Most small business owners have to choose a pay period when it’s time to hire their first employee. But long-standing business may also want to reconsider their approach to payroll when conditions change or employees request a new pay schedule. Whether you’re a newbie or you’re an old hand, we have all the information you need to make the right choice for yourself and your team.
From spending more than 30 years in the payroll business, we know there’s no single approach that works for everyone. There are advantages and disadvantages to different pay frequencies, and what’s easiest for you may not jive with your employees’ needs. To make sure you make an informed decision, here’s a breakdown of common pay periods, along with the pluses and minuses for each.
There are four common pay periods most small businesses choose from (click on any of them to skip ahead):
Digging into the available data, most employers pay their employees on weekly or bi-weekly schedules. Semi-monthly pay schedules are also very common for reasons we’ll cover a little later:
In addition to size, industry also can have a major impact on how often businesses choose to pay their employees. For example, construction companies are five times as likely to use weekly pay periods as education and health care companies:
|Natural resources and mining||44.2||25.5||19.1||11.2|
|Trade, transportation, and utilities||36.1||37.3||16.4||10.2|
|Professional and business services||20.4||36.0||28.0||15.6|
|Education and health services||12.6||52.9||22.9||11.6|
|Leisure and hospitality||28.9||46.2||17.0||7.9|
So what’s best for your business? Let’s take a look at the pros and cons of each approach:
Weekly payroll is typically paid at the end of each week for hours worked during the previous week. If you pay the majority of your employees on an hourly basis, a weekly payroll period may be a good option for your business. As you can see in the table above, weekly pay periods are very popular in industries like construction and manufacturing.
Advantages: Employees like to be paid weekly because it helps them get a better handle on their personal cash flow. Weekly paychecks have been shown to lead to better overall job satisfaction and higher retention rates. If your employees are paid hourly, chances are they’ll have a strong preference for weekly pay and it makes keeping on top of overtime pay week by week easier for you.
Disadvantages: Processing payroll weekly can be much more time-consuming than other approaches. If you use a payroll provider, it can also be expensive if you’re billed by the pay run (although many of the best providers have all-in pricing). Adding to your workload, any payroll deductions, such as health insurance premiums, will have to be calculated for weekly withdrawals, too. You’ll also have twice as much payroll-related bookkeeping to do as bi-weekly employers.
A bi-weekly pay period delivers checks to your employees every other week on the same day (typically on Fridays, but employers can choose the payday that suits them best). A bi-weekly schedule can be a good choice for businesses with a mix of employee types so you can easily keep up with both hourly wages and salary checks. However, it can also introduce a little complexity to your back office.
Advantages: It’s easy to manage and run payroll on a bi-weekly cadence. Running payroll half as often as a weekly schedule means less work and fewer chances for errors. Overtime is easier to calculate for hourly workers on a bi-weekly pay schedule. Being paid every two weeks is also a very predictable schedule that allows your employees to budget around their paycheck.
Disadvantages: Running payroll 26 times per year means there will be two months with three pay periods (while the rest have two), so it can complicate your bookkeeping and your cash flow projections. Specifically, your debits for payroll expenses may not always line up with the credits on your balance sheet. And it means you need to be ready to spend an additional 50% paying employees the two months a year you have a third pay period. If this is feeling a little complicated, you can learn more about payroll accounting here.
A semi-monthly pay period means you’re paying your employees twice each month, often on the first and the 15th, but you’re free to set your own schedule. Semi-monthly pay periods are a good choice for businesses with salaried employees who don’t mind waiting two weeks for a paycheck.
Advantages: Running payroll twice per month makes it easy for accountants to track payroll expenses and calculate benefit deductions for employees. Payments are frequent enough that they’re unlikely to cause hardship for well-compensated employees.
Disadvantages: Semi-monthly frequency is not necessarily the best choice for businesses with hourly employees as it can be difficult to calculate weekly overtime. For employees who are used to being paid bi-weekly, adapting to semi-monthly payments can be a bit challenging, too. There is no set payday, so they may be paid on a Monday one period and Thursday the next time. Having to run payroll on different days may be inconvenient for you, too. And if paydays fall on Saturday or Sunday, employers must choose between paying their team on Friday or on the following Monday.
Monthly pay periods require businesses to process payroll only 12 times per year, compared to 52 times a year for those running weekly payrolls. However, for most employees, it is difficult to wait an entire month for a paycheck. For this reason, some states don’t allow businesses to pay their employees monthly. If you’re leaning towards a monthly pay date, be sure to check with the Department of Labor for your state’s requirements.
Advantages: For business owners, the advantage is that you’ll only have to run payroll once per month — saving time, making bookkeeping easier, and saving fees from payroll service providers who by the pay run. This may be a good option if your business employs 1099 workers or contractors who invoice you monthly, if you’re the only employee of your business, or if all employees are highly compensated.
Disadvantages: If you have hourly employees, this is not a practical option. State restrictions aside, it may also be difficult to find and retain employees when you pay only once a month as employees simply do not like getting paid only once per month.
Paying yourself: If you own your own business, please note that there may be other options for how to pay yourself. For more information, check out our guide to taking an owner’s draw.
Holiday policies: Bank holidays will also inevitably coincide with paydays now and again. And when the banks are closed, nobody gets paid. Set a policy now for how you will handle that conflict — paying employees early or after the holiday — so they can plan their finances without surprises.
Getting help: If you seek help from a third-party payroll service, it’s possible your options may be limited. However, some services may give you more flexibility and offer payroll software integrations that take some of the administrative sting out of running payroll more frequently.
While it’s important to spend time thinking about the best pay period for your business, just remember that it’s not a binding contract. You can always change your pay approach to find a rhythm that works best for you and your employees — just make sure they know about any changes in advance.