The age-old question that every new business owner faces when starting a company: how should I pay my employees? You generally have four options to choose from weekly payroll, bi-weekly payroll, semi-monthly payroll, and monthly payroll. All these payroll schedules are used by different companies. They have their benefits and drawbacks. Ultimately, you have to choose the option that works best for your business—consider your cash flow, payroll processing times, payroll budget, and even your employee preferences if they’re important to you.
Bi-Weekly versus Semi-Monthly
First, let’s look at the difference between bi-weekly payroll and semi-monthly payroll. These two are quite common but they’re often confused for each other. They sound the same, after all, but there are subtle but often significant differences between the two.
With bi-weekly payroll, employees are paid 26 times (27 if there’s a leap year), as opposed to the 24 pay periods included in semi-monthly payroll. With bi-weekly, there will be two months of the year where you have to deal with three pay periods, which means your accountant will have to recognize expense accruals in the month the compensation was paid. Semi-monthly payroll is also more convenient because you can run it at the same time as benefits deductions, so they’re easier to process.
Though salaried employees can’t typically collect overtime, companies with hourly employees often prefer bi-weekly pay periods because overtime is easier to calculate. If extra hours are worked between two separate semi-monthly periods, the adjustments that have to be made can get confusing. For salaried employees, bi-weekly cycles are paid for 80 hours, while it’s 86.67 hours for a semi-monthly cycle in order to get the 2,080 work hours that salaried employees are compensated for on a yearly basis.
Monthly payroll isn’t as popular as bi-weekly and semi-monthly, but some companies do choose this payroll schedule because it makes payroll simpler when you only have to deal with 12 pay periods. It can save your accountant time to only process payroll once a month.
Though most companies choose one of the above payroll options, weekly payroll is popular in the trades, such in the electrical, plumbing, or construction industries. Most business owners avoid using weekly payroll because it’s more expensive to process it every single week, especially when a payroll vendor is used and charging for each run. It’s also more time consuming to process it every week. However, employees often prefer to be paid weekly so they have better cash flow.
Choosing a Mix
For employers who have both salaried and hourly employees on staff, using a mix of bi-weekly and semi-monthly cycles is often the best choice. You pay your hourly employees bi-weekly and your salaried employees semi-monthly to simplify the process.
Choose the Schedule That Suits Your Needs
As a business owner of a new company, it can be exciting but also nerve-wracking to start to hire employees to work for you. One of your first big decisions will be to decide on a payroll schedule that works best for your needs. When you’re deciding, take into consideration the type of employees you’ll have on staff, any cash flow issues you might have, and whether or not you expect to give overtime pay and benefits. Cost and time spent processing payroll may also be factors you’ll want to consider.
If you’re not sure which schedule would be best for your business, contact a payroll provider that can help you make the decision that suits your needs.