A common question that many business owners ask themselves is, "How frequently should I pay my employees?" There are a few factors to consider when determining how often you pay your workers, but it mostly comes down to preference. In this post, we will go over how to find the best pay frequency for your business.
What Determines Pay Frequency?
From the employer’s perspective, costs and cash flows determine a firm’s pay frequency length. For example, mailing out checks, running payroll, and paying the banking fees associated with a direct deposit and more are all costs that could incline an organization to pay their workers less frequently. However, most states place a minimum limit on the frequency in which employees are paid.
Your industry, the number of employees you have working for you, the type of workers you have, benefits deductions, accounting implications, and legal requirements are all factors that contribute to pay frequency. Of course, the frequency of pay periods can depend on the occupation and preference of your employees too.
Which Pay Frequency is the Best?
Choosing the best pay frequency for your workers is much harder than it looks. Ultimately, whichever one your company finally decides on will be based mainly on your firm’s individual needs and how often you want your staff to be paid.
What to Consider When Determining Pay Frequency
We're often asked by businesses what they should consider when determining pay frequency. Several different factors need consideration, though. Before you make a final decision about which pay frequency you’ll be using, we suggest you contact our Payroll Managers at Horizon Payroll.
Once you do, some questions to ask yourself are:
What are my company’s needs?
Do I want my staff paid more frequently so that every week has a payday?
Do I need to pay less often to save money by paying workers just once a month?
What is the minimum wage limit set by state law?
How many employees does my company have?
Here's a quick snapshot of how each payroll interval works to help with your decision.
A weekly pay period is favored by over 70% of construction firms and over 50% of manufacturing companies. Employees like weekly pay, too. It is also the second most used pay frequency behind bi-monthly.
Payment frequency: 52 paychecks a year
Paydays: Once a week, every week, usually at the end of a week (Thursday or Friday)
Typical number of hours paid a week: 40
More pay frequency is almost always preferable among employees. Also, weekly payroll is best for employees that get paid by the hour and work a good deal of overtime, as it doesn’t cause them to wait for weeks before getting their overtime pay. Moreover, pay by week is also a darling among “giggers” and contractors with flexible schedules since they are speedily paid for time they worked.
There is a higher cost associated with weekly payment schedules since they have the highest amount of pay periods – and there are more expenses involved every time you do payroll. Similarly, there is a massive time commitment since the payroll department will have to process payroll four or more times monthly versus once or twice a month.
Because payroll runs weekly, this option is more costly and time-consuming than any other pay frequency on this list. Meanwhile, this cadence is popular with organizations that have workers that are paid by the hour or have workers with flexible schedules, such as contractors or freelancers. Lastly, if you make your selection based on the best employee recruitment and retention metrics, the weekly pay period is your best bet.
Almost 37% percent of private enterprises pay their employees at the two-week mark on a set weekday. Furthermore, paying biweekly is the most utilized pay frequency option, and industries that use this option include education and health services (53%) and leisure and hospitality (46%).
Payment frequency: 26 paychecks a year
Paydays: Alternating Thursdays or Fridays
Typical number of hours paid every two weeks: 80
When you pay twice a month, calculating an hourly workers’ overtime is pretty straightforward, as any overtime they accrue in a week will be recorded in that same time. There is also more time and cost-savings from a payroll perspective since you cut the paychecks from 52 to 26 a year.
The expense accruals of this option are a big con. For example, if you look closely at the twice a month model, there are a couple of months in the year where there are three paydays. In these circumstances, employees will earn their wages, but it accrues, and no payment is issued to them until the following pay period comes around. That’s a burden if you are an employee with something like a car payment due.
Another con is that it’s challenging for payroll to handle the benefit deductions. For instance, employee benefits occur monthly, so payment periods and benefit deductions do not always line up. So instead, they have to calculate these deductions by basing them on the 26 pay periods in a year versus the more naturally occurring monthly basis.
A biweekly frequency is extremely convenient for calculating hourly employees’ overtime. On the other hand, having three paydays in a single month can often make it a challenge for the accounting department to handle expense accruals and benefit deductions. In addition, it’s cheaper from an employer’s perspective than weekly pay periods, but some employees may feel anxiety from waiting.
Twice a Month
Not to be confused with biweekly, where paydays happen every two weeks, is semi monthly. Paydays happen twice per month with this frequency, which equates to 24 paychecks a year. Some industries that use semi-monthly pay periods include information and financial activities.
Payment frequency: Semi-monthly paydays happen on two dates in the month. The dates are typically the 1st & the 15th, although some companies choose the 15th & 30th for semi-monthly pay frequencies.
Typical number of hours paid twice monthly: about 87
Accounting teams prefer semi-monthly pay periods because the last paycheck typically occurs at the end of every month. Another plus: premiums for insurance benefits are charged monthly, so processing benefit deductions during the pay period is less taxing.
What’s more, consider that the pay schedule for semi-monthly doesn’t have as many pay periods as the other pay schedules do, thereby cutting down on the time, effort, and expense to complete payroll.
Semi-monthly pay frequencies aren’t exactly the stellar choice for hourly employees, as the semi-monthly pay schedule makes commission and overtime payments a chore. Adjustments will also be complex since a standard workweek is going to be 87 hours a pay period. As an example, payroll administrators may be forced to divide overtime among two unrelated pay periods, thus making it difficult to perform any adjustments needed.
One of the other disadvantages of semi-monthly are those occasions where the paydate falls on the weekend and needs to be paid on the Friday prior, which could result in having to artificially end the pay period before the scheduled date, either estimating hours or adjusting your pay period calendar. If semi-monthly is the choice, you should consider making the pay date five days after the end of the pay period to take into account the weekend pay dates.
This option is not optimal for your employees who get paid by the hour, although it’s excellent for processing any benefit deductions. A semi-monthly pay period offers consistency, but it also creates headaches regarding overtime and payouts for commissions.
Running a monthly payroll is precisely as it sounds, and you pay your workers 12 times annually. Also, monthly pay periods are by far one of the cheapest options to pay employees, but only around 11% of private industries use them.
Payment frequency: 12 paychecks a year
Payroll date: Paydays occur at month’s end, e.g., April 30.
Typical number of hours paid monthly: 172
The monthly option uses the least number of resources since you only have to run payroll once a month. Also, premiums for insurance benefits are typically charged monthly, making payroll deductions for benefits more manageable.
Although some employees say that a monthly payday teaches them to save better, many say it is challenging to pay the bills with only 12 paychecks for the whole year. Receiving one monthly payment is incredibly daunting for new hires, too, as it can sometimes take more than a month for them to take home their first paycheck. Plus, most states do not support a monthly pay frequency. These states require that employees receive at least two paydays a month.
According to the Bureau of Labor Statistics, the monthly pay frequency is the least used of the four. And, while the less frequent payroll times are very cost effective and great for processing deductions, it will also be your worker’s least preferred payment method. As such, it may be worth the extra splurge on funds if you don’t want issues with recruitment and retention.
Let Horizon Payroll Help You with Your Payroll Frequency
Picking a payroll frequency is a big decision, and you can benefit from the assistance of knowledgeable, professional payroll teams. That’s why small and medium businesses turn to Horizon Payroll for their payroll requirements. Rest assured, we’ll work with you to find a payroll frequency solution that is both economical and welcomed by your employees.
Our team is relentless in satisfying our customers, so if you want more information about how you should choose your pay frequency, please get in touch with us at 1 (888) 434-8244. Alternatively, you can contact us on our website.