Choosing a Payroll Schedule: Pros, Cons, and Considerations
What’s the best payroll schedule for your small business? You have a few different options, and there are several important factors to consider, including regulations, expenses, and the needs and preferences of your employees.
First, let’s take a look at the four standard pay frequencies you can choose from, and their advantages and drawbacks.
Weekly (52 paychecks per year) Who uses it: Weekly schedules are most commonly used in industries like construction, mining, and manufacturing.
Pros: This pay schedule is most favorable for contract workers or hourly employees with a lot of overtime or irregular hours. If they’ve worked extra one week, they won’t have to wait to get that pay.
Cons: Because this schedule has the most pay periods per year, it’s likely to be the most expensive option for small businesses to implement, whether they process payroll in-house or opt to use a payroll service.
Biweekly (26 paychecks per year) Who uses it: Biweekly is the most popular choice overall, and especially in education, health, and hospitality.
Pros: With this popular payroll option, it’s easy to calculate overtime for hourly employees because each pay period always comprises the same number of days and ends on the same day of the week.
Cons: Since two months each year will have three pay periods instead of two, managing benefit deductions and expense accruals can be trickier, as can household budgeting for some employees.
Semimonthly (24 paychecks per year) Who uses it: Semimonthly pay is most frequently used in information, financial, and business services.
Pros: This option can make financial reports easier to manage because the number of pay periods per month and quarter is consistent. The regularity works well for salaried, noncommissioned employees.
Cons: Semimonthly schedules don’t work as well for hourly or commissioned employees, since workweeks are split between two pay periods and they may have to wait a while to receive extra pay they’ve earned.
Monthly (12 paychecks per year) Who uses it: Monthly is the least popular overall, but isn’t rare in professional services or firms under 10 employees.
Pros: This method can be the most cost-effective choice for small businesses, because there are many fewer pay periods to process. It’s also easy to manage voluntary deductions for healthcare or retirement.
Cons: This option is not suitable for hourly workers, causes difficulties for new hires, and can make household budgeting difficult for employees who have to make sure a single paycheck lasts all month.
Things to Consider
Here are some questions to find answers to before deciding on a payroll schedule:
- What are your state’s laws regarding minimum pay schedules?
- What are the needs and expectations of your employees?
- Are your employees mostly salaried or hourly?
- Are their hours mostly consistent or highly variable?
- How much time and money will it take your business to administer payroll each period?
- What are your company’s liquidity and cash flow capacities?
- Will you process payroll in-house or hire a payroll company?
- How will you calculate benefits deductions?
- How will you handle overtime payments?
We Get It.
Entrepreneurs like you are constantly faced with complex decisions that can have big impacts – like what payroll schedule to use. That’s why it’s so important to have a financial partner that understands the distinctive needs of small businesses. Want to learn more? Get in touch today.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
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