How to Choose a Payroll Schedule for Your Small Business
As a small business owner, determining the ideal time to administer payroll may sound simple in theory. But the reality is that your payroll schedule must take into account a number of factors including: state regulations, cash flow needs, overtime rules, and the types of workers or contractors you hire.
Simply put, you should not only consider what’s best for the business but also what works for your team members as well. If you don’t pay your team often enough, it can have a negative impact on staff morale and employee turnover. And if you pay them too often, it could result in administrative headaches on your end.
Keep reading to learn our top tips for creating a payroll schedule that fits your small business needs.
Understanding Your Options
There are four common types of payroll schedule frequencies in the United States: weekly, biweekly, semi-monthly, and monthly. Most states have regulations that must be adhered to surrounding pay schedules. For example, many states including Idaho do not allow monthly paychecks. On the other hand, in Massachusetts, employers can only choose between semi-monthly and monthly payroll options.
As a first step, find your state on the U.S. Department of Labor website in order to ensure compliance.
- If your team is mostly made up of hourly workers, then they may prefer to receive weekly paychecks. However, this is generally not the most cost-effective option because there are processing costs each time you run payroll.
- With this option, payroll is administered every other week on the same day, typically a Friday. As there are 52 weeks in a year, there will be 26 paychecks. However, it is important to note that two months out of the year will have three paychecks since 26 does not divide evenly into 12.
- With a bi-weekly payroll schedule, defining the work week and calculating overtime is relatively easy because each pay period has the same number of days. This makes bi-weekly payroll an ideal choice for companies who typically rely heavily on hourly workers.
- However, one of the main drawbacks is that workers who are paid bi-weekly may find it a bit trickier to budget since they are not paid on the same date each month.
- Bi-weekly and semi-monthly may sound like equivalent terms but when it comes to payroll, they are distinctly different. In terms of semi-monthly, employees receive twice monthly paychecks on the same dates each month. This is often on the 1st or 15th of the month, though you may choose any schedule — e.g. the 16th and the 30th — as there are no state or federal restrictions in this regard. Employees who are paid semi-monthly benefit from predictability in managing their own finances. For instance, it is easier for them to set up auto payment options for their bills since they are paid on fixed dates twice per month.
- This payroll schedule is recommended for freelancers or contract-based workers, such as graphic designers or copywriters, as salaried employees would find it difficult to confidently plan for their own finances if they were only paid once a month.
See below for a summary of the four common types of payroll frequencies.
|Type||Frequency||Number of Paychecks Per Year|
|Weekly||Once a week on a specific day e.g. Thursday||52|
|Bi-Weekly||Every two weeks on a specific day of the week e.g. Friday||26|
|Semi-Monthly||Twice a month on two specific dates e.g. the 1st and the 15th||24|
|Monthly||Once a month on a specific date e.g. the 25th||12|
Cash Flow Considerations
Having a good handle on the timing of your cash inflows and outflows can help you to better plan your payroll schedule.
If you choose a bi-weekly payroll schedule, it means that you will need to have accurate cash flow projections to handle those months that will have an extra pay period. Some small business owners also find it prudent to secure alternative financing options in advance — such as a line of credit — which would come in handy should they ever find themselves in a cash crunch when it comes time to process payroll.
Others may find it more beneficial to switch to semi-monthly as a way to optimize payroll and ensure their cash flow is more predictable (since payroll is administered on the same dates each month). However, overtime calculations can become more complex if hourly workers enter the mix.
Which Payroll Schedule Should You Choose?
It all depends on how your small business is structured. A bi-weekly payroll schedule is ideal if most of your workers are paid by the hour because it is relatively easy to calculate overtime plus employees generally look forward to the “extra” paycheck that rolls around twice per year. On the other hand, if most of your employees are salaried, then running payroll semi-monthly would be an ideal choice since you do not need to worry about overtime calculations. Processing time and costs tend to be quite low with this option as well.
Companies with bigger teams may find it beneficial to have two payroll schedules — bi-weekly for hourly workers and semi-monthly for salaried employees.
After ensuring that you adhere to state guidelines, at the end of the day, choosing a payroll schedule boils down to personal preference and what fits best with your needs as well as those of your employees. However, determining the right payroll schedule is just one of many critical payroll functions that must be carried out expeditiously. Remember, the responsibility lies with you as the small business owner to ensure that the process is seamless.
The good news is that you can outsource payroll to a team of experts, freeing up time to focus on your core business. By ensuring accuracy, timeliness and compliance, you can avoid the potential for an IRS tax audit and penalties.
Here at RQB, we are equipped to take care of all aspects of your payroll (from payroll processing, direct deposit to calculating employees’ work hours). You’ll benefit from access to more technology and expertise to perform payroll well, while keeping costs low and reducing risk.
Contact us to see how we can assist with your payroll needs.
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