
Lots of hands and deadlines in the pot!
If the ODFI is a large institution and sends early in the day and the RDFI is a large institution with a late pickup window, the direct deposit may well only take one day. Therefore, it could be sent by the employer’s ODFI early Monday and be available for the employee at the RDFI at the opening of business Tuesday. Any delay or time slippage or having a credit bureau in the mix or dealing with smaller ODFIs/RDFs will cause the direct deposit to not be available until the second business day – in this example, Wednesday.
What holds true for direct deposit also hold true for debit cards.
Payroll Deadline for Checks
Paying employees by check is different because it can be on demand. If the payroll deadline is Tuesday, you can cut your checks on Tuesday. But, it’s not the recommended way to pay your employees. If an employee loses his check, you have to stop payment. You will usually pay a fee, with your bank and then write another check. It takes two days to deposit funds through Direct Deposit. It is the easiest way to guarantee the employee is paid.