Pay frequency means how often you, the employer, issue a “paycheck” to your employees. And, who doesn’t love payday? Whether you pay weekly, biweekly (every 2 weeks), bimonthly (twice a month), or monthly, “Christmas” comes with every payday. Generally, payday occurs on a Friday, 4-5 days after the period has been closed out. However, as a small business owner, you get to decide how to handle payroll at your business while being cognizant of the expenses involved in doing so. It’s a huge responsibility. You need to get it right, because payroll done wrong can cost you time, money, and employee morale.
Managing payroll can be very time-consuming and challenging. Based on how you pay your employees, certain payment methods are more of a hassle than others. Are you using outdated methods, like checks or cash, to pay your employees or are you increasing the frequency you pay your employees? This means that you’re spending money on printing supplies and investing unnecessary extra time on bookkeeping. Even direct deposit entails higher pay frequency, which can mean more transaction fees if you’re not utilizing online payroll software.
The best payroll schedule for your company will depend on how you answer the following questions:
- How much time and money can I afford to spend on payroll each month?
- How often would my employees appreciate being paid?
- How will I calculate overtime?
- What are my state’s requirements?
Consider Employee Benefits
When deciding how frequently to pay your employees, you’ll also want to factor in their benefits. You’ll typically run employee benefits, such as health insurance, on a monthly basis. As a result, paying your employees monthly or semimonthly is more convenient when calculating voluntary paycheck deductions versus paying your employees biweekly or weekly.
Yet, there are additional factors to consider when determining how often you pay your employees. Legal requirements, for example, must be met; then there’s your industry to consider; and finally, employee classification and payroll administration costs.
On the legal side, while the Fair Labor Standards Act doesn’t dictate how often employers must pay their employees, according to the U.S. Department of Labor, “Wages required by the FLSA are due by the regular payday for the pay period covered.”
Then, too, many states’ have minimum payday laws, so make sure the pay frequency you’re considering doesn’t conflict with your state’s requirements. Plus, some states have specific conditions for how often employees are paid, based on the type of work they perform. For example, some states have very complicated payday laws. In Arizona, paychecks must be issued no more than 16 days apart, and employees must receive a minimum of two paychecks per month, while Michigan’s payday laws are some of the least restrictive, because pay frequency is based on occupation. Then there are states with no payday requirements—Alabama, Florida, and South Carolina.
No two states mandate pay frequency the same way. You need to do your homework. Check out the findlaw.com website and go to the State Laws tab to determine the laws for your state or talk to a local employment lawyer to learn more about your state’s payday requirements, if you or someone you know has a question about employment laws in your state.
Of course, you can always pay your employees more frequently, but no less than what your state has mandated. You also need to pay your employees consistently. You can’t change how frequently you pay them for no reason. Courts will only permit changing pay frequency for legitimate business reasons. You can’t change pay frequency to escape paying wages. You also can’t cause any unreasonable delay in paying employees’ wages. In some states, employers must give advance written notice to employees who will be experiencing a change in their pay frequency. Even if your state doesn’t have this requirement, it’s in your best interest to provide adequate notice.
And, as the employer, making a change in your employees’ pay frequency is completely your call, because pay frequency can be easily handled through your payroll tool or by requesting it from your payroll service provider. However, again, it’s critical that you communicate the change clearly and give your employees plenty of advanced notice, so they can plan accordingly. It’s also a good idea to map out each payday for the remainder of the year after the change to make sure employees know they will be paid their full annual pay.
Depending on Your Industry…
From a competitive standpoint, it’s best to know how frequently other businesses in your industry pay their employees. For instance, if state law requires at least semimonthly payments, but most of your competitors pay their employees biweekly, it’s best to weigh the pros and cons of both pay frequencies before deciding.
