As you build your business, you’re faced with innumerable decisions: where to open a storefront, which vendors to partner with, what your logo should look like, how many employees to hire, and whether to play laser tag or have a scavenger hunt for a team-building exercise (I vote for laser tag).
Less exciting but nonetheless important, business owners must contemplate a series of accounting questions. One of them is how frequently to pay employees.
Overview: What is a pay period?
Federal and state laws require that employees receive paychecks at regular intervals. The time between paydays is called a pay period, and business owners have latitude in choosing how long or short it is.
Independent contractor payments work differently. Unlike with employees, businesses aren’t tethered to paying contractors at regular intervals, so they’re most often paid as they complete projects.
Small business owners choose their pay period when they hire their first employees. Let’s explore your options and how to decide what works best for your business and its employees.
What are the typical pay periods?
While other pay schemes exist, the standard pay periods are weekly, bi-weekly, semi-monthly, and monthly.
A weekly pay period means you pay employees 52 times each year. You designate one day of the week — usually a Monday — to compensate employees for the previous week’s work.
Paying employees weekly is likely the most attractive option to your employees since it provides the shortest delay between working and collecting a paycheck.
Bi-weekly means that you pay employees every two weeks. You might pay employees on a Wednesday for the previous two weeks of work in a bi-weekly pay schedule.
Depending on the year and the weekday when you pay employees, there will be 26 or 27 pay periods in a year. You can blame leap years for the complication.
Employees who receive their paychecks semi-monthly are paid twice per month, or 24 times per year.
Businesses that pay semi-monthly should commit to paying employees on the 15th and last day of the month. If either day falls on a weekend, change the payday to the closest business day before that date.
Some businesses that pay semi-monthly send out paychecks on the first and 15th of every month, but I wouldn’t recommend it. Since there’s a chance the first of the month falls on a weekend or holiday, you might wind up having three paydays in one month and one payday in the next month. It’s easier to account for semi-monthly pay periods when you’re paying on the 15th and final day of the month.
Although it’s not as common as the other pay period options, some businesses operate on a monthly pay schedule. For example, a company that pays monthly would pay employees on the first business day of the month for the previous month’s work.
How do I decide which pay period works best for my business?
Not sure which pay period works best for your business? Think about labor laws, cash flow, and employee pay as you decide.
Not all states allow monthly or semi-monthly pay periods. For example, New York requires that manual laborers be paid weekly unless the business receives special permission to pay less frequently.
Check out our guide to the laws regarding pay periods.
Business cash flow
Your business needs to remain a going concern to make payroll. Consider how cash comes into and leaves your business when choosing your payroll schedule.
Say you bill clients at the end of the month, and checks start rolling in two weeks later. Paying employees weekly could risk a cash shortage at the beginning of the month when there’s no cash coming in.
Instead, go with a bi-weekly or semi-monthly pay schedule that gives you time to collect revenue from customers before paying employees. The cash in your bank account at the top of the month will need to cover rent and other first-of-the-month expenses.
Employee cash flow
Employees would generally prefer to be paid more frequently. Shorter pay periods mean that employees receive their earnings earlier. For example, if you hire Kevin on Jan. 1, and your business pays monthly, his first paycheck doesn’t come until Feb. 1, potentially straining his finances.
Hourly vs. salaried compensation
Many small business owners are deciding between a semi-monthly and bi-weekly pay schedule. Let the nature of employee pay guide your decision. Go for bi-weekly if your employees are paid hourly and choose semi-monthly if they’re salaried.
Say that Kevin is paid $30 per hour, and he works 40 hours each week. If he’s paid bi-weekly, his paycheck would be calculated on $2,400 in gross wages ($30 per hour x 80 hours worked in two weeks).
If he’s paid semi-monthly, his paycheck wouldn’t be uniform because there won’t always be the same number of workdays in the pay period. A semi-monthly pay schedule also complicates the overtime calculation since the threshold for overtime isn’t always the same.
However, semi-monthly pay periods are best for salaried employees. If Kevin earned a $48,000 salary instead, each semi-monthly paycheck would be based on $2,400 in gross wages ($48,000 salary ÷ 24 pay periods).
Although it might complicate your payroll register, you can pay salaried and hourly employees on different pay schedules.
Example of a small business pay period
Let’s help Angelica, the owner of the Sweet Sweater Store, choose the best pay period for her business. She has five employees, with four paid hourly, and one manager earns a salary.
The Sweet Sweater Store designs, manufactures, and sells uniforms for businesses in the area. She bills clients at the end of every month on net 15 pay terms, meaning she expects to collect her accounts receivable within 15 days of sending invoices.
Since most of Angelica’s employees are paid hourly, we can strike the semi-monthly pay schedule from the list of options. While she could put the manager on a different schedule, it’s an administrative burden that’s not worth it for just one employee.
That leaves us with weekly, bi-weekly, and monthly pay schedules. Since the Sweet Sweater Store collects most of its revenue during the first two weeks of the month, the business should have enough money to run payroll bi-weekly, making it the best choice.
If only every day could be payday
Don’t let your busy schedule get in the way of running payroll weekly if that’s what truly works best for your business. Payroll software turns hours of number crunching into minutes, giving you the flexibility to pay employees regularly without taking up too much time.