Automated Clearing House (ACH): What It Means for Employers

What it means in practice

The Federal Reserve Board describes the ACH system as "a nationwide network through which depository institutions send each other batches of electronic credit and debit transfers." The CFPB puts it in consumer terms: an ACH transaction is "an electronic money transfer made between banks and credit unions," used for direct deposit of paychecks and for routine monthly debits. Treasury's ACH regulation defines the ACH as "a funds transfer system governed by the ACH Rules which provides for the interbank clearing of electronic entries for participating financial institutions" (31 CFR 210.2(f)). ACH is one way to make an electronic funds transfer (EFT).

Who writes the rules. The Bureau of the Fiscal Service says financial institutions in the ACH network follow operating rules developed by Nacha, that "Nacha is not a government agency," and that the Federal Reserve's ACH Operating Circular governs how Reserve Banks and sending and receiving banks clear and settle commercial ACH credits and debits. For payments to and from federal agencies, 31 CFR Part 210 incorporates Nacha's operating rules by reference and gives them the force of federal law, with listed exceptions (31 CFR 210.2 and 210.3).

Credits and debits. An ACH credit pushes money out of the sender's account; the Federal Reserve Board lists direct deposit of payroll, Social Security benefits and tax refunds as typical credits. An ACH debit pulls money from an account under the account holder's authorization; mortgage and utility bill debiting are the Board's examples. Employers use both. Payroll is a credit the employer starts through its own bank. A tax payment can go either way: Treasury's tax-collection rule defines an ACH debit entry as one originated by the Treasury Financial Agent "at the direction of the taxpayer," and an ACH credit entry as one originated by a financial institution at the taxpayer's direction (31 CFR 203.2).

How a payroll file moves. Step 1: the employer, or a payroll provider acting for it, gives its bank a file of credits with a payment date. Step 2: that bank, the originating depository financial institution (ODFI), sends the file to an ACH operator by a transmission deadline. Step 3: according to the Federal Reserve Board, the operator edits and sorts the payments, delivers them to each employee's bank, the receiving depository financial institution (RDFI), and settles by debiting and crediting the institutions' settlement accounts. When the two banks use different operators, the Reserve Banks settle the payment. Consent, payment-method and payroll card rules for employees are covered on the direct deposit page.

Standard and same-day timing. On the FedACH processing schedule (effective September 12, 2022), future-dated items settle at 8:30 a.m. ET on a future business day. Same-day items sent by the 10:30 a.m., 2:45 p.m. or 4:45 p.m. ET transmission deadlines settle at 1:00, 5:00 or 6:00 p.m. ET that day. Federal Reserve Financial Services says that under the ACH Rules, international transactions, automated enrollment entries and transactions above $1,000,000 are not eligible for same-day processing, and an item must not carry a future effective entry date. These deadlines apply to banks sending files to the Reserve Banks. An employer's own cutoff is set by its bank or payroll provider; IRS Publication 15 likewise warns that third parties "may have different cutoff times." The CFPB adds that ACH payments can take days to complete and can "bounce" when an account lacks funds.

Holidays and weekends. The Federal Reserve's K.8 schedule lists the days the Reserve Banks close. For a holiday on Saturday the Reserve Banks open the preceding Friday; for a holiday on Sunday all Federal Reserve offices close the following Monday. FedACH also publishes when processing stops and restarts around each holiday. The federal tax calendar uses a different list. Publication 15 defines a "legal holiday" for deposits as a legal holiday in the District of Columbia, and its 2026 list includes April 16 (District of Columbia Emancipation Day) and July 3 (Independence Day observed). Neither is a closure date on the K.8 schedule, which notes the Reserve Banks are open on July 3, 2026. Build both calendars into the pay period schedule.

Paying federal payroll taxes by ACH. Publication 15 (2026) says "you must use EFT to make all federal tax deposits," through EFTPS, IRS Direct Pay or the IRS business tax account, or through a tax professional, financial institution, payroll service or other trusted third party. EFTPS is free. With an EFTPS payment, EFTPS debits the employer's designated bank account on the scheduled date (IRS Publication 966). An employer that prefers an ACH credit from its own bank must first be enrolled in EFTPS and should check whether its bank offers the service and charges a fee (Publication 966). New employers that indicate a federal tax obligation when requesting an EIN are pre-enrolled in EFTPS (Publication 15). If a deposit was not set up in time, the employer can still deposit on time with a same-day wire through the Federal Tax Collection Service, arranged with its bank in advance. That is a wire, not an ACH payment.

The deposit schedule still controls. Deposit rules "are based on the dates when wages are paid (cash basis)," not on when liabilities accrue (Publication 15). A monthly schedule depositor deposits by the 15th of the following month. A semiweekly depositor deposits taxes on Wednesday, Thursday or Friday paydays by the following Wednesday, and taxes on Saturday through Tuesday paydays by the following Friday. Anyone who accumulates $100,000 or more on a day must deposit by the next business day. A deposit due on a non-business day is timely if made by the close of the next business day. These amounts are payroll liabilities until the ACH transfer completes.

