Demystifying Pay Periods: Understanding and Choosing the Best Pay Period for Your Business
It can be challenging for small businesses to strike the perfect balance between employee convenience and cost efficiency, which is why selecting a pay period demands careful consideration.
Choosing the right pay schedule is crucial for keeping your employees motivated, happy, and productive. Although many of them would likely appreciate receiving their paycheck more frequently, you also need to account for the business expenses associated with different pay periods. If you have different types of workers, such as those on salaries, full-time, part-time, or contractors, it’s also important to understand how the different pay structures work.
By making informed choices about pay periods, you can ensure your business is complying with tax and labor laws and your employees stay satisfied.
The Four Most Common Pay Periods in the U.S.
When it comes to pay periods, many business owners are familiar with the semi-monthly schedule, which typically occurs on the first and fifteenth of the month. However, there are several ways to structure payroll, and the decision ultimately depends on your business’s unique needs and the types of workers you employ or contract.
The most common types of pay periods in the U.S. are:
Weekly: Employees receive pay once a week on a specific day, such as every Friday; employees receive 52 paychecks per year.
Bi-weekly: Pay is issued every other week on a specific day, such as every other Friday; employees receive 26 paychecks per year.
Semi-monthly: Employees are paid twice a month on two designated dates, such as the 15th and 30th; employees receive 24 paychecks per year.
Monthly: Pay is provided once a month on a specific recurring date, such as the 20th of every month. With this schedule, employees receive 12 paychecks per year.
In California, however, there are specific rules governing the frequency of wage payments. In most cases, wages must be paid at least twice per month on designated regular paydays. For wages earned between the 1st and 15th of the month, they must be paid by the 26th day of that same month. Wages earned between the 16th and the last day of the month must be paid by the 10th day of the following month.
If the payroll period doesn’t fall within the 1st-15th or 16th-last day of the month, different pay frequencies like weekly, biweekly (every other week), or semi-monthly (twice per month) can be used. In such cases, wages must be paid within seven calendar days after the end of the payroll period in which the wages were earned.
There are some exceptions to this rule, depending on the types of workers you employ; consulting with an experienced payroll specialist can help you determine the best pay period schedule depending on your company’s unique needs. Keep in mind that employers are responsible for establishing set paydays and must inform employees of the day, time, and location of payment through a notice.
Read more about pay period regulations in California.
The Pros and Cons of Each Type of Pay Period
Depending on the type of workers you have, you may or may not have the flexibility to determine your pay periods. If you do have the option to select a pay period, here are some of the pros and cons of each type of schedule to be aware of:
Weekly Payroll Schedules
Pros: Employees enjoy getting paid every week. This type of pay schedule works well for organizations with hourly or irregular schedules.
Cons: Due to the increased frequency of issuing paper checks and weekly payroll, you'll experience higher processing costs and be charged more accordingly. Your business will also have more payments going out on a regular basis.
Bi-weekly Payroll Schedules
Pros: This pay period is popular for hourly employees who fluctuating work hours and overtime. Employees will also get paid the same day every other week, so they can enjoy a consistent pay schedule.
Cons: Often requires extra accounting work to align costs and payouts for tax purposes; your business will have more payments going out on a regular basis.
Semi-monthly Payroll Schedules
Pros: Potentially lower processing costs; provides regularity for salaried employees and your business will have fewer payments going out each month.
Cons: Hourly employees often prefer bi-weekly schedules because they’re paid more frequently, which makes it easier to budget for the month; businesses experience larger payments with each pay run.
Monthly Payroll Schedules
Pros: Monthly pay periods potentially offer the lowest processing costs compared to other options; a good option for sole owner S corporations.
Cons: Employees may find it challenging to manage finances due to infrequent payouts and new employees may face delays in receiving their first paycheck; businesses experience the largest payments with each pay run.
Making Your Decision
Selecting the right pay period for your business is a vital decision that requires careful consideration of various factors. In addition to business expenses and employee satisfaction, understanding employment laws, aligning the workweek with the pay period, complying with overtime regulations, handling withholdings, and fulfilling reporting requirements are all essential considerations in this process.
To navigate these complexities and ensure compliance, it's highly recommended to work with payroll specialists. At Payroll Boutique, we offer full-service payroll and payroll support services to ensure that your business remains compliant while addressing the needs of your business and employees. We can provide valuable insights, streamline your payroll processes, and alleviate the burden of managing complex pay structures.
Each business is unique, and there is no one-size-fits-all solution when it comes to determining the ideal pay period. By carefully evaluating the specific needs of your business, consulting with professionals, and leveraging the expertise of payroll service providers, you can make an informed decision that promotes financial stability, employee satisfaction, and regulatory compliance. Schedule a free consultation today to get started!
Please note that this article is for informational purposes only and is not intended as business or financial advice. As every client's situation is different, the views expressed in this blog may not apply to you; for specific advice regarding your business, please consult a qualified CPA.
