Pay periods determine how often you run payroll and how frequently your employees get paid. The balance lies in choosing a pay period that minimizes the cost of running payroll and abiding by state law while simultaneously giving employees a pay schedule they can rely on. The most commonly used pay periods are weekly, bi-weekly, semi-monthly and monthly. As businesses grow, there is a myriad of reasons to change pay periods. Regardless of the reason, there are a few things to consider before making the switch.
Benefits of each pay frequency
Weekly paychecks are considered the most desirable for employees, and they can be a great way to attract top performers. However, this pay frequency will cut your profit. When you process payroll weekly, it means your payroll department or payroll software provider is spending more time prepping payroll. The money spent on labor to process payroll 52 times per year adds up. However, that does not mean running a weekly payroll is not appropriate for your business. Weekly payroll is a popular option in industries like construction, plumbing, and other similar professions. It is not the most commonly used option in other lines of work because of the cost and the amount of time spent for the person running payroll every week.
Bi-weekly means you are paying your employees every other week, which means you have to run payroll 26 times per year. Typically, running a bi-weekly payroll will cut your costs in half, depending on your method of payroll processing. This is commonly seen in business because it is a less expensive means of paying your employees but isn't as undesirable as processing monthly. Employees who earn overtime should be paid on a weekly or biweekly basis to avoid confusion. Basing payroll calculations on previous pay periods can cause the process to become more complex than it needs to be. While biweekly paychecks make the most sense to the employee, they can be a hassle for the payroll processor. Since there aren't exactly four weeks in every month, two months out of each year will come up with one extra paycheck. This may cause an inconvenience for the payroll processor since the reports and benefits are calculated and ran monthly.
A semi-monthly pay frequency is when you pay your employees twice a month, usually on the 1st and 15th or 15th and the 30th. This means you would pay your employees 24 times throughout the year. This can be significantly more attractive to employers because it lowers the cost of running payroll. Semi-monthly paychecks are probably the most convenient for salaried employees, too, since it is the easiest to pay bills when checks come on certain days of the month.
Paying employees every month is simple. Your employees get paid 12 times a year. This is the cheapest option to pay employees but is not seen often. Monthly payroll is a fantastic option for a business itself, but not so great for employees because that means they have to budget for a whole month which can become difficult. Processing payroll monthly can cause problems with recruitment and retention purposes.
Things to keep in mind...
Before selecting a pay frequency, remember to take the following into account:
- Your industry
- The number of employees that work for you
- How many hourly v.s. salary workers you have
- The state laws where your business is located
What is legal?
Before switching pay periods, double-check with your state to ensure it's legal before switching pay frequencies. For example, according to the employment law handbook of Michigan, “an employer may pay employees one (1) time per month, two (2) times per month, every two (2) weeks, every week or more frequently. An employer must designate regular paydays.”
Consider the impact on the employee.
After determining the desired pay period is legal in your state, consider the impact of employee benefits, for example, the change to plan remittance to carriers. This is especially true when switching from semi-monthly to bi-weekly. When you run bi-weekly payroll, there are two months with three paychecks and these additional days change the deduction amounts. A popular option is to block deductions from the third paycheck. Before making a switch in pay frequencies, consider how it will affect employee deductions and how you want to go about it.
If you decide to change your pay frequency, it's crucial to inform your employees of this change. Give your employees enough time to sort out their benefits, contribution, and personal budgets before the pay period change is implemented. With some strategic planning (and the right payroll software!), there should be minimal disruption in your pay schedule. Payroll professionals would advise you to make the pay change at the start of a new quarter or calendar year to ensure the switch is as seamless as possible.
At Dominion, we can guarantee you will be operating within legal parameters when it comes to your payroll pay periods. We cut the time to run your payroll up to 90% from the moment service begins. When year-end rolls around, Dominion guarantees tax filing so you won’t have any penalties. If you are interested in what services Dominion offers, schedule a demo with us.