Choosing a payment schedule can be confusing. You have to choose what will suit your accounting needs, your HR or administrators, and, of course, your employees. You are also subject to state laws that might have certain requirements. Each type of pay schedule will have its advantages and disadvantages. You will have to weigh the pros and cons so that you can make an informed decision. Here is an overview of the most common pay schedules to help you decide.
First, in most cases, your accountant will be running monthly reports. This is a reason they might recommend that you have a semi-monthly pay period since this will align the last paycheck of the month with their month end.
Second, if you choose to pay your team biweekly, you will end up having two months of the year where you will be paying them three times instead of two. This requires payroll expense accruals, so your accountant can identify costs in the month the additional compensation was paid.
Last but not least, your benefits probably run on a monthly basis. When employees are making voluntary deductions for healthcare, the semi-monthly system makes it easier. Once you get into biweekly pay deductions, they will have to be managed based on the total number of annual pay periods. This means more work.
Here are the pros and cons of the four types of pay schedules:
Many employees love this as they get paid every Friday. However, this can prove to be more costly for you as it takes up more time to process. This is also the preferred mode of pay for freelancers and contract employees. If you have an hourly wage setup or people tend to work irregular schedules, this can also be the best choice for you.
Increased Employee Satisfaction
Weekly payroll provides a reliable payday where employees can expect to receive their pay. As a result, they feel they have more control over their own money and are less likely to face financial hardship throughout the month.
Easier Calculation for your Payroll Team
Your payroll team can calculate weekly paydays more easily as they always know what day of the week the payroll is due. Instead of using a semi-monthly schedule where the days can change, they can schedule the same time and day of the week for processing.
Weekly Time Reporting
Employees are less likely to miss handing in their pay sheets on time when they are due the same day each week. This reduces time chasing after sheets for your payroll team.
More Processing Time
Although your payroll team has a dependable day of the week to process payroll, they also have to do it every week. As a result, they waste more time, and it costs you more money to repeat the payroll process so frequently. It costs even more if you outsource your payroll.
Increased Costs
Not only are you spending more to process payroll, but you also incur more costs on checks if you are still using manual paychecks. If you use direct deposit, you might also find your bank charges a deposit fee, which also contributes to more money wasted processing payroll.
End-of-Month Overlaps
The end of the month can get awkward if it overlaps two different months, with the beginning of the week in one month and the end of the week in another. This creates unnecessary accounting headaches.
With the bi-weekly payroll setup, you have 26 pay periods per year. Your employees are usually fine with this setup as they know they can expect their pay every second Friday.
Save Time
Bi-weekly payroll cuts your payroll processing time in half, as you are only processing checks or direct deposits every second Friday (or whatever day you use for payday). This frees up your team to focus on more important work.
Save Money
Less processing time saves money on labor, checks, and direct deposit fees. There is also less risk of errors, as you are cutting the work in half. This also contributes to cost savings, as payroll staff don’t waste time on corrections.
Higher Value Tasks
With less time dedicated to payroll, HR and accounting teams can concentrate on higher-value tasks. As a result, you can become more strategic in important areas such as reporting, hiring, and employee retention.
Decreased Employee Satisfaction
Some employees might prefer the weekly payroll schedule as they can depend on receiving payment for their work every week. Placing financial strain on employees contributes to employee churn.
Three Paycheck Months
You will encounter months where there are three payrolls due. As a result, you have to improve your cash flow management to cover the additional expenses. Depending on the size of your business, this can create a real cash flow issue.
Overlaps
You still face the challenge of those end-of-month overlaps where a single payroll straddles two months.
Many people think this is the same as bi-weekly. However, in this case, instead of being paid every second Friday, employees are paid on the 15th and last day of the month. Some companies might do the 1st and 15th instead. There is a low time investment to set up your payroll. You are looking at 24 payments a year.
Easy Payment Schedule
You will have an easy payment schedule that everyone understands. Employees know their pay is due on two specific days of the month, which most employees are fine with.
Improved Cash Flow Management
It helps you manage your cash flow, especially when benefit payments have to be made. Accountants love it since it makes it easier to calculate accruals.
No Worry of Bank Holidays
You avoid clashes with most bank holidays, particularly if you choose the 15th and final day of the month. You also don’t have to worry about odd days or leap years.
Not Suited for Hourly Workers
Salaried employees receive the same amount each payroll, making it easier to contend with deductions and calculations. It gets awkward when overtime is involved with hourly workers. Sometimes, employees find this confusing because cut-off times are required for their hours.
Challenging for New Hires
In the case of new workers, they usually have to wait longer to get their first pay. You will also have to make sure it is allowed in your state to avoid compliance issues.
Administrative Challenges
Semi-monthly payroll is often paid current with no lag time. This can lead to an administrative challenge to process payroll. It is especially contentious for an hourly workforce, as the payroll manager has to forecast what hours the employees will work and then adjust the next payroll accordingly.
Monthly payroll provides your employees with one pay period each month. This means just 12 pay periods for you per year. You can choose the date of the month, but you will definitely feel the wrath of your team if this is the route you choose.
Less Work
Your payroll department has less work, with only one payroll cycle to contend with each month. This saves time so they can focus on higher-value tasks and might even mean you can work with a smaller team.
More Cost Effective
With less work and fewer direct deposits or checks, you’ll find monthly payroll is the most cost-effective solution. As mentioned, you might even save by reducing your payroll team.
Easier Processing
You can align it with other payroll deductions for easy processing with just one set of deductions each month. Again, this saves time and money while also keeping your team leaner.
Unhappy Workforce
Very few employees will be happy with a monthly payroll as it can leave them having to stretch out their pay for weeks. Placing financial strain on employees contributes to job dissatisfaction, employee churn, and reduced employee engagement.
Non-Compliance in Some States
Some states, such as Connecticut, have strict payroll frequency laws that dictate whether you can choose a monthly payment schedule. If your payroll spans different states, this can become complicated to manage and track to remain compliant.
Complicates Overtime
Although benefits deductions can be easier, overtime pay becomes more complicated. Your team might save time by doing just a single payroll each month, but they have to be extra diligent in tracking over four weeks of overtime each month. This means a busier end of month that can make it feel like more work rather than less.
This can be a challenge if you already have employees who are used to a certain pay frequency. When you do decide to make a change, you will have to provide employees with a warning, especially if it will reduce the frequency of pay. You also want time for your accounting and HR team to adjust.
Using payroll software will make a transition easier. It will also make choosing any of the payroll schedules manageable. Even if you go with the weekly schedule, with an automated payroll system, you can run your payroll schedule to suit your needs. You can also streamline your software with your scheduling and time tracking system, so everything is automatic. This reduces mistakes.
The bottom line is that if you want to make your employees happy, you are best off choosing the most frequent payment method. Using a payroll software tool will reduce man-hours associated with pay prep times. However, because people are also generally happy with bi-weekly or even semi-monthly setups, you will strike a happy balance between team satisfaction and reasonable work in payroll prep.
