If you’re a small business owner or figuring out payroll for that new startup, pay periods are one of the most important things to get sorted. After all, employees don’t like it much when there is any confusion about how they get paid.
There are a lot of factors to consider when choosing a pay period, including tax obligations, employee morale, and payroll processing time.
In this article, we’ll first talk about what a pay period is, look at each of these factors in a little more detail, and help decide which kind of schedule is best for you.
Let’s dive in!
What is a pay period?
A pay period is the time frame over which an employee accumulates hours and then is paid. According to the U.S. Bureau of Labor, the most common schedules are bi-weekly (36.5 percent), weekly (32.4 percent), semi-monthly (19.8 percent), and monthly (11.3 percent).
There are pros and cons to each type of pay period schedule. You’ll need to decide what will work best for your employees and your business.
What are the factors to consider?
It can be a daunting task to try and figure out the best pay period schedule off the top of your head, so let’s look at a few different factors that can determine which is the best for your business.
Tax Obligations
Anyone that has ever had to generate a W-2 knows the IRS requires that employers withhold federal income taxes, Social Security taxes, and Medicare taxes from their employee’s paychecks. These taxes are based on the employee’s wages and the number of pay periods in a year.
This means that employers need to carefully calculate how much money needs to be withheld from each paycheck to cover all of the applicable taxes. The withholding calculations can be complicated, so it’s important to work with an accountant or tax specialist to make sure everything is done correctly.
Employee Morale
Employees appreciate knowing when they’ll be receiving their next paycheck. This helps them budget their money and plan for expenses. Many employees prefer bi-weekly or weekly paychecks, rather than monthly payments. This gives them more access to their earnings and the ability to quickly respond if a new expense emerges.
Payroll Processing Time
The time it takes to process payroll can vary depending on the size of the company and the number of employees. Generally, the more employees a company has, the longer it will take to process payroll. This is because more calculations need to be done and more paperwork needs to be filed.
Small businesses with only a few employees can usually create 1099s or process payroll within a day or two. However, larger businesses may need several days or even weeks to complete all of the necessary tasks.
What are the different schedule options?
Now that we’ve looked at some of the factors to consider when choosing a pay period, let’s take a look at some of the most common pay periods:
Weekly
A weekly pay period is good for small businesses with only a few employees. It’s also ideal for employers who want to keep track of their employees’ hours and overtime payments. However, as a business grows, it can become difficult to keep up with a weekly schedule and mistakes can happen.
Bi-Weekly
A bi-weekly pay period is good for both small and large businesses. It allows employees to receive wages every other week, which helps them budget their money more easily. This schedule also results in the odd three-check month, since there will be 26 pay periods spread over 12 months.
Semi-Monthly
While this is similar to a bi-weekly schedule, a semi-monthly pay period lasts exactly half of a calendar month. This means there is never an extra paycheck going out and can allow a business to have the same pay date every month.
Monthly
Monthly pay periods are a good choice for businesses with a large number of employees. This pay period allows employees to receive one full paycheck every month. It also gives employers more time to process payroll, which can be helpful if they have a lot of employees.
However, monthly pay periods can be disruptive for employees who have to wait an entire month for their next paycheck.
There are other options, including early wage access, which can help employees get access to their funds quicker and in case of emergency.
Final thoughts
Now that you know how what factors go into the perfect pay period and what options are available, you can make the best decision for your business. Keep in mind that there is no “one size fits all” solution when it comes to choosing a pay period.
You may need to experiment with different types until you find one that works best for you and your employees.
