There are lot of options for payroll schedules, including monthly, semi-monthly, biweekly and weekly. You might be thinking, “Why does it matter how often I pay my employees… they will still be receiving the same amount of money?”
However, the truth is that paycycles do make a difference and there are advantages and disadvantages to each schedule. There are a lot of things you will need to consider when it comes to choosing the right paycycle for your business.
It’s important to take the time to choose the right pay schedule at the outset – because once you set up the schedule you can’t change it. You’ll need to stick to a consistent schedule.
When you find the paycycle that works best for you and your employees, it will save you a lot of hassle and keep your team happy and motivated. So, let’s look into what you need to consider when it comes to determining the paycycle for your business.
What to Consider
- What are the local laws about minimum pay periods? For example, some states require you to pay employees at least semi-monthly.
- Does your accountant run monthly reports or weekly reports?
- Do you pay hourly or salary?
- Do you pay overtime?
- How much does it cost to process the payroll?
- How much do you pay your employees?
- How many employees do you have?
Your Industry Makes the Difference
Another important consideration to make is the industry in which you work. Some types of businesses and industries are better suited to specific types of pay cycle.
For example, weekly pay periods are favored in the trade industry, such as construction, landscaping, flooring, plumbing, etc. In fact, 70.6% of businesses in the construction industry use a weekly pay period. This is because historically in the trades industry projects can go belly up and workers don’t get paid.
With a weekly pay schedule the construction workers can do the work and then get paid at the end of the week without any complications. Weekly pay is usually used for projects covered by the Davis Bacon Act, which regulates all payment to mechanics and laborers on Federal Government construction projects. Also, some workers in the construction and manufacturing industry may be members of unions, which can require weekly payroll checks.
Biweekly pay periods are preferred in industries where employees earn an hourly wage because overtime can be easily calculated. With semi-monthly payments you will be paying hourly employees up to 86.67 regular hours per period rather than 80 regular hours, so this can make figuring out overtime more complicated.
You can also consider how much you pay your employees. If you are paying minimum wage, consider a weekly pay schedule. If your employees earn a higher wage, you can pay them less frequently. They will not be as constrained when managing their budgets by the lower frequency of payments, as they have higher hourly earnings.
Another factor to consider is whether your industry has an unusual compensation structure that is higher risk for employees. If this is the case, you may want to look for ways to maximize the reward and call in the payroll as frequently as possible. For example, this may apply to industries where payment is based on commissions or percentage of sales.
Pros and Cons of Each Option
Employees who are paid weekly will get 52 paychecks per year. Most companies that pay weekly will pay on the Friday for the previous week.
Being paid more often makes it easier for employees to budget their own personal expenses. Also, it means that employees won’t have to wait a long time to be compensated for overtime. For example, if an employee works 60 hours one week and then 30 hours the next week, a weekly payroll will make sure that they receive their overtime pay quickly so they can use it if needed.
Weekly payments don’t always coincide with the calendar months, which can be very confusing for employees and the accounting department. Also, if your business makes a monthly budget yet pays weekly, it won’t always match up neatly. Plus, most payroll software vendors will charge every time payroll is run, so paying more frequently will cost you more.
A bi-weekly payment is made every other week, which means that employees get 26 paychecks per year (27 in some years). Usually the payment is made for the previous two weeks, or for the two weeks just ended.
This is the most common payroll schedule – nearly 36% of private businesses in the US choose to pay their workers bi-weekly.
You will save money on the cost of processing payroll, as you only need to do it 26 times per year rather than 52 times. If you are in an industry where employees are paid hourly it is easy to calculate overtime.
Weeks don’t always match up with months. For two months of the year, you will have three pay periods rather than two. This means that your monthly budget will need to have payroll expense accruals so that the costs are recognized in the month that the compensation was paid.
With a monthly pay schedule, your employees will be paid on the same day every month. They will receive 12 paychecks per year.
If your accounting department runs monthly reports and makes monthly budgets, this will make things a lot easier. There will always be one payroll per calendar month and employees will know what to expect. You won’t have to worry about cross-period accrual of payroll related expenses. Plus, you’ll save a significant amount on payroll processing costs.
Also, often employee benefits such as dental, medical and vision care usually run on a monthly basis so monthly payments make these deductions easier.
Only getting paid once per month can put a financial strain on employees, especially if you are in a low-income industry. More frequently payments will help them to manage their finances more easily.
With semi-monthly payments your employees will be paid twice per month- for example on the 1st and the 15th. This means that there will be 24 pay periods throughout the year.
Semi Monthly payments have a lot of the same advantages as monthly payments, as they match up well with the calendar months.
This payment schedule may be confusing for employees, as they won’t be paid on the same day of the week. Sometimes the 15th might fall on a Wednesday, then next month on a Friday, etc. Sometimes the pay date might fall on the weekend, which means that adjustments will need to be made to make sure that your employees are paid on the nearest weekday.
Tips for Setting up a Paycycle
- Using real-time employee time tracking software such as Boomr can help to make managing and organizing your payroll much easier.
- Take the time to make sure that all employee details are correct on your payroll system, such as addresses, start dates, dates of birth, etc. Any sloppy mistakes will lead to issues down the line.
- There will be a difference between paying employees and independent contractors – knowing how these two types of employees affect your payroll is important to understand.
- Make sure that you understand your local Employment and Labor Laws when it comes to handling paid time off, business deductibles and employee compensation.
- Plan ahead for payroll, so that you will have time to figure out any issues that may arise.
What is the right paycycle for your small business? There are pros and cons to every option, so take the time to choose the best solution for your employees and your business.
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