Picking the perfect pay schedule for your business

Your pay schedule options

Based on our data, it appears that most employers pay 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.

What pay periods do different industries use?

So what’s the best approach for your business? Let’s take a look at the pros and cons of each option. Let’s take a look at the pros and cons of each approach.

Bi-weekly vs weekly pay periods

First, let’s review bi-weekly versus weekly pay periods and what to consider.

Weekly pay periods

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 because it makes keeping on top of overtime pay week by week easier for you. As you can see in the table above, weekly pay periods are very popular in industries like construction and manufacturing.

Advantages of weekly pay periods: 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.

Disadvantages of weekly pay periods: 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.

Bi-weekly pay periods

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 of bi-weekly pay periods: It’s easy to manage and run payroll on a bi-weekly basis. 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 cadence. Being paid every two weeks is also a very predictable schedule that allows your employees to budget around their paycheck.

Disadvantages of bi-weekly pay periods: 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 in our small business guide to payroll accounting.

Monthly vs semi-monthly pay periods

Next, let’s compare the benefits and drawbacks of monthly and semi-monthly pay periods as well as how each of these approaches works.

Semi-monthly pay periods

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 of semi-monthly pay periods: 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 of semi-monthly pay periods: 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

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 of monthly pay periods: 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 charge 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 of monthly pay periods: 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.

A few other considerations:

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 solution, 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.

Bi-weekly versus semi-monthly pay periods

While bi-weekly and semi-monthly pay periods sound very similar, there are some important differences between these two approaches. In both cases, employees primarily receive two payments per month.

However, as mentioned in the discussion of bi-weekly pay periods above, when using the bi-weekly approach there will be two months each year when employees are paid three times. This is in contrast to semi-monthly, when the cadence of the pay is always twice per month and never changes.

Viewed another way, if your business opts for a bi-weekly pay period, you will be running payroll a total of 26 times each, compared to 24 times under the semi-monthly approach.

As always, there are pros and cons associated with each choice to keep in mind.

• Size of paychecks: When implementing the semi-monthly pay period, employee’s paychecks will be bigger because their annual pay is divided amongst fewer pay periods. Conversely, when opting for bi-weekly, each paycheck is smaller because there are more pay periods annually.

• Consistency vs lack of consistency: Using the bi-weekly approach provides employees with increased payday consistency because the pay is typically distributed on the same day each pay period—such as every Friday, for instance. With a semi-monthly approach, however, employees are typically paid on the 15th of each month and the last workday of each month. The specific day that the 15th lands on will shift from one month to the next. Sometimes it may be a Friday, while other times it may be a Tuesday or Wednesday or even a weekend. This variation can be challenging for employees.

• Efficiency: From the business owner’s perspective, semi-monthly involves less work because you’re running payroll two fewer times per year. But as discussed above, most employees prefer a bi-weekly pay cadence as it is easier to budget and get by when you have cash coming in every other Friday.

• Fluctuations in monthly payroll totals: For you as the business owner, bi-weekly pay comes with the downside of having two months per year when your payroll expense will be higher, because there are three paydays instead of two. You’ll need to make sure you’re prepared to cover the extra expense for those two months.

State employment laws surrounding pay periods

While determining a pay cadence will largely be driven by what’s right for your business and  employees, it’s important to note that a company’s geographic location may also need to be factored into such considerations.

As we mentioned above, some states don’t allow businesses to pay employees on a monthly basis. In fact, many states have regulations surrounding the frequency of pay. The state of California, for instance, requires that wages (with some exceptions) must be paid at least twice during a calendar month. And that pay must be distributed on days that have been designated in advance as regular paydays. The state’s detailed policy even stipulates that wages earned between the 1st and the 15th of a month, must be paid no later than the 26th of the same month.

Rhode Island, on the other hand, allows businesses to pay hourly employees either weekly, biweekly or semimonthly. However, the state also stipulates that childcare workers have the right to opt for a bi-weekly pay period.

Again, if you have any uncertainty regarding the laws in the state where your business operates, it’s important to check with your state’s department of labor to ensure that the payroll cadence you select conforms with local regulations.

Which pay schedule will you choose?

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.

And once you decide the pay period that makes the most sense for your business, give our salary payroll calculator a whirl. It makes it easy to figure out employee payroll tax withholdings and deductions for any state or payment type.