You can base your decision on data from government sources, employer associations, or by surveying vendors. As an example, based on research provided by the Bureau of Labor Statistics, 70.6% of employees in the construction industry are paid weekly, 52.9% in education and health services are paid biweekly, 35.9% of those who work in the information sector are paid semimonthly, and 17.6% who work in the financial arena are compensated monthly.
Here’s a breakdown guide to help you determine how often to pay your employees.
- Weekly pay date.
- 52 pay periods per year.
- Employees prefer this, as weekly income makes budgeting and automatic payments easier.
- Pay your employees every other week.
- 26 pay periods per year (sometimes three per month).
- Because paydays fall on different dates each month, cash flow is more difficult for employees to manage.
- You, as the employer, save time and money, because you’re outputting half the cost of payroll processing compared to a weekly pay frequency.
- It’s still easy to calculate overtime with an 80-hour pay period.
- Employees are paid on two pay dates per month, commonly on the 1st and 15th or the 15 th and the last day of the month.
- Entails 24 pay periods per year.
- Easier for employees to pay their bills, because they can plan/budget based on when they will be paid.
- Employer incurs about half as much payroll processing costs as in a weekly pay frequency. This saves time and money.
- Calculating overtime is challenging in an ~86 hour pay period due to the need to analyze each 40-hour work week separately.
- This pay frequency is easiest when tracking accounting, since reports are often done at the end of the month.
- One pay date per month.
- 12 pay periods per year.
- Long stretches between paydays can be difficult for employees to budget financially. Can also put a strain on the employer’s cash flow management.
- Employer saves the most time and money on payroll processing, because they only have to do it once each month.
- Calculating overtime is even more difficult in an ~173 hour pay period, because each 40-hour work week needs to be analyzed separately.
- This pay frequency is also easy for accounting to track, since reports are often done at the end of the month.
After reviewing these pay frequency options, you as the employer need to determine which frequency is best for your business.
How Are Your Employees Classified?
Employee classification can also have an impact on how employees are paid. Employees classified as exempt or nonexempt can be impacted differently in terms of how frequently they’re paid. As an example, to keep payroll calculations simple, some employers pay nonexempt hourly (overtime-eligible) employees weekly or biweekly. Exempt salaried (not eligible for overtime) employees are paid semimonthly. If your employees don’t work overtime, it’s more practical to have a single pay-frequency system in place for everyone.
The Cost of Administering Payroll
As mentioned earlier, the more often you run payroll, the higher your administrative costs. Some payroll providers may charge you each time you run payroll. If you pay your team weekly, those costs could add up quickly. If your provider offers unlimited payroll runs, you will still need to consider your cash flow to ensure that you have enough money on hand to run a weekly payroll.
Running a weekly payroll requires 52 payrolls per year. Operating a biweekly payroll typically entails 26 payroll runs, while a semimonthly payroll has 24 annual payrolls, and monthly necessitates 12 annual payrolls. Obviously, you need to weigh the complete picture when considering your costs, meaning, while it’s cheaper to process your payroll monthly, it may not be a desirable option for many of your workers. Doing this could result in challenges with attracting and keeping competent talent. However, if you process payroll weekly, this could “tax” your budget or lead to financial waste.
When it comes to managing employees, nothing is more important than making sure their paychecks are accurate and delivered on time. With ASAP Payroll Service, as a business owner, you can be confident in knowing your employees’ paychecks are handled on the industry’s leading payroll and tax software, Evolution.
Evolution is a SaaS-based payroll and tax management system that provides features, flexibility, and best practices to handle nearly every type of payroll, regardless of complexity or uniqueness.
Whether it’s a simple payroll for a small company or a complex payroll for a large business with multiple locations, Evolution can handle nearly every type of payroll. In addition, Evolution can support payroll entries from employers located anywhere in the world, provided they have internet access via Evolution’s proprietary SaaS-based system.
Contact ASAP Payroll Service today for help determining the best payroll frequency for your business. They can be reached at 317 887-2727 or by fax at 317 887-2741.