A payroll cycle is the frequency at which a company pays its employees. The term describes the administrative process of paying employees on a recurring basis, no matter the schedule.
Payroll cycles are also known as pay cycles. Following a payroll cycle enables companies to ensure fair compensation and correct reporting.
Payroll refers to the process of compensating employees for the work they do during a pay period. Payroll is often maintained through the human resource department within the company, an accounting organization, or a third-party provider.
Types of payroll cycles
Every country has unique requirements for pay periods, meaning you may have to pay international employees at different times based on local employment laws. It may be possible to establish different pay cycles for specific types of employees, such as hourly employees versus salaried employees. Companies typically pick one specific payroll cycle to follow to provide employees with a consistent experience. The following are the most common types of payroll cycles.
Monthly pay schedule
A monthly pay schedule results in 12 employee paychecks per year (unless the employee resides in a country with 13th-month pay). Typically, the payroll date is the last day of the month. This method offers several benefits, including streamlined beneficial deductions, less time spent on payroll tasks, and consistency. It may also cost less when using a third-party payroll service.
Employees are less likely to prefer this pay cycle as there is more time between payments, which can make managing personal expenses and budgets difficult. It’s also troublesome for new hires who have to wait at least one full month to receive their first paycheck.
Semi-monthly pay schedule
This type of payroll schedule produces two payments each month, resulting in 24 paychecks per year. Most commonly, this means payroll will occur on the 1st and the 15th of the month or the 15th and the 30th of the month.
This method is easy to manage in terms of benefit deductions for monthly reoccurring expenses, and it creates more regularity in payments. In contrast, this method is less desirable for those with hourly employees because overtime and commission tend to be more complex to determine.
Bi-weekly pay schedule
This pay schedule produces payments every two weeks, usually every other Friday, resulting in 26 pay periods throughout the year. The biggest benefit is the ease of calculating overtime for companies with hourly employees.
A bi-weekly pay schedule may cost more to manage as payroll must be run more frequently. Calculating benefit deductions can also become more difficult since the pay periods are based on weeks rather than months.
Weekly pay schedule
Often favored by employees, the weekly pay schedule typically allows employees to receive a paycheck every week, typically on Fridays, resulting in 52 payments each year. Those with irregular schedules also appreciate this method.
By contrast, it tends to cost more for companies due to the need to process payroll more often. This requires more time commitment by human resources, too.
What are the steps of a payroll cycle?
Payroll processing, which is another term for payroll cycles, requires HR teams to work through several steps. For proper payroll management, companies need to manage payroll deductions on a consistent basis, which is why payroll software that handles payroll calculations is often preferred.
Updating employee information
The first step is to enter the employee into the payroll system. With hourly workers, this may involve the issuing of a time card to monitor hours worked. It also requires setting the pay rate for the employee and enrolling them into appropriate employee benefits programs.
Employers are also responsible for gathering identification for the employee and all necessary data required by their government to ensure the employee is legally allowed to work. In the US, state laws may also need to be met during this process.
Entering the hours worked
Human resource professionals then enter hours into the payroll software based on the time sheets for each employee. The timekeeping process may also involve a review to ensure accuracy.
Deducting taxes and benefits
Payroll also involves payroll deductions for applicable payroll costs. In the US, this could include Social Security, federal income tax, and state taxes. Employers may also be required to set up garnishments.
Net pay is then calculated by subtracting all payroll deductions from gross pay. This is entered on the employee’s paycheck.
Dispensing compensation to employees
Payments are then made to employees via their selected payment method, such as issuing paper checks with pay stubs or sending direct deposits into employee bank accounts.
How are payroll cycles determined?
Payroll cycles are typically determined by the employer and based on factors such as the company’s pay schedule, pay period, and pay date.
The pay schedule may be determined by the employer’s policies, collective bargaining agreements, or other factors. The pay period is the length of time covered by a single paycheck, and the payday is the date on which employees receive their paychecks.
What to consider when choosing payroll cycles
When choosing a payroll cycle, there are several factors to consider to ensure that it is well-suited to the needs of the business and its employees.
Employment laws and regulations
Employment laws and regulations within a geographical area may establish requirements for compliance. In the US, the Department of Labor (DOL) enforces the Fair Labor Standards Act (FLSA), which describes labor laws and standards. Whether a large or small business, the human resources team and business owners must ensure compliance when planning payroll periods.
Take note that these laws do not apply to an exempt employee excused from certain labor laws, such as the requirement to be paid overtime.
Understanding the workweek is important for both employers and employees to calculate pay and determine eligibility for overtime. The workweek, which is a set period of seven consecutive days, is used to determine when an employee is eligible for overtime pay, as well as to calculate their regular pay.
Payroll costs, such as wages, salaries, bonuses, and other forms of compensation, have a significant impact on the pay cycle as employees strive to streamline the costs involved and manage cash flow.
These costs can vary depending on factors such as the number of employees, their level of experience, and the type of work they do.
Overtime is typically paid at a higher rate than regular pay and is determined by factors such as the employee’s job title and experience level. The pay cycle can affect when an employee is eligible for overtime pay, as the pay period determines the time covered by a single paycheck.
Employee needs and preferences have a significant impact on the pay cycle. For example, some employees may prefer to receive their pay more frequently, such as weekly or biweekly, to have more frequent access to their earnings.
The amount of money withheld from an employee’s paycheck can vary depending on factors such as the employee’s income, tax filing status, and the number of dependents. The pay cycle can affect the amount of money withheld from an employee’s paycheck, as the pay period determines the length of time covered by a single paycheck.
Reporting refers to providing information about employee pay and withholdings to government agencies, such as the Internal Revenue Service (IRS) in the US and state tax agencies.
Employers are typically required to report employee pay and withholdings on a regular basis, such as monthly or quarterly, to ensure that employees are properly taxed and that the government receives the necessary information for tax purposes.
Why are payroll cycles important to HR leaders?
Paying attention to payroll cycles helps HR leaders ensure employees are paid accurately and on time, which is essential for maintaining good relationships with employees and promoting employee satisfaction.
They are also important to effectively manage employee pay and benefits and to ensure compliance with relevant employment laws and regulations. For these reasons, a payroll cycle should be a focus in the development of an HR strategy.
What is an HR leader’s role in maintaining a functioning payroll cycle?
An HR leader ensures that the payroll process is carried out accurately and on time. This may involve setting the pay cycle, calculating employee pay, processing payroll, and reporting employee pay and withholdings to government agencies. In general, the HR leader plays a crucial role in ensuring that the payroll cycle functions smoothly and effectively. Rather than using timesheets and manual processing, a payroll system that offers various payroll services helps employees get paid on time while following federal and state laws.