What Is a Pay Period and How to Choose One for Your Business
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Are you struggling to determine what kind of pay period will be the most suitable for your business?
It’s not easy to hit the balance between what works for you and what works for your employees. You need to juggle plenty of factors that may affect your decision and at the same time, you want to make the pay schedule optimal for everyone.
We completely understand that. Whether you have hourly workers or salaried employees, picking pay dates can be challenging. Is it going to be a bi-weekly pay period? Or maybe semi-monthly would be better? What’s even the difference between these?
We’re here to answer all your questions in this comprehensive guide to your payroll schedule.
Different types of pay periods are based on the length of time between two paydays. Pay frequency depends on many factors concerning both the employer and the employees and these are the most common pay periods.
Monthly pay period
According to an official survey from a year ago, the monthly pay period is the least common in the US. Only 4.7% of employers claimed they pay their workers on a monthly basis. The same survey also showed that small business owners are more likely to choose this type of payroll system and typically choose the last day of the month to pay out their employees.
A monthly pay period means an employee will receive 12 paychecks within one calendar year.
It’s worth mentioning that each state in the US has its own state laws signed off by the Department of Labor when it comes to pay frequency. In many states, different pay periods are allowed and they depend on the employer.
For example, in Iowa, there isn’t a specific pay schedule an employer needs to follow, but the employees need to receive their payment at least once a month. Their payday also can’t be more than 12 days after the pay period in which they’ve earned their wages, regardless of whether they’re hourly employees or salaried workers.
Other states with a monthly pay schedule (in some, under specific circumstances) are Alaska, California, Illinois, Michigan, Nevada, North Dakota, Washington, etc.
Semi-monthly pay period
A semi-monthly pay period means your HR department will need to process payroll twice a month. One pay period lasts half a month and can, for instance, be June 1 to June 15, while the second period will end at the end of the month.
Note that, given that the number of days in one pay period depends on how many days there are in a month, the length of the pay period may vary. That especially refers to February, since it’s the shortest month. You need to pay attention every leap year, too, since you’ll have an additional day in February.
A semi-monthly paid employee will have 24 paychecks within one calendar year.
States in which you can pay your employees on a semi-monthly basis are Arizona, Delaware, Hawaii, Kentucky, Maryland, New Mexico, Virginia, etc.
Bi-weekly pay period
Unlike the semi-monthly pay period which depends on how many days there are in a month, if you choose the bi-weekly payroll, the length of the pay period is always the same - two weeks.
However, you may notice that some years will have an extra pay period. That happens every four years when your employees will have 27 instead of 26 paydays, due to February having 29 days, so the number of pay periods for this type of schedule increases by one.
The bi-weekly schedule is an ideal solution for many businesses. Employees are happy with the more frequent cash flow because they have access to their salaries and wages more often. On the other hand, the predictive number of paydays and length of time between two paydays gives the employer time to do their budgeting and payroll processing in a more organized way.
You can pay your employees bi-weekly in these states: Indiana, Louisiana, Mississippi, Rhode Island, Virginia, etc.
Weekly pay period
Sometimes employees get paid on a weekly basis - their annual pay is divided into 52 payments within a calendar year.
Weekly payroll usually means the employees receive their paychecks on the same day of the week every time. In many companies, it’s on Fridays since it’s also the end of a workweek and it’s not time-consuming to track employees’ hours this way.
Weekly payments are common in the US and are allowed in many states, including Connecticut, Iowa, Massachusetts, New Hampshire, New York, Vermont, etc.
What can affect your pay cycle?
There are several factors that can affect your decision on how to pay your employees.
- Your budget - how much is running payroll going to cost you and what your cash flow looks like. When you pay your workers more often, payroll costs are higher, and it’s challenging to find a balance between meeting your employees’ wishes and your abilities.
For example, many employees want to be paid bi-weekly, but that can cause expense accrual because two months per year will have three paydays instead of two.
- The number of employees you have (the size of your business)
- Taxes, benefits, and other employer contributions that are involved in your employees’ compensation
- The type of payment your employees receive (hourly wages or salary)
- Your employee’s position
- Your business industry
What to do in specific cases - overtime pay
What should you do if your employees have been working overtime? It may be challenging to track all their hours, especially if you’re paying them semi-monthly and the payday falls on a Thursday, for example.
In this case, a good solution is to choose a different pay schedule for different employees, based on how likely they are to earn overtime pay and on which days of the week. If you opt for an appropriate pay period for each type of employee or contractor, calculating overtime pay for them shouldn't be too challenging.
Choose your ideal pay cycle
How you run payroll depends on many factors, but you also have many options. If you trust a good payroll service with your pay cycle, the whole aspect of paying your employees instantly becomes less demanding, time-consuming, and complicated.
The good news is, you can always change the pay schedule as your company grows - just make sure you’re compliant with the law in your state.