How frequently your business runs payroll may seem like a simple decision, but there are several important factors to consider, including employee preferences, Department of Labor regulations, payroll costs, and taxes and benefits. Additionally, your pay schedule choice can affect your organization’s ability to attract and keep the best employees.
We’ll look at the most important factors to consider when choosing a pay schedule, standard pay schedule models, and how to determine what’s suitable for your company.
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The first step in choosing the proper pay schedule for your business is analyzing the type of employees you have. Consider how much your employees work each week, how much their pay varies from week to week, and whether they’re hourly or salaried employees. You’ll also look at their overall income in a typical pay period.
Once you’ve considered what’s best for your employees, visit the Department of Labor’s website to learn your state’s payment requirements. Laws vary by state and pay period type. For example, some states don’t allow for monthly pay periods.
After checking your state’s regulations, talk with your accounting department or payroll specialist to determine what schedule is best for your business. Taxes, employee benefits package costs and processing costs often impact which schedule is the most suitable.
Generally, businesses with hourly employees prefer weekly pay periods. Biweekly and semimonthly pay periods can be ideal for small businesses, depending on the makeup of their workforce and the payroll taxes required for each employee. Monthly pay periods are ideal for freelance or contract-based work only, as many employees struggle to budget effectively on a monthly basis.
Standard pay schedules range from weekly to monthly, and each has its advantages and drawbacks. For example, while weekly pay may be better for businesses that employ hourly workers, monthly may be better for freelancers who work on a project basis.
Here’s an overview of the most typical pay schedules, what they entail, and their pros and cons.
While ideal for hourly employees, weekly schedules are usually more expensive. This is because payroll companies usually charge client businesses each time they process payroll. Many hourly workers prefer a weekly pay schedule, but sometimes it’s not worthwhile for small businesses.
“If your team is mostly comprised of hourly members, then a weekly pay schedule is probably the best,” said Andrew Schrage, CEO of Money Crashers. “It helps them out the most, and the cost to you is minimal if you choose the right service.”
With a biweekly pay schedule, employees are usually paid twice a month (not always – it depends on the month) on the same day of the week. This is usually a Friday – for example, the first and third Friday of each month. This pay period is suitable for businesses with a mix of salaried and hourly employees.
The biweekly plan gives workers a concrete understanding of when they’ll receive a check each month. However, talk with a payroll specialist or your accountant to ensure this is an ideal schedule for your business. This schedule could potentially affect outstanding taxes or benefits-related costs.
A semimonthly pay schedule is similar to biweekly, but instead of having two paydays on consistent days of the week each month (e.g., the first and third Friday), semimonthly pay periods are tied to specific dates. These paydays are usually on the 1st and the 15th, or the 15th and the 30th. If these dates fall on a weekend, you and your payroll specialist can decide if employees will receive checks on the Friday before or Monday after.
As with the biweekly pay period, you should review tax, healthcare costs and regulations before deciding on this pay schedule.
A monthly pay period isn’t ideal for most small businesses. This is a good option for contract-based or freelance employees. A monthly schedule is also more heavily regulated than the others. Check with the Department of Labor to see if your state allows monthly pay schedules. [Finding the right accounting software can be a challenge. We’ve analyzed the major players and put together a list of the best accounting software for your business.]
Dock Treece contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.