Electronic Funds Transfer (EFT): What It Means for Employers

What it means in practice

EFT is a broad category, not a single payment network. The Electronic Fund Transfer Act says it includes, but is not limited to, point-of-sale transfers, ATM transactions, direct deposits or withdrawals of funds and transfers initiated by telephone (15 U.S.C. 1693a(7)). For payroll, the most common kinds are the automated clearing house (ACH) credits that carry direct deposit of net pay, loads to payroll card accounts, and the electronic payments employers use to deposit federal payroll taxes. Two separate bodies of federal rules apply: consumer-protection rules for money going into employees' accounts, and IRS deposit rules for money the employer sends to the Treasury.

The legal definition. Regulation E (12 CFR Part 1005), issued by the Consumer Financial Protection Bureau (CFPB), defines an EFT as "any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer's account" (12 CFR 1005.3(b)(1)). The CFPB's official interpretation lists a transfer sent via ACH among covered transfers (comment 3(b)(1)-1.ii). A "consumer" is a natural person, and an "account" is a checking, savings or other consumer asset account "established primarily for personal, family, or household purposes," including a prepaid account (12 CFR 1005.2(b)(1), (b)(3) and (e)).

What is not an EFT under Regulation E. Section 1005.3(c) excludes transfers originated by check or similar paper instrument, check guarantee services, and wire transfers "through Fedwire or through a similar wire transfer system that is used primarily for transfers between financial institutions or between businesses." The official interpretation adds that if a bank receives funds by Fedwire and then sends them to a consumer's account by ACH, the ACH leg is covered even though the wire is exempt (comment 3(c)(3)-1). The Federal Reserve Board says Fedwire transfers are "immediate, final, and irrevocable once processed." The commentary also says a payroll allotment to a creditor that is deducted from salary is not an EFT because it does not debit or credit a consumer asset account (comment 3(b)(1)-2.i); that is a payroll deduction, governed by wage-payment rules instead.

Who Regulation E reaches. Most of Regulation E governs financial institutions, but section 1005.3(a) makes several provisions apply to "any person," including the written-authorization and compulsory-use rules in 1005.10(b), (d) and (e) and the record-retention rule in 1005.13. The CFPB's commentary says employers and payroll service providers typically are not "financial institutions" for payroll card accounts, but an employer that holds the accounts or issues the cards and agrees to provide EFT services "would be deemed a financial institution" (comment 18(a)-2).

The compulsory-use rule for pay. No financial institution or other person may require a consumer to establish an account for receipt of EFTs with a particular institution as a condition of employment (12 CFR 1005.10(e)(2); 15 U.S.C. 1693k). The official interpretation says an employer may require direct deposit if employees choose the receiving institution, or may offer deposit at an institution it designates alongside another method "such as by check or cash" (comment 10(e)(2)-1). CFPB Bulletin 2013-10 applies the same rule to payroll cards and says permissible alternative payment methods "are governed by state law." The Department of Labor's Field Operations Handbook treats direct deposit as acceptable under the FLSA "provided employees have the option of receiving payment by cash or check directly from the employer" (FOH 30c00(b)). Our direct deposit entry covers consent, payday timing and state rules in detail.

Payroll card accounts. A payroll card account is an account "directly or indirectly established through an employer" to which EFTs of wages, salary or other compensation are made on a recurring basis, whoever operates it (12 CFR 1005.2(b)(3)(i)(A)). The commentary excludes cards used only for bonuses or other incentive pay, petty cash or per diem, or isolated payments such as a final paycheck (comment 2(b)(3)(i)-2). The card issuer's short form disclosure must open with a statement such as "You do not have to accept this payroll card. Ask your employer about other ways to receive your wages" (12 CFR 1005.18(b)(2)(xiv)(A)). Employees who use the card get Regulation E error-resolution and liability protections.

Employee protections that follow an EFT. If an employee reports a lost or stolen card or other access device within two business days of learning of it, the employee's liability for unauthorized transfers is capped at the lesser of $50 or the amount taken before notice; a later report raises the cap to $500, and failing to report a transfer on a periodic statement within 60 days can leave the employee liable for later transfers (12 CFR 1005.6(b)). Error resolution rules for misdirected or wrong-amount deposits are summarized in the direct deposit entry.

