The Pros & Cons of Different Pay Schedules
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.
Some Considerations Upfront
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.
The Four Pay Schedules
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.
Provides higher employee satisfaction while also keeping freelance and contract workers happy. It is also an easy calculation for your payroll team. People also more easily get in the habit of handing in their pay sheets as a weekly ritual.
As mentioned, this takes more time for you to process. As well, if you are working with someone who comes in and does your payroll, it costs you more as they have to come in more often. This impacts your overhead. If you are not on an automated system, the more cheques you use, the more it costs you. If your bank has a deposit fee for direct deposit, this also costs you more. The end of the month can get awkward as well since it will overlap two different months, which can cause 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.
This will save you a lot of time and effort. It also saves money on cheques and direct deposit fees. It literally cuts your payroll prep time in half, leaving more time for HR or payroll staff to focus on other tasks. There is also less risk for error, as you are cutting the work in half.
This can affect the monthly expenses with the pay periods. Once again, you will be spanning two months for the first and last pay periods. This can make deductions more complex.
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.
You will have an easy payment schedule that everyone will understand. This payment method is fine with employees for the most part. It is especially effective for salaried employees. It helps you manage your cash flow, especially when benefit payments have to be made. You avoid clashes with most bank holidays, particularly if you choose the 15th and final day of the month. You don’t have to worry about odd days or leap years. Accountants love it since it makes it easier to calculate accruals.
This really works best for salaried employees. It gets awkward when overtime is involved with hourly workers. Sometimes, employees find this confusing because cut-off times are required for their hours. In the case of new workers, they usually have to wait longer to get their first pay. You will have to make sure it is allowed in your state.
Additionally, semi-monthly payroll is often paid current with no lag time. This can lead to an administrative challenge to process payroll, especially for an hourly workforce, as the payroll manager has to forecast what the employees will work and then adjust the next payroll.
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.
This is obviously the least amount of work. You can align it with other payroll deductions for easy processing with just one set of deductions each month.
Most employees will hate this. It might also not be in compliance with state laws.
Deciding to Change Your Payroll Frequency
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.
About The Author
Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.