What is a prenote used for?

One of the biggest problems an employer can encounter is sending an employee’s wages to the wrong account. It delays the employee’s payment and creates stress in the workplace. A prenote for direct deposit is a series of trial transactions that go into the employee’s account to ensure that future transactions arrive seamlessly and accurately.

The deposits are usually less than a dollar and are often reversed after the test is completed. During prenote account verification, the employee reports the deposit amounts, and the bank verifies that the transactions were made. A direct deposit can’t be established without this process.

The benefits of direct deposit as a form of payment

There are many benefits to using direct deposits as a form of payment for both you as the employer and your employee, including:

Convenience

If employees have open bank accounts, they may prefer to receive their payments as direct deposits, rather than getting a paper check for each pay period. When receiving a traditional check, the employee must make a deposit with their bank, and they could be forced to wait several days before the money becomes available for use. This can be frustrating, especially if the money is needed for monthly bills that are coming due.

Direct deposits are arranged via ACH batches with many transactions made simultaneously. The money arrives in the employee’s account on payday, and in some cases, before payday.

Peace of mind

Direct deposits are much more secure than paper checks. Paper checks can be lost or stolen, and other mishaps could occur that could cost the employee their hard-earned money. Employees have more confidence and peace of mind when enrolling in direct deposit because there are no paper checks to get lost in the mail, fall between the seats of a vehicle or get stolen.

Reduced paperwork

Employers benefit from reduced paperwork when using direct deposit as a payment method. All ACH transactions have a digital record, which becomes useful when filing tax documents and other required forms.

Companies that issue direct deposit often have all of their employees’ withholding information on hand, making sending out 1099s and W-2s at the beginning of each year a seamless process. The amount of time saved can reduce what an employer might need to pay an accountant or its payroll department.

Cost efficiency

Not only does printing paper checks cost money, but businesses that mail their checks must also pay for postage, which further increases the cost of payroll. Direct deposit transactions are cost-effective for employers. There’s no need to print or mail a check, and the cost of using ACH transactions is significantly lower than what it costs to print checks.

Setting up the prenote process

To ensure that payments are being sent to the right accounts, you need to collect some information before setting up direct deposit for your employees:

• A blank and voided check: A check can often provide you with all the information you need to set up the account. If some information is missing, you can easily confirm it with your employee.
• The bank account number: This is the account that receives the deposit. Direct deposit payments may be sent to checking and savings accounts.
• The names on the account: If the account is a joint account, you need all the names that appear on the account.
• The name and address of the bank: It’s important to include both the name and address of the bank or credit union—even if it’s a small bank with a single branch.

Privacy and security

Privacy and security are concerns that many employees have in a world where cybercrime is running rampant. For that reason, you should return the voided check to your employee after the prenotification is complete and secure all the direct deposit information that you keep on file. As an employer, you have a responsibility to take action to prevent cases of identity theft and other cybercrimes.

The prenote process

When an employer submits the information to the financial institution that makes its direct deposit, the prenote process begins. The employee is sent a very small deposit and must confirm that it’s arrived. When it shows up, the deposit is shown as pending. It’s important to make sure that the status moves from pending to complete—if it doesn’t, there’s a problem.

Processing timeline

Sometimes it takes as little as a few days to process the paperwork for direct deposits. However, it may take as long as four weeks, so you need to communicate with your employee to let them know when they can expect to begin receiving direct deposits. Until the first direct deposit is completed, the employee should continue to receive paper checks.

Not everyone qualifies for direct deposit

While direct deposit takes a lot of weight off of an employer’s payroll department, some employees may not be able to take advantage of this payment option. Employees who don’t have or can’t open a bank account need to receive payment in the form of a paper check or debit card.

Debit cards are another option for employees who can’t sign up for direct deposit but would like to have more security. The money can be deposited to the card by the employer to be used for credit or debit transactions at the employee’s discretion. It’s important to offer multiple payment options because no two employees have the same financial circumstances.