Weekly, bi-weekly, monthly? Compensation planning isn’t just about how much you pay employees. It’s about the when. Determining an appropriate timeline for paying employees is a challenge all new businesses face. With multiple options to consider, it’s certainly not an easy decision, especially when changing pay periods can be a major hassle. To help you understand which pay period frequency is the right fit for your business, here are ten things you need to know:
1. What is a Pay Period?
A pay period refers to the recurring schedule your payroll department will follow to compensate employees. There are several common pay periods to choose from, and each has its own advantages and disadvantages. The option that works best for one company is not necessarily right for another.
2. Not All Pay Periods Are Created Equal
You may already know the most common pay periods to choose from include weekly, bi-weekly, semi-monthly, and monthly. But do you know how those differences might impact your business?
Weekly Pay Periods:
Employees receive 52 paychecks per year – one for every week of the year. Payroll is scheduled to run on the same day every week, most often on Thursday or Friday.
- Employees like frequent paychecks
- Most time-consuming in terms of administration
Bi-weekly Pay Periods:
Employees receive 26 paychecks per year. Because bi-weekly pay periods occur once every two weeks, some months will have three pay periods. To further complicate matters, every decade or so the extra day from leap years wreaks bi-weekly pay havoc by necessitating a 27th paycheck.
- Employees like getting paid more often
- Works well with large proportion of hourly employees
- More time/cost-efficient than weekly pay
- Accounting can be more demanding during 3-pay period months
- Managing monthly benefit premiums on a bi-weekly schedule can be complicated
- Administrators must pay careful attention to pay dates to accurately process payroll on schedule
- The 27th check can have complex impact on factors such as meeting employee annual pay expectations, amount of employer contributions, tax and benefit implications, etc.
Semi-monthly Pay Periods:
Employees receive 24 paychecks per year, 2 per month. Employers typically issue checks on the 1st and 15th of the month, or the 15th and the last day of the month. You do have the option of scheduling recurring payments on any two dates in a month that are spread equally apart.
- Employees and employer always know payroll dates
- Consistent and regular schedule, no leap-year-causing complications
- Calculating overtime can be challenging
- Works best for exempt salaried employees
- Workweeks don't always align with pay cycles
- Dates may need adjusted due to bank holidays
Monthly Pay Periods:
Employees receive 12 paychecks per year, issued on the same date every month, usually the first or last day the month.
- Easiest for employers to manage
- Cost-effective and time-saving
- Can work for salaried employees, but not hourly workers
- Not great for employee budgeting
- Dates may need adjusted do to bank holidays
Depending on the needs of your business, decide what days make up your workweek. *According to the Fair Labor Standards Act (FLSA), a workweek is a fixed period consisting of seven consecutive 24-hour periods, 168 hours in total. *
4. Payroll Costs Vary
Cost will vary depending on how you process payroll. The more frequently you run payroll, the more you may end up spending on processing and administration. In general, weekly pay periods are likely to be the most expensive option, while monthly will be the most cost-effective.
5. The Value of Time
Managing and processing payroll accurately can be time consuming. The more frequent your pay periods, the more time you or your employees will need to spend on pay cycle functions as opposed to other things like growing your business.
6. Consider Your Employees
Consider the proportion of your employees who are exempt (paid a salary) versus those employees paid by the hour. Hourly employees benefit from more frequent paychecks, especially in trades where irregular schedules are the norm. Industries that employ more exempt salaried workers tend to select semi-monthly and monthly pay periods.
7. Business Management
Companies need to assess how their specific business operates before settling on a pay period.
- Are there certain times of the month that are busier than others?
- Does cash-flow need to inform your selection?
- Do you anticipate lots of OT?
According to the Fair Labor Standards Act (FLSA), overtime should be paid at 1.5 times the regular hourly rate for any hours worked over 40 in a week. Some states have additional requirements.
If you have a high proportion of non-exempt employees who are eligible to earn overtime, you may want to consider that as you choose your pay cycle. For example, if you pay semi-monthly on the 15th and the last day of the month, each pay period may have a different number of days. In addition, the pay period will likely end in the middle of a workweek. HR managers may find calculating OT for hourly employees more challenging on a semi-monthly pay schedule.
The Department of Labor has issued its final overtime rule to increase the minimum salary threshold for overtime exemption from $23,660/ year to $35,568/year. The final rule will take effect January 1, 2020. To ensure compliance, employers must review their exempt employees and determine if they meet the new threshold.
9. Legal & Regulatory
The federal government requires that you pay your employees on a regular basis but sets no guidelines as to how often that should be. Some states, on the other hand, do have minimum pay period requirements. Check with the Department of Labor in your state to verify laws and regulations.
10. Withholding & Reporting Requirements
Employers are required to withhold the appropriate amount of federal, state and local taxes from each employee paycheck. The more often you run payroll the more accounting must be managed to ensure monthly and quarterly payroll tax payments and reports are submitted accurately. Failure to do so can result in substantial fines and penalties.
Know Your Options
No matter what type of business you’re in, understanding the various scheduling options and the implications of each will help you determine the one that works best for you.
Ready to take the next step?
For nearly 30 years, Paycor has maintained a core expertise in payroll and compliance. Our payroll software is an easy-to-use yet powerful tool that gives your team time back and our expert tax team assists with complicated areas like payroll tax compliance and workers’ comp so you can focus on paying your people. Contact us today to learn more about how our expert payroll and tax solution can help you pay your employees on time and avoid compliance missteps.