One of the biggest mysteries in payroll management is frequency. While you design the system that works for your company, you have to consider how often you want to pay your employees, what the perks and drawbacks are of each method, and the tax implications resulting from each design. The following is a basic breakdown of the nuances of payroll frequency to help you choose wisely.
When choosing a payroll frequency, your goal as an employer should be to straddle the line between what your employees want and what’s most cost effective for your business. You have four major payroll frequency options at your disposal:
- Monthly – once a month, or 12 times a year
- Semi-monthly – twice a month, or 24 times a year
- Bi-weekly – once every other week, or 26 times a year
- Weekly – once a week, or 52 times a year
According to the Department of Labor, monthly pay is the least popular option in the nation, though it is often the cheapest for businesses. The main issue with monthly pay lies with employees’ discontentment; unless you’re on a tight accounting budget, it’s in your best interests as an employer to bypass this option.
The semi-monthly and bi-weekly frequencies are much more common choices. At first glance, the two are fairly similar, but bi-weekly pay comes with the guarantee of a set pay day (e.g., Thursday) every other week, while semi-monthly pay is date-based (for example, most businesses schedule for the first and the fifteenth of every month). This can occasionally lead to some awkward pay days on weekends or holidays, so bi-weekly pay is slightly better for your employees’ well-being.
Naturally, employees prefer weekly pay, but it comes with some potentially significant drawbacks, depending on your selected payroll provider. If you have to pay on a check-by-check basis or by number of pay days per month, a weekly pay frequency will clearly cost the most.
Of course, if you choose to enforce a mandatory direct deposit complete with paperless pay stubs and payroll software, you will negate a lot of your payday costs since you won’t have to account for printing, distribution, or any physical side-effects thereof. If you want to use direct deposit, make sure you can legally require your employees to do so before implementing any regulations.
Payroll Frequency Laws and Etiquette
Federal law concerning payroll frequency is fairly straightforward. There are two factors you absolutely must keep in mind when determining your payroll cycle: you have to provide employees with a routine pay period upon which they can rely, and said pay period has to occur at least once a month. As long as it meets these criteria, whatever payroll frequency you select is entirely up to you.
State law, on the other hand, is variable and subject to change. Before you establish your payroll frequency, be sure to check in with your state’s labor office to see what regulations—if any—apply to your designated pay periods. Several states have a minimum frequency of one month, whereas others top out at semi-monthly or lower. Remember that you can pay your employees more frequently than your state’s requirement—just no less frequently.
On top of federal and state laws, you should be aware of the Fair Labor Standards Act (FLSA), which may apply to your business. According to the FLSA, non-exempt hourly employees who work more than 40 hours a week need to receive overtime compensation. Since you calculate time and a half on a weekly basis, you might consider paying these employees likewise to avoid any confusion in the record-keeping process.
The frequency with which you pay your employees does not affect their tax liability, but you might want to explain to your employees the tax ramifications of your chosen frequency. The correlation between increased income and increased taxes seems logical, but you should cover your bases just in case.
As a matter of courtesy, you should officially report any changes to your chosen payroll frequency to your employees long before implementing them. Since both federal and state laws require regularity in your paydays, neglecting to report said changes can prove catastrophic to both you and your employees.
We understand that picking the right payroll frequency can be a challenge. If you’re ready to decide on your system, we’re ready to help. Call Abacus Payroll at 856-667-6225 today for a no-obligation quote.