Which Pay Period is the Right Pay Period?
The differences between pay periods for your employees involve many different factors that can affect your decision. It may seem simple to go with the standard bi-weekly schedule, but do you know the benefits and drawbacks? How often do your employees earn overtime? How much do your employees get paid? Do you have hourly employees, or are they salaried? Below are the pros and cons of the different standard payroll periods. Another deciding factor may be how much time and money you want to invest in payroll software or payroll services. We’ll cover this later!
Weekly Payroll – For the Employees
Weekly payroll benefits hourly employees the most, especially full-time employees that regularly receive overtime. Part-time employees enjoy a more frequent payment schedule, particularly since they don’t log as many hours. Getting paid weekly means that employees don’t have to wait as long to receive their hard-earned money. Running payroll weekly can also make it easier on your payroll team, since the numbers are easier to calculate between regular time and overtime, especially if you use a time tracking software.
The most significant downsides of weekly pay are the time and money that goes into processing every week. The more often you pay employees, the more time you, or a payroll processor, will need to enter their time, and tax filings tend to be due more often. So if you have someone in-house enter time for you, prepare to be paying them more for entering payroll. You may want to think about outsourcing payroll if you don’t have enough employees to justify a payroll department. Also, if your bank charges you deposit fees for direct deposits, you’re paying more of those fees over the year. It’s similar if you have paper checks. You’re printing more, so you’re spending more on check paper.
Bi-Weekly Payroll – Most Common
A bi-weekly pay period is the most common, resulting in 26 paychecks a year. This helps to cut down on payroll costs for the business. Since payroll is run less frequently, you’ll be paying less for processing, deposits, check paper, and all those things we mentioned from the cons for a weekly schedule. Being paid every two weeks works the best for hourly and salaried employees, and with the need for payroll processing cut in half, this leaves more time for you or your staff to focus on other necessary tasks.
However, with bi-weekly pay, the breakdown of any bi-monthly premiums or employee contributions must be taken into account and broken out by 26 rather than 24. This can result in some checks having higher deductions than others, which means there are two months in the year that result in three paychecks. Those additional paychecks result in a higher expense for the company for those months that can be troublesome if you aren’t expecting them.
Semi-Monthly Payroll – Predictability at a Cost
When putting employees on a semi-monthly pay period, you’ll need to decide which two days out of the month to pay your employees. The first and 15th of each month are when companies typically choose to pay employees. However, you are not restricted to these days. Semi-monthly payroll is all-around beneficial. Employees always know what days they’re getting paid, those who are running payroll have a more straightforward pay period to run payroll off of, and it still provides workers with timely payments for the days worked. You also won’t run into the same issue as breaking out those two extra paychecks in the year, meaning more accurate deductions for any employee benefits.
The biggest drawback to semi-monthly comes down to overtime. When paying employees hourly, any amount of time worked over 40 hours per work week must be paid out as overtime. Due to this, it’s essential to make sure to keep up with any extra time worked by those employees to apply to the appropriate paychecks. For this reason, semi-monthly is typically used for salaried employees, so there isn’t as much to keep up with.
Monthly Payroll – For the Business Owners
Monthly payroll pays out employees on a specific date each month. While those are ordinarily the last day or the first day of the month, you may choose whatever day of the month you feel would be most beneficial. This pay schedule is more for the employer’s benefit since you don’t need to run payroll as often, cutting down on payroll costs. You’ll also be paying your payroll taxes less often. Employers would also be able to align it with monthly reports, and any deductions that you have for your employees would be processed in just one set rather than the two to five as you would with other pay periods.
The disadvantage of this type of pay period comes down to your employees. Most employees don’t enjoy the limited cash flow caused by one paycheck a month, even if it’s one big check. A monthly payroll schedule will require employees to budget their checks more than usual and doesn’t work well for hourly employees due to the aforementioned overtime implications. Hourly employees would need more time for payroll clerks to adjust paychecks to include any overtime they may have performed during the previous month. Employee retention is a significant factor for many companies, and monthly paychecks aren’t usually on the list of why employees stay.
The Pros and Cons and What Will Work for You
There are pros and cons to each type of payroll. Some types benefit employees, while some favor the employer. Understanding these benefits and an understanding of the needs of your employees can help you make this decision a little easier. Other things to keep in mind are that a standard workweek consists of 40 hours, and under the Fair Labor Standards Act (https://www.dol.gov/agencies/whd/overtime), everything over that is required to be paid at time and a half. In addition, a workweek only needs to consist of a 7-day consecutive period, so you can choose to have Monday-Sunday or Thursday-Wednesday. It all depends on how you want the payroll schedule to work for you.
When deciding on a pay schedule, the most important thing is to check with state law, as some states restrict the types of pay schedules you’re allowed to have, which can affect your payroll taxes (https://www.dol.gov/agencies/whd/state/payday). If you’re still uncertain of which schedule you should go with, there are always people to contact and work with you to assist in finding the one that is just right for you and your business.