When an ACH tax payment fails. A deposit by EFT counts only when the money leaves the account and is "not returned or reversed" (26 CFR 31.6302-1(h)(8)). Publication 966 makes the employer responsible for submitting the payment on time, recording the acknowledgment number and "making sure your account contains the funds." Publication 15 (2026) sets late-deposit penalties of 2% for 1 to 5 days late, 5% for 6 to 15 days, 10% for 16 or more days, and 15% for amounts still unpaid more than 10 days after the first IRS notice. Amounts paid directly to the IRS instead of deposited also draw 10%. Under the accuracy of deposits rule, a shortfall is not penalized if it is no more than the greater of $100 or 2% of the required deposit and is made up by the makeup date. Penalties do not apply when a failure was due to reasonable cause and not willful neglect.

Regulation E protections for employees. Regulation E defines an electronic fund transfer to include "direct deposits or withdrawals of funds" (12 CFR 1005.3(b)(1)), and the official interpretation names "a transfer sent via ACH" (comment 3(b)(1)-1.ii). Section 1005.3(a) applies several provisions to "any person," including an employer that debits an employee's account. Recurring debits from an employee's account must be authorized "only by a writing signed or similarly authenticated by the consumer," and whoever obtains the authorization must give the employee a copy (12 CFR 1005.10(b)). If a recurring debit will change in amount, the payee must send written notice of the amount and date at least 10 days before the transfer (12 CFR 1005.10(d)). The employee can stop a preauthorized debit by notifying the bank at least three business days before it is scheduled (12 CFR 1005.10(c)). No person may condition credit, such as an employee loan, on repayment by preauthorized transfers (12 CFR 1005.10(e)(1)). Reversals of erroneous direct deposits are covered on the direct deposit page.

Where states differ. State payroll tax agencies set their own electronic payment rules. Two examples from official state pages: California's EDD requires all employers, including out-of-state employers, to submit payroll tax deposits electronically. It lists EFT and ACH credit among the compliant options and charges a penalty of 15% of the amount due for a non-electronic DE 88 deposit; an approved waiver lasts one year. New York's Department of Taxation and Finance says NYS-45 Web File filers pay by ACH debit, making one payment for withholding tax and one for unemployment insurance, while PrompTax filers can use ACH debit, ACH credit, Fedwire or certified check. If the employer's bank account has a debit block, New York tells employers to give the bank the department's ACH company ID and name; otherwise the bank may reject the payment and the department may bill the amount with penalty and interest.

Recordkeeping. Publication 15 says to keep employment tax records for at least 4 years, including the "dates and amounts of tax deposits you made and acknowledgment numbers for deposits made by EFTPS"; each successful payment also returns an EFT Trace Number usable as a receipt. FLSA records must show total wages paid each pay period and the "date of payment and the pay period covered by payment" (29 CFR 516.2(a)(11)-(12)). See payroll register.

Example 1: a Thanksgiving week payday. A Remindax illustration: a biweekly employer pays on Friday, November 27, 2026. Thanksgiving, Thursday, November 26, is a Federal Reserve holiday, and FedACH stops processing at 11:30 p.m. ET on Wednesday, November 25. Future-dated items settle at 8:30 a.m. ET on a future business day, so a file that reaches FedACH on Wednesday with a Friday date can settle Friday morning. The bank's or provider's own cutoff comes earlier.

Example 2: the tax deposit for that payday. If the employer is a semiweekly depositor, taxes on the Friday, November 27 payday are due Wednesday, December 2, 2026 (Publication 15). If the deposit is $1 million or less, EFTPS will accept it the same day if submitted before 3:00 p.m. ET on December 2; if it is more than $1 million, it must be submitted by 8:00 p.m. ET on Tuesday, December 1. If the ACH debit is returned for insufficient funds, the deposit is not deemed made (26 CFR 31.6302-1(h)(8)).

Example 3: weekend and holiday due dates. A monthly depositor's taxes on October 2026 wages are due November 15, 2026, a Sunday, so a deposit on Monday, November 16 is timely. If any employer accumulates $100,000 of taxes on Wednesday, November 25, the next-day rule moves the deposit to Friday, November 27, because Thanksgiving is a legal holiday.

Questions employers ask. Is ACH the same as EFT? No. EFT is the broader term; Regulation E's definition also covers ATM, point-of-sale and telephone transfers, and it excludes Fedwire transfers used mainly between institutions or businesses (12 CFR 1005.3(b)(1) and (c)(3)). Does a payroll provider make us exempt? No. Publication 15 says the employer remains responsible if the third party fails to deposit, and Publication 966 suggests enrolling in EFTPS separately to check that payments are made. Does ACH timing move payday? No. Overtime is due on the regular payday for the period in which the workweek ends (29 CFR 778.106). Can an EFTPS payment be cancelled? Publication 966 (Rev. 03-2012) says by 11:59 p.m. ET at least two business days before the scheduled date.

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