As an employee of an organization, corporation, or company, you may have come across this confusing option while filling out your payroll form. This option is the one that asks ‘always fund distributions before net pay?’
This option is usually found in the direct deposit distributions section of the payroll form and has left many people wondering what it means. You don’t have to wonder any longer as we will be explaining exactly what that phrase means.
We will also be giving examples of how your monthly net pay can be divided between different bank accounts, such as a checking account, savings account, and more. The option is available for your employer to understand how you want your payment deposited.
What does the ‘always fund distributions before net pay’ option mean?
This is an option available for people who have multiple accounts set up and would like their employer to split the employee’s pay between these accounts. The employee can set up their take home pay to be divided between up to three accounts.
Clicking ‘yes’ on this option means that you are letting your employer know that you would like a certain dollar amount or percentage of your paycheck to be paid to your main account and the rest of the funds to any remaining account that you include.
The settings you choose will be applicable for all your future payments, though you can change your settings. This may include adding a different checking account, making a transfer request, or other changes.
What is net pay distribution?
The concept of net pay distribution is when you request for your net salary to be distributed among different accounts as a direct deposit to each one. This is an option that most employees who work in companies have the right to.
The method of distribution can be set by you or the system will assume you want the default option. Net pay distribution happens once an employee has set up multiple direct deposits and then filled out a deposit order.
The default deposit order for a net distribution of payment is from the savings account to the checking account, though the employee is free to add another checking account so that the salary is split between the three.
Examples of how payment can be split
There are different ways that an employee’s pay can be split between many accounts. As long as the employee’s bank account information is available for all the accounts they want to receive payments into, they can set up their payday however they want.
Here are a few options for the method in which this can be done. In each of these scenarios, we will be assuming that an employee makes $1,000 monthly as their net pay.
Allocating Dollar Amounts
The first method that an employee can use for net pay distribution is allocating a particular dollar amount to one account and specifying that the rest of the money goes to another. In this case, that would be $500 each.
The employee could specify that they want $500 to go to a listed savings account while the rest of the money goes to a checking account in the same bank. The process of distribution will go as follows.
The first $500 will be deposited into the savings account. After this is done, the remaining $500 goes to the checking account. However, if an employee only makes $500 in monthly net pay and they make a deposit order of $500 to their savings account, the situation would be different.
In that case, the $500 would go to the savings account and nothing would be deposited in the balance account.
Allocating percentages (e.g. 50/50)
Another common way that an employee can make use of net distribution pay is by setting up their money to be deposited by percentages into different accounts. One of the most common ways that this is done is by splitting the paycheck 50/50.
This means that 50% of the funds go to a savings account while the remaining 50% goes to a checking. If, for instance, the employee is making $800 monthly, their savings account will receive a deposit of $400, and the checking will receive the same.
Allocating dollar amounts to more than two accounts
Another option that many employees opt for when distributing their net pay is to divide their money between more than two accounts for easy access. This might be in a bid to save, or the employee may have other reasons for using three accounts.
In this situation, the employee would specify how much funds they want to be deposited in the first two accounts while the remaining goes to the third. For example, an employee may specify that they want $200 in their savings, $300 in their checking, and the balance in another account.
Keeping in mind that our fictional employee is making $1,000 monthly, that would mean that their savings gets a deposit of $200, their checking gets $300, and the other checking account will get the balance, which is $500.
Employees are free to make this division to any degree that they desire, and their employer or the human resources department of their company will handle the distribution of the funds.
Keep in mind in this situation that if the employee’s salary cannot accommodate a distribution to three accounts, the allocation will stop at the second. For example, if an employee specifies $200 for savings, $300 for checking, and the balance to another account but their salary is only $500, no money would be deposited in the third account.
Allocating money by both dollar amount and percentage
The final method of net pay distribution that an employee can opt for is having money distributed by both a specified amount and a specified percentage. This means that the employee allocates a dollar amount to one account and a percentage of the net pay to another.
For example, an employee can request $400 to be deposited into their savings and 20% to their checking with the balance sent to another checking account. That 20% specified is to be a fraction of the total net pay, not the balance after depositing the savings.
This would mean that the employee’s savings would first be deposited with a total of $400. After this, 20% of the net pay would be sent to the first checking account, which is $200. The remaining $400 will be sent to the last checking account.
How do direct deposit distributions work?
The direct deposit distribution determines the order in which payment is allocated to the different bank accounts of an employee. When an employee decides to split their paycheck in this way, they can also decide in what order their accounts are to be credited.
The deposit order is the designated order in which accounts are credited. The account labeled as one (1) will be credited first, and so on for as many accounts as the employee has.
With direct deposits, employees can access their salaries quickly and easily. Employers do this by transmitting payrolls up to two banking days before payday. This ensures that employees receive their paychecks on time.
If employers fail to transmit direct deposits during banking hours with enough prior notice, it may take a few extra days before employees see the deposit in their accounts. This is why employers need to make timely payments.
Transmitting direct deposits on non-banking days such as public holidays, weekends, or after business hours will result in the deposit being made on the next banking day.
Payment distributions are a good idea for people who want to save money in different accounts or be able to access their money from different accounts. It is an option available for most employees of companies and can be easily carried out.
Next time you come across the ‘always fund distributions before net pay’ option, you will know what it means and whether it is an option you want to choose.