What Is a Payroll Schedule? How to Choose One
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A payroll schedule determines how often employees get paid, and choosing one for your company is among the first decisions you'll make as a business owner. Even if you're the only employee in your business, establishing a payroll schedule for yourself can create a more predictable income and protect the business’s bank account from becoming a personal line of credit.
Several factors go into choosing your company’s payroll schedule, and these are the most important:
Your business’s cash flow rhythm. Small businesses live and die by their cash flow. A business that is profitable on paper can be forced to shut its doors if it runs out of cash. Payroll is often the largest expense a company has, so your payroll schedule must be in sync with your cash flow.
Labor market expectations. Some industries have unwritten standards around payroll frequency. If your payroll schedule doesn't align with your labor market’s expectations, job candidates might decide not to work for you.
State regulations. Most states have requirements around the minimum number of times an employee must be paid in a month. Some states have different requirements for different job classes. Make sure your payroll schedule aligns with your state’s payday requirements.
These three factors might determine your payroll schedule for you. Most employers, though, find they need to choose between two or more options. Here are the five most common payroll schedules and why they might work — or not work — for your business.
While you can usually change your payroll schedule after establishing it, doing so is disruptive and can lead to employee dissatisfaction. If you need help determining the best payroll schedule for your business, consult with an accountant, a payroll specialist or your state’s labor board.
1. Weekly payroll schedule
If you choose a weekly payroll schedule, you'll pay employees on the same day of the week, every week of the year. The most common payday for a weekly payroll is Friday, but you can choose any day of the week that works for the business.
Why choose it
You own a retail store, restaurant or business that relies on manual labor. For employees in these types of businesses, a weekly payroll is standard. Your workers might not want to wait two weeks or longer to get paid.
Most of your employees are hourly workers. Weekly payroll can help you match hourly payroll costs to changes in your business’s income. For example, let’s say you own a restaurant. You schedule more work hours for your employees on holiday weekends. You know this means the next week’s payroll will be higher than usual, but the increased holiday sales will cover the higher payroll expense. And if business is slow, you can send your employees home to save on payroll costs the following week. This “real-time” matching of payroll expenses to your income can help you manage your cash flow.
When to skip it
Most of your employees are salaried workers and your business’s sales aren’t consistent from week to week. In this case, a weekly payroll schedule could mean you have little or no revenue to cover a weekly payroll. This type of cash flow crunch is stressful, and a different payroll schedule can help you avoid it.
2. Biweekly payroll schedule
The biweekly pay period is the most common pay period used by businesses in the U.S., according to February 2020 data from the U.S. Bureau of Labor Statistics, the most recent data available. Like the weekly pay period, employees paid biweekly get a paycheck on a specific day of the week. However, instead of being paid every seven days, employees paid biweekly get a paycheck every two weeks.
Why choose it
You have both hourly and salaried employees. A biweekly payroll is easy to administer for all employees, regardless of how you compensate them. This eliminates the need for multiple payroll schedules.
A biweekly payroll schedule helps your employees regulate their personal cash flow. An hourly employee who is sick one week can work extra hours the following week and reduce the impact of the lost time on their paycheck. Salaried employees can count on a regular paycheck every other week. This helps them avoid the stress of having to make their income stretch until the 15th or the end of the month. An added bonus for salaried employees: A biweekly payroll schedule results in 26 paydays per year. This means two months a year, your salaried employees will get an “extra” paycheck.
When to skip it
You can't budget for the twice-yearly "extra" payroll. Those two extra paydays salaried employees see as a bonus can be a real stressor for the business. If you can’t set aside funds to cover this third payroll, a biweekly payroll schedule is not the best choice for the business.
3. Semimonthly payroll schedule
With a semimonthly payroll schedule, you will pay your employees twice a month, or 24 times a year. A typical semimonthly payroll schedule is either on the first and 15th of the month or on the 15th and the end of the month. Any two dates that are relatively equidistant can work, though. The semimonthly payroll schedule is most popular with companies that don’t employ hourly workers.
Why choose it
A semimonthly payroll schedule helps you stabilize payroll cash needs. For example, let’s say an employee earns $60,000 per year. If you pay this employee semimonthly, you will pay them $5,000 every month ($60,000 / 24 pay periods = $2,500 per pay period x 2 pay periods per month = $5,000 per month.) If you pay this same employee biweekly, you will pay them $4,616 per month 10 months out of the year. That sounds good until you consider the two months when you have a third payroll and will have to pay them $6,923 per month ($60,000 / 26 pay periods = $2,308 per paid period.) Even though you will pay the employee $60,000 per year in both scenarios, payroll costs will seem $2,308 higher two months out of the year.
Some employees prefer a semimonthly payroll schedule. A semimonthly payroll schedule can help employees align their most important expenses (mortgage payments, car payments, etc.) with their paydays.
When to skip it
You have hourly employees. A semimonthly payroll schedule can be a lifesaver when you’re managing the cash flow for salaried employees. It can also be a nightmare if you have hourly employees. With a semimonthly payroll schedule, workweeks for your hourly employees will often be split between two pay periods. This makes tracking hours for overtime difficult. Your cash requirements for each pay period can also vary if you have hourly employees.
4. Monthly payroll schedule
A monthly payroll schedule means you will pay employees only once per month, often on the last day of the month. Few businesses choose a monthly payroll schedule, and many states require employees to be paid more often than monthly.
Why choose it
You're the only employee. When you’re the only employee, a monthly payroll schedule can make sense. This is especially true if most of your business's revenue comes in all at once, as in a subscription-based business.
Your employees are paid a commission. A commission-based compensation model lends itself well to monthly payroll. But remember, most employees prefer to be paid more often than once per month. Since most companies pay at least semimonthly, you could lose employees if you choose to pay only monthly.
When to skip it
Your state's laws mandate a more frequent payroll schedule. You don't want to run afoul of your state's labor board. Even if it's better for cash flow to run a monthly payroll, choose a more frequent schedule if your state mandates it.
You have hourly employees, especially those whose hours worked vary from month to month. A monthly payroll schedule will create too much uncertainty for these employees, causing them to seek employment elsewhere.
5. Multiple payroll schedules
Having multiple payroll schedules means you use more than one of the payroll schedules detailed above.
Why choose it
You employ different types of workers, and it's not feasible to pay them all on the same schedule. Some states, like California and Michigan, require employers to pay farm laborers weekly. Other states, like Illinois, Nevada, New Mexico and Virginia, allow businesses to pay executive, administrative and professional employees monthly. All others must be paid at least semimonthly. If you have some workers in your business that need to be paid more frequently than others, and it’s not convenient to pay them all on the same schedule, you might choose to adopt multiple payroll schedules.
When to skip it
Most of the time. Unless you have an unavoidable business reason to choose multiple payroll schedules, one payroll schedule is the way to go. The administrative burdens of managing multiple payroll schedules outweigh the benefits for most small-business owners.
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OnPay Payroll Plans start at $40 per month (base) and $6 per person per month. Read review. | |
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RUN Powered by ADP Plans start at $79 per month (base) and $4 per person per month. Read review. | |
Wave Payroll Plans start at $20 per month (base) and $6 per person per month. | |
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