Authorizations to pull money from an employee's account. Preauthorized EFTs from a consumer's account "may be authorized only by a writing signed or similarly authenticated by the consumer," and the person that obtains the authorization must give the consumer a copy (12 CFR 1005.10(b)). If a recurring debit will vary from the previous amount, the payee or institution must send written notice of the amount and date at least 10 days before the transfer (12 CFR 1005.10(d)).

The employer side: federal tax deposits by EFT. Treasury regulations say a taxpayer with a required deposit obligation "must use electronic funds transfer" for all deposits made after December 31, 2010, unless exempted by IRS guidance (26 CFR 31.6302-1(h)(2)(iii)). IRS Publication 15 (2026), section 11, applies this to withheld federal income tax and both halves of social security and Medicare taxes, and lists EFTPS, IRS Direct Pay or your IRS business tax account as ways to deposit; a tax professional, financial institution, payroll service or other trusted third party can deposit for you. EFTPS, Direct Pay and the business tax account are free. Publication 15 says not to use a credit or debit card, or electronic funds withdrawal when e-filing, to make federal tax deposits. Your monthly or semiweekly deposit schedule comes from a lookback period. See payroll liabilities for how these amounts build up.

How an EFTPS deposit works. A new employer that showed a federal tax obligation when requesting an EIN is pre-enrolled in EFTPS and receives a PIN by mail to activate (Pub. 15). Each successful payment produces an EFT Trace Number that serves as a receipt. Publication 15 (2026) says EFTPS accepts same-day payments of $1 million or less submitted before 3:00 p.m. Eastern time on a business day; larger payments must be submitted by 8:00 p.m. Eastern time the day before the due date, and third parties may have different cutoffs. If you miss the EFTPS window, the same-day wire option through the Federal Tax Collection Service lets your bank wire the deposit, using the IRS Same-day Taxpayer Worksheet; the IRS says to ask your bank about availability, fees and cut-off times. Under the regulations, an EFT deposit is deemed made "when the amount is withdrawn from the taxpayer's account, provided the U.S. Government is the payee and the amount is not returned or reversed" (26 CFR 31.6302-1(h)(8)).

Penalties for deposits made late or the wrong way. Publication 15 (2026) lists failure-to-deposit penalties of 2% for deposits 1 to 5 days late, 5% for 6 to 15 days, 10% for 16 or more days, 10% for amounts that should have been deposited but were paid directly to the IRS or with the return, and 15% for amounts unpaid more than 10 days after the first IRS notice. The IRS penalty page says the penalty covers deposits not made "in the right way" and that the rates do not add together. Penalties do not apply when a failure was due to reasonable cause and not willful neglect, and the IRS may waive the penalty the first time a deposit is required if you "inadvertently send the payment to the IRS rather than deposit it by EFT" (Pub. 15).

Using a payroll provider. Publication 15 says an employer that uses a payroll service provider "remains liable for its employment tax obligations" and should ensure the provider uses EFTPS so the employer can confirm deposits. When a third party enrolls the employer in EFTPS, the employer receives an Inquiry PIN it should activate to monitor the account. A reporting agent must use EFTPS for deposits made on an employer's behalf.

FUTA deposits. Publication 15 (2026), section 14, says that if your FUTA tax liability for a quarter, including amounts carried forward, is over $500, you must deposit it by EFT by the last day of the month after the quarter ends. If it is $500 or less, you may carry it forward to the next quarter.

Recordkeeping. Publication 15 says to keep employment tax records for at least 4 years, including the dates and amounts of tax deposits and acknowledgment numbers for deposits made by EFTPS. On the employee-payment side, a person subject to Regulation E must keep evidence of compliance for at least two years from the date action is required (12 CFR 1005.13(b)). Wage payment records belong in your payroll files.

Where states differ. CFPB Bulletin 2013-10 says the Act and Regulation E preempt state laws only to the extent of inconsistency, that a state law giving consumers greater protection is not inconsistent, and that most states add restrictions on how wages are paid. States also set their own tax deposit methods. One example: the California Employment Development Department's e-file and e-pay mandate requires all employers, including out-of-state employers, to submit payroll tax deposits electronically, lists EFT (ACH credit) and e-Services for Business among the options, and sets a penalty of 15% of the amount due for payments not made electronically. Check your own state labor and tax agencies; DOL lists state labor offices.

Questions employers ask. Is a wire an EFT? Not under Regulation E (12 CFR 1005.3(c)(3)), but the IRS accepts a same-day wire as a federal tax deposit. Can we require EFT for pay? Only if employees choose the institution or have another option (comment 10(e)(2)-1), and state law may add conditions.

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