At some point, every business has to answer a big question that may seem kind of trivial at first: How often should we pay our people? While something like pay frequency may not seem all that important, there are a bunch of legal and practical implications for both employers and employees.
Think about it: Your team relies on you to get payroll right. You pay them after they complete their work for you, so you really owe it to them to do it on time and on a regular basis. To protect employees, some states even have requirements about when you can run payroll. Hey, we told you choosing your pay period wasn’t trivial.
Here’s a high-level look at what you need to think about when you decide how to compensate your employees, a deeper dive into the pros and cons of different pay schedules, plus stats that show what other small businesses are doing. We hope this provides good background, but you should definitely double-check the schedule you set up with an accountant or lawyer to make sure you’re getting it right.
The four factors of pay period picking
To keep everyone pumped about the pay period you choose, here’s what you need to consider:
- Cost and time: How long does it take you to run payroll? Do you pay a payroll provider or accountant every time you send out checks? Paying your employees often can get expensive and time-consuming, so you’ll want to do it in a way that doesn’t create an undue burden on yourself.
- Your employees’ preference: On the other side of the equation, your employees may want to be paid more frequently. For example, hourly workers with low wages may not have a lot of savings, and waiting two weeks (or longer) to get paid can be a real problem. Take good care of your people by setting up a pay period that jives with their financial circumstances.
- Cashflow and accounting logistics: Do you always have cash on hand for payroll? Are some parts of the month busier than others? You want payroll to fit into your work schedule — not pop up as a fire drill that causes you to stay up late or shuffle cash around. Schedule payroll for days when you’re most able to deal with it.
- The law. There’s no federal law stating how often you should pay your employees. But some states have explicit rules about how frequently you should run payroll. For example, the Department of Labor reports that employees must be paid on a semimonthly basis in Arizona, with no more than 16 days between paychecks. In Michigan and California, pay frequency varies by industry. So before you settle on a plan, make sure your state hasn’t already settled on one for you.
How other businesses handle payroll
Thanks to the Bureau of Labor Statistics (BLS), we can see how companies across America set their pay schedules. Here’s what their research turned up:
Bi-weekly pay was the most common schedule, with about 36 percent of companies paying their employees every other week. Not far behind, however, were employers who paid their employees weekly (just over 32 percent).
The smallest businesses (one to nine employees) are all over the place when it comes to the length of their pay period. As companies grow larger and take on more headcount, however, a bi-weekly payroll schedule jumps out from the pack.
The pros and cons of different pay periods
If you need a little more help making up your mind, here’s a closer look at what your choices are, what they mean from a practical standpoint, and additional data on who’s doing what.
The quick overview:
Now let’s dive in:
According to the BLS, a weekly pay period is favored by 70 percent of construction firms and 50 percent of manufacturing companies. This cadence is also the top choice for hourly employees too, because there’s not much lag time between doing the work and getting paid.
- Cost and time: Most expensive
- Employee preferences: Preferred — especially by hourly employees
- Payroll and accounting logistics: Most difficult
Biweekly and semimonthly might sound like the same thing, but in payroll terms they are very different. Here’s an easy way to remember if you ever get them confused:
- “Bi” means two, so it’s every two weeks
- “Semi” means half, so it’s every half month
On the biweekly pay schedule, employees get paid every two weeks on a specified day. If employees on a biweekly pay period are paid, say, on the first of March, the rest of the payroll schedule would look something like this:
- Friday, March 1
- Friday, March 15
- Friday, March 29
- Friday, April 12
- Friday, April 26
- Friday, May 10
- And so on
As you can see, having 26 pay periods per year generally results in two paychecks per month — with two months having three paychecks.
Employees tend to love these bonus months. Your accountants? Not so much. Since reporting happens monthly, accountants have to accrue expenses so costs are recognized in the appropriate month. Benefits premiums are deducted monthly so a biweekly pay period will require some coordination with HR as well.
Biweekly pay gets even more complicated during leap years. Because our 365-day year doesn’t divide nicely into 7-day weeks, every few years you will have a year with 27 pay periods in it, instead of the expected 26. You’ll want to plan in advance how to pay your employees in these special cases.
- Cost and time: Less expensive than weekly
- Employee preferences: Preferred. Most employees in the US get paid this way.
- Payroll and accounting logistics: Can be complicated and requires cross-departmental coordination
A semimonthly payroll means two paychecks per month: one in the middle and another at the end. Your accounting staff will prefer this to the biweekly schedule because it slots neatly into their reporting.
Payroll administrators have to keep an eye out, however. Unlike biweekly pay, where payday is always on the same day every two weeks, a semimonthly schedule could hit on a non-business day. This will require some occasional last-minute adjustments. When payday naturally falls on a weekend, most employers opt to pay their employees early.
- Cost and time: Less expensive than weekly and biweekly
- Employee preferences: Neutral
- Payroll and accounting logistics: Generally straightforward
Why not take a load off and run payroll just 12 times a year? It’s much less expensive for those who get charged for each payroll run. It takes less time if you do it yourself. Logistically speaking, it’s the easiest to administer. But there are (more than) a few buts.
The first is that most employees don’t like to wait a whole month to get paid. For some workers, particularly low-paid hourly workers, this delay can cause serious cash flow problems.
The second is that some states mandate a shorter pay period. If your company has employees in different states, it can be more hassle than it’s worth to pay some of them monthly and adjust the others depending on their state laws.
- Cost and time: Least expensive
- Employee preferences: Least favored by employees
- Payroll and accounting logistics: The easiest way to go
Making your choice
As the BLS data make clear, there is no single pay period that works for everyone. How frequently you run payroll ultimately comes down to balancing the needs of your employees, the requirements of your state, and your business goals. It’s definitely worth taking a little time to think it through to make sure payday is one day that makes everyone happy.