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Whether you are a new business trying to plan your approach to payroll, or a current business looking to modify that approach, know that deciding the pay period type you will use is the first decision you need to make. There are several elements companies consider when making their decision.
Factors to Consider
- Time – Each pay period runs for different lengths of time. This means certain pay periods require you to run payroll more often. If you pay an accountant or payroll provider to process your payroll, it may be more time consuming and expensive to use one of the more frequent pay periods.
- Cash flow and logistics – If the business’s cash flow fluctuates greatly it is important to make sure you will have cash on hand to pay your employees, so payroll should fit your schedule. If certain days of the week are busier than others, choose a pay period that allows you to run payroll on the same day each pay period.
- Employee preference – More than ever employee preference is affecting business decisions. Typically, employees would like to be paid more often, especially hourly or low wage workers. Taking employee preference into account is a good way to build a positive relationship with your people.
Common Types of Pay Periods
Weekly
- Time – Occurs most often and therefore is the most expensive.
- Cash flow and logistics – Logistically it is more complicated since it occurs often.
- Employee Preference – Employees generally prefer weekly pay periods
Weekly pay periods work exactly as you would expect. You can choose any day of the week to start the pay period. Employees generally prefer this pay period since they get paid more often and decrease the lag time between getting paid and the work they perform.
Bi-Weekly
- Time – Occurs less often than weekly and you can choose which day payroll is run.
- Cash flow and logistics – Logistically it is more complicated to track salaried employees and accrued time because there is an uneven number of pay periods in a year.
- Employee Preference – Most common type of pay period used by businesses.
“Bi” means two so that means bi-weekly happens every two weeks. The pay period can begin on any day of the week and continue for 14 days. This is convenient because pay day will fall on the same day of the week every pay period. However, logistically bi-weekly pay periods cause issues when tracking salaried employees or accrued time such as vacation, sick and paid time off. Since there are 14 days in a bi-weekly pay period and 365 days in a year that means there are 26.07 pay periods in a year. If an employee earns a set salary per year or is awarded a set amount of accrued time per year, dividing that amount up 26.07 pay periods is challenging.
Semi-Monthly
- Time – Similar time frame to bi-weekly.
- Cash flow and logistics – Much better for tracking salaried employees and accrued time. However, it does make tracking weekly overtime more difficult.
- Employee Preference – Second most common pay period used by businesses. Employees enjoy it because they get paid twice a month.
“Semi” means half so that means a semi-monthly happens twice per month. The day of the week the pay period begins and ends changes every month. Most commonly, semi-monthly pay periods go from the 1st to the 15th and the 16th to the end of the month, but it can be for any date range. This is convenient because businesses and employees usually structure their budgets on a monthly basis and payroll occurs twice a month. The biggest difficulty comes if you calculate weekly overtime because a semi-monthly pay period contains partial weeks.
Monthly
- Time – Occurs less frequently than all other pay periods.
- Cash flow and logistics – Similar to the semi-monthly pay period, tracking weekly overtime is more difficult, but tracking salaried employees and accrued time is simplified.
- Employee Preference – Least favored by employees.
Running payroll 12 times a year is literally half the workload of the next closest pay period type. While business owners may appreciate this, most employees prefer to be paid more than once a month. Some states also mandate a shorter pay period. In practice using a monthly pay period is uncommon among most businesses.
Choosing your pay period
There is no right or wrong answer when it comes to choosing a pay period, as the circumstances vary widely as business types do. Be sure to consider your employees’ preference while trying to balance what is best for the business.