Choosing The Right Pay Schedule For Your Business
When it comes to paying your employees, setting up a payroll system is an important component of your business plan. But before you set up a payroll system, you’ll need to make a few choices, and one of the first is to decide on the pay schedule that works best for your business. Should you pay employees monthly? Bi-weekly? What do all those terms mean and what are the pros and cons of each? How do you know you’re making the best choice for your business?
Read on while we delve into the debatable topic of pay schedules.
Types of Pay Schedules
Pay schedule is defined by your pay period and your pay date. When and how often will you pay your employees? There are four major prevailing pay schedule types businesses may choose when setting up payroll:
Each type has its own pros and cons, and assessing the right fit will boil down to what works best for your business and your employees. However, it’s important to note if your state has a minimum payroll frequency requirement or other payday requirements based on industry.
|Pay schedule||What it means for your business and employees|
|Weekly||Employees are paid more often for a total of 52 paydays per year.|
|Bi-weekly||Employees are paid every other week for a total of 26 paydays per year.|
|Semi-monthly||Employees are paid twice a month for a total of 24 paydays per year.|
|Monthly||Employees are paid once a month for a total of 12 paydays per year.|
The Weekly Pay Schedule
The weekly schedule means employees are paid every week for 40 hours of work, usually on a Friday, with 52 paychecks a year.
Paying weekly is a standard in some of the trades like construction, warehouse, plumbing, or back-of-house jobs. In general, employees like being paid more often, and a weekly pay schedule works best for employees living paycheck to paycheck. It is also the easiest for calculating overtime for employees who work irregular schedules.
The more pay periods, the more money your company might lose in fees, especially if your payroll system charges per payroll run. Fewer payroll runs, fewer costs. Not only does a weekly payroll cost the most for your company but it also takes up the most time for or your accountant.
The Bi-Weekly Pay Schedule
The bi-weekly schedule means employees are paid for 40 hours of work every two weeks, usually on a Friday, for 26 (or 27) total payments a year. With the bi-weekly method, two months out of the year, employees will be paid three times a month, and the way weeks fall year-to-year will impact whether you issue 26 or 27 paychecks annually (Leap Year, you sly little troublemaker).
This is less expensive than running a weekly payroll and less time-consuming. This method is often the most ideal for hourly workers and preferred among employees for its consistency (every other Thursday; every other Friday, etc.) and can be useful for financial planning and paying bills.
Bi-weekly pay can be the most cumbersome for an accountant or payroll supervisor in terms of time and difficulty. With the inconsistency of 26 or 27 paychecks, this method is the most headache-inducing to calculate benefit deductions and taxes.
The Semi-Monthly Pay Schedule
The semi-monthly schedule pays employees for 40 hours of work twice a month usually on the 1st and 15th (or 15th and 30th) of the month, for 24 payments a year. How is this different than bi-weekly? Under the semi-monthly plan, paychecks are consistent and there are only two paydays per month. Employees receive fewer and slightly bigger paychecks on the semi-monthly schedule.
Accountants like the consistency of running payroll. Payroll dates are set, and there is no confusion about paydays. Filing and taxes line up nicely at the end of the month with reporting cycles.
Bank holidays can put a wrinkle in a payment schedule, and the semi-monthly pay schedule doesn’t always line up with the work week.
The Monthly Pay Schedule
Employees are paid for their 40 hours of work once a month, toward the end of the month, for 12 payments a year.
This is the easiest for the employer with only 12 payroll runs per year; also, your payroll money has longer to sit and accrue during the month. It’s the easiest to run for salaried employees, and is the most cost-effective method. Accountants like it, too!
This is the least preferred method among employees.
How To Choose The Right Pay Schedule
In trades, where irregular scheduling makes week-to-week different, paying your employees consistently is an important factor. If it is industry standard to pay your employees weekly, it’s best to remain competitive and (if you can swing it) offer weekly pay.
However, choosing a pay schedule has more to do with the time you can commit to payroll and any state requirements you need to follow. If you pay employees a salary, calculating hourly wages may be less of a concern. So, as you try to marry your needs and wants, ask yourself these questions:
- Do I have the hours/ability to commit to a weekly payroll?
- Do I have a professional/service calculating payroll taxes/deductions?
- How much is my time worth?
- What method of payment would my employees prefer?
- Does my payroll service charge per payroll run?
- Do I want every Leap Year to make me irrationally angry at the universe?
- Does my state have a minimum paycheck requirement?
- What does my monthly cash flow look like?
- Does my industry offer overtime? Which pay schedule is best for calculating overtime?
Payroll is important, necessary, and a foundational aspect of your business. The pay schedule you choose will impact your business, dictate your cash flow, and matter a lot to your employees. No pressure, right? If you have an accountant or bookkeeper, weighing their time and abilities is important: you do not want to create a burden on employees. However, once you’ve decided on a method, stick to it and, if you’re ready, outsource as much of payroll as you are able.
There are many cloud-based payroll software options for small businesses and some of those even allow for different pay schedules depending on employee type. We recommend Gusto as a place to start for full-tax services with competitive pricing. However, each payroll system is unique — like your business — and you might find one of the other systems a better fit. Check out our reviews of Square, QuickBooks, Paychex, and ADP to see if there is a program that works for you.