What's the Best Payday Frequency?
If you own a small business, you need to consider how often you will pay your employees. That's one of the first things a new hire will ask. While different pay cycles impact employees, there's an employer side of the discussion as well that can help businesses decide how often employees should receive their paychecks.
In most places, state law dictates how often you must pay your employees at a minimum. However, you can choose to pay more frequently than the law dictates. There are several common pay schedules: weekly, biweekly, semimonthly and monthly.
Weekly is the most straightforward: payment every week, usually on a Friday.
Biweekly means employees are paid every other week, again, usually on Friday. This schedule means employees will typically receive 26 paychecks a year (two months will have three paydays). Hourly employees like to be paid weekly or biweekly because it allows them to accurately calculate overtime each week.
Semimonthly differs slightly from biweekly: Employees are paid two times a month or 24 times per year, usually on either the first and 15th of every month or the 15th and last day of every month. Accountants like this method because it makes monthly voluntary deductions easier to calculate. Semimonthly pay periods for hourly employees can get tricky, though, because there are 86.67 hours in a typical pay period, making overtime complicated. Also, you have to decide what to do when a payday falls on a weekend or legal holiday.
Monthly pay is the least costly option for businesses because, if using a payroll service, businesses pay each time payroll is run. But even when state law allows it, employees often resent waiting that long.
When deciding how often to run payroll, you should consider the following:
- Cost of running payroll — Do you have to pay your payroll provider every time you run payroll? Are you completing payroll yourself? Your time and finances should be considered when determining how often to run payroll.
- Other costs involved with running payroll — These include printing checks for employees, any direct deposit charges incurred by banks, and time spent by an employee or bookkeeper to calculate payroll.
- Employee preference — Most hourly employees like to be paid more frequently. This helps employees budget from paycheck to paycheck. The majority of hourly employees are paid on a weekly or biweekly schedule. For salaried employees, the frequency is less important because they know how much money each paycheck will provide and are able to plan accordingly. Most salaried employees are paid either biweekly or semimonthly. In general, most employees like to be paid more than less frequently.
- The easiest method for accounting — While employee preference is important, you also want to keep your bookkeeper's patience in mind. Biweekly pay schedules can be complicated if there are 27 pay periods in a year as opposed to the normal 26. This occurs depending on which day of the week the year starts and how the days of the week fall. Semimonthly pay schedules can be tricky for hourly employees because, as noted above, overtime calculations can get complicated.
Paying employees requires a bit more thought than you may have imagined, but this quick overview should help clear things up for your business. Give us a call to discuss your particular situation.