Choosing the right pay schedule may seem like a simple decision, but there are some important factors that go into it, including employee attitude, Department of Labor regulations, payroll cost, and taxes and benefits. The first step toward choosing the right schedule for your business is analyzing what type of employees you have.
"What you'll want to do is to choose one that is beneficial to the business as well as the employee," said Andrew Schrage, CEO of Money Crashers. "Fail to take the worker into account, and your turnover rate could skyrocket. Having said that, you have four main options: weekly, biweekly, semimonthly and monthly."
Once you've considered what's best for your employees, visit the Department of Labor's website to see the payment requirements in your state. Laws vary by state and pay period type. Some states, for example, don't allow for monthly pay periods. After checking in on your state's regulations, talk with your accounting department or payroll specialist to determine what schedule is best for your business. There are often taxes, benefits costs and processing costs that impact which schedule is best for your business.
Generally, weekly pay periods are preferred mainly by businesses with hourly employees. Biweekly and semimonthly pay periods can be ideal for small businesses, depending on the makeup of employees within the organization and the various taxes and charges for each. Monthly pay periods are only ideal for freelance or contract-based work, as many employees can struggle to budget effectively on a monthly basis.
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Sean Glynn, chief operating officer for CUE Marketplace, said his company uses a biweekly pay schedule because it features a mix of salaried and hourly employees. He also said processing payroll every week can be five to 10 percent more expensive for a small business.
Weekly schedules, while ideal for hourly employees, are usually more expensive. That's because payroll companies usually charge its customers every time it processes payroll. Many hourly workers would prefer a weekly pay schedule, but sometimes it may not be worth it for small businesses.
"If your team is mostly comprised of hourly members, then a weekly pay schedule is probably the best. It helps them out the most, and the cost to you is minimal if you choose the right service," Schrage said.
In a biweekly pay schedule, employees are paid twice a month on the same day of the week. These days usually fall on a Friday, and would be locked in as the first and third Friday of each month, for example. Glynn said this pay period is good for businesses that have a mix of salaried and hourly employees.
"Biweekly is a good compromise for hourly workers, and it's actually really nice for salaried workers, which is typically what we have more of on our staff … For us it is a good mix and a good option," he said.
The biweekly plan gives workers a concrete understanding of exactly when they'll receive a check each month. However, it's important to talk with a payroll specialist or your accountant to make sure this is an ideal schedule for your business. There could be outstanding taxes or benefits-related costs that this schedule affects. [Interested in payroll systems? Check out our best picks and reviews.]
A semimonthly pay schedule is like a biweekly one, but instead of having two paydays on consistent days of the week each month (say 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 days fall on a weekend, you and your payroll specialist can decide if employees will receive checks on the Friday before or Monday afterward.
"[A] semimonthly plan might be the best choice, although because of dates, payments might be delayed or actually future-based, which could present a problem from an accounting perspective," Schrage said.
Like the biweekly pay period, review tax, healthcare costs and regulations before deciding on this pay schedule.
The monthly pay period isn't ideal for most small businesses. This is a good option for contract-based or freelance employees. This is also the more heavily regulated pay schedule compared to the others. You can double-check if your state allows for monthly pay schedules here. [Interested in small business accounting software? Check out our reviews and best picks.]