No matter how dedicated or passionate they are about their work, the reality is that your employees are probably in it for the money. And there’s nothing wrong with that; it’s only natural that a worker should want compensation for the value that they bring to the company. As such, setting up a payroll system is a vital early step in any business, and determining how and when employees will be paid is an absolute necessity.
And this means setting up pay cycles.
What Is a Pay Cycle?
A pay cycle is a term used to describe the frequency that an employee is paid for their work. Also called a pay schedule, the pay cycle takes into account the pay period (the period of time the employee worked that will be reflected in a specific paycheck) and the payday (the day that payment is issued to the employee). By establishing regular pay periods and paydays, businesses create a calendar detailing when employees can expect payment for their work, and the time duration that will be included in that pay.
In other words, the pay cycle determines when paychecks go out, and is an essential responsibility of any business. Pay cycles not only help ensure that workers are paid for their labor in a timely and predictable manner, it also plays a significant role in reporting requirements associated with insurance, taxes, and expenses.
Pay Cycle Types
When not otherwise directed by law, employers have the freedom to set their own pay cycles. The following are some common, and less-common, pay schedules to consider:
One of the least common pay cycles, daily paychecks are issued at the close of each workday. Daily pay may be beneficial for employees who are less financially established and may need to cover unexpected expenses without having to wait for payday. However, because many payroll providers charge per pay period, daily pay cycles may be prohibitively expensive for many businesses.
Although not as frequent as the daily pay cycle, weekly pay may likewise benefit hourly employees, employees with irregular schedules, and freelancers.
A bi-weekly pay cycle means that employees get paid every two weeks. Paychecks arrive on a predetermined day of the week (usually Friday). And because there are 52 weeks per year, and not every month has four full weeks, two months of the year include a bonus pay period. This schedule may be enjoyable for employees who look forward to a Friday payday, but can be difficult for some businesses that have to deal with irregular bonus periods in their accounting and reporting.
Although sometimes used synonymously, the truth is that semi-monthly and bi-weekly are not the same thing. Instead of a recurring paycheck every other week, semi-monthly cycles distribute paychecks twice per month; regardless of how many full weeks there are in said month. A business using a semi-monthly pay cycle may elect to pay its employees on the 1st of the month and the 15th, or the 15th and the last day of the month, for a total of 24 payments per year. This method works best for salaried employees.
Although less popular with employees than the more common bi-weekly and semi-monthly schedules, monthly pay cycles are not entirely unheard of. Some businesses find that they save on costs and effort with only 12 pay periods per year, and because insurance premiums are generally updated on a monthly basis, payroll deductions demand less attention in a monthly pay schedule.
Choosing the Right Pay Cycle
Pay cycles can have a big impact on your business, potentially affecting recruitment, retention, and employee satisfaction rates, as well as a business’ ongoing expenses and overall net income. With this in mind, here are five considerations you should make when choosing the right pay schedule for your organization:
Often, pay periods are determined by the area in which you do business. And while some US states have no specified regulations, others adhere to laws that dictate when an employee should be paid, what kinds of employees have regulated paydays, and whether special exemptions may apply. State payday requirements are outlined here.
As previously mentioned, hourly employees often prefer pay cycles that occur more regularly, while most salaried employees are happy with bi-weekly or semi-monthly schedules. Review the types of employees you have within your organization, and consider which pay cycle would benefit them most.
The various tasks and responsibilities associated with managing payroll each have their own costs. And when you’re processing paychecks on a weekly basis, those costs can really add up. As you select a pay cycle, be sure to consider your budget; too-frequent pay periods can end up hurting your business’ bottom line.
The last thing you want is to have to empty your accounts to pay your employees. By identifying the times during the month when your business brings in its greatest returns, you can select a payment schedule that takes advantage of this information to help ensure that regular paydays occur when you are most financially prepared to handle them.
According to federal law, overtime rates must be calculated on a weekly basis. As such, if you have hourly, non-exempt employees, payroll will need to take overtime into account on a weekly basis — even if you are using a bi-weekly or semi-monthly pay schedule. Businesses that need to account for a large amount of overtime may be better suited for weekly pay periods.
The Right Pay Cycle for You and Your Employees
At the end of the day, the most important consideration in choosing a pay cycle is what works best for your business, and what your employees will appreciate most. Often, this may mean finding a compromise between more regular paydays and more-cost effective, longer-duration pay periods. If you’re unsure which direction to take, speak with an experienced business accountant; they’ll be able to offer their insight to help inform your decision. After all, employees need to get paid, and how and when you pay them can make a big difference in your ongoing success.