by Lisa Higgins, Contributing Editor
If yours is an established business, you may be beyond the question posed above because you set your pay schedule long ago. But if you’re just getting started, considering a change, or setting up a new business beneath your established umbrella operation, you may be wondering about whether there is a right or wrong answer.
The answer, of course, is: It depends. There are advantages and disadvantages to payroll schedules of all stripes. Let’s go over some of them in an effort to help you make the best decision you can, for the company and the employees.
Payroll can be done monthly, semimonthly, biweekly, or weekly. Some jurisdictions (states, counties, cities) set a minimum number of pay periods; you are free to pay employees more frequently, but not less. Be sure to check about the rules in your particular area. Your state Payroll topic page on Compensation.BLR.com is a good place to start.
The Bureau of Labor Statistics (BLS) collects data about payroll and pay periods. They found biweekly to be the most common payroll schedule, with 36.5% of businesses using it, based on their examination ending in March 2013. Weekly pay periods were used by 32.4% of private businesses. Less common were semimonthly (just under 20%) and monthly (11.3%) pay periods.
Biweekly Or Semimonthly: What’s the Difference?
Because the differences between biweekly and semimonthly pay periods may seem a little unclear, it’s a good idea to thoroughly understand each of them before making a decision about which to use.
Biweekly pay is every other week, for a total of 26 paychecks each year. An example might be paychecks issued every other Friday. For semimonthly pay, a paycheck is cut two times per month, commonly on the 1st and the 15th, or on the 15th and the last day of each month, for a total of 24 paychecks a year.
The company’s Accounting department or contractor may prefer semimonthly pay periods, because they often run monthly reports, and it’s easier to account for a consistent two-checks-per-month process. When checks are cut biweekly, things can get fuzzy—and when things are fuzzy, mistakes can be made.
Because pay periods will not coincide with calendar months, things may be confusing for the Accounting department and for employees. There will be 2 months every year that will have three pay periods instead of two. Biweekly pay periods can therefore add a layer of complexity that may not be necessary.
If you decide on semimonthly payroll, make sure to account properly for benefit deductions. If your employees will be able to purchase voluntary benefits, like extra life insurance, disability insurance, or disease-specific coverage, you’ll need to divide their annual cost by 26 rather than 24. In some years, there may even be 27 pay periods—so make sure your payroll processor understands and accounts for that.
Consider Employee (and Company) Preferences
There is often a difference between the employer’s preference and the employees’ preference when it comes to payroll schedules. Employers want to keep their costs down, which is more likely when the number of payroll periods is lower. This would suggest monthly payroll would be their schedule of choice.
On the other hand, employees are happier when they are paid more often. They may prefer weekly pay periods, because it can be easier for them to budget when their pay comes in every week. However, of the four most common pay periods, weekly is the most expensive.
Most payroll providers charge per pay cycle, and more in-house employee time also goes into processing weekly. The employer must find the right balance in his or her particular organization between cost containment and employee morale.
Companies often prefer semimonthly payroll processing over biweekly. In cases where the payroll processor charges per pay cycle, using a semimonthly schedule of 24 pay periods will cost less than a biweekly processing schedule of 26 pay periods annually.
For employees, though, semimonthly pay may be confusing. Check amounts may vary, because the processing may be done on different days of the week. And because months have differing numbers of days, paychecks may include more days in some months than in others, also resulting in variations.
Typically, semimonthly pay is used for salaried employees because they receive a fixed amount of pay each pay period that is not dependent on the number of days or hours in each period.
Writing for PayScale in February 2015, Tess C. Taylor says a weekly pay schedule is positive for compensation management, too. “First of all, it makes earnings more visible and attractive for employees because they can better budget for each week’s expenses,” she wrote.
“Also, deductions and contributions can be more readily seen by employees when they have a regular weekly pay stub to reference. Finally, when an employee works a somewhat flexible schedule, the hours worked each week, including overtime, are clearly indicated to the employee.”
Whichever payroll schedule you choose, you can find a professional processor to help make it easy. Follow the rules, be clear with employees, and set up procedures to keep things running smoothly.