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At startup, small business owners make one decision after another. Deciding how and when to pay employees is an important one. You must address these questions when setting up payroll for a small business.
Whether you have one employee or several, you’ll need to maintain compliance with tax and employment laws, and consistently meet payroll obligations.
The first step is selecting the best pay schedule for your business.
So, what is the best payroll period for paying employees?
Short answer: The one that works for you.
But it’s a tad more complicated. You also need to consider:
There is no one-size-fits-all approach to setting pay periods for a small business. Depending on where your employees work and the type of industry you operate in, your state may provide guidelines for the type of payroll schedule you need to follow. In addition, the Fair Labor Standards Act requires that you pay employees on a regular, predetermined payday each pay period.
It depends on the pay frequency you pick.
The four most common pay periods are:
Most private companies pay biweekly, according to a recent Bureau of Labor Statistics (BLS) report.
Here are some pros and cons of different pay period frequencies to help you decide how to pay employees.
A weekly pay period means employees get paid once a week on a designated date, such as every Friday. This can offer employees a steady cash flow. But it can be costly and demanding for you. A weekly payday means you must process payroll, including ensuring proper tax withholdings and administering benefits, once a week, every week, 52 times a year.
Employees on a biweekly pay schedule receive a paycheck every two weeks, totaling 26 paychecks each year (some years 27). A biweekly payroll also means employees will receive three paychecks in some months. While employees may enjoy what they perceive as an “extra” check in those months, biweekly pay periods can make tracking and projecting cash flow more cumbersome for you compared against less frequent pay periods.
A semimonthly pay period means employees get paid twice a month—or 24 paydays a year. On this schedule, employees are paid on the same dates each month, such as the 1st and 15th of the month. If one or both of those dates fall on a weekend, the pay date is typically the Friday before.
If you’re paying salaried employees, you may find this schedule relatively simple since you will run payroll on the same dates each month and the check amounts are typically the same each pay period.
This pay period also reduces how long you’ll need to spend on payroll tax and benefit administration tasks. However, these pay periods can complicate the payment of wages to hourly and other nonexempt employees because semimonthly pay periods don’t naturally align with workweeks.
For a monthly pay period, employees receive one paycheck per month, usually issued on the first or last day of the month. On this schedule, you will process 12 payrolls per calendar year. Running payroll monthly can potentially save you time, money and resources.
It does, however, present challenges if you have hourly or other nonexempt employees. Many states do not allow a monthly pay schedule for nonexempt workers. Employees also may find it tougher to manage their personal finances on a monthly pay schedule. Monthly pay frequency is the least common pay period according to the BLS report.
No matter which pay period you choose for your small business, it’s vital to include space in your schedule to carefully process payroll and ensure your employees are paid accurately and timely.
That’s not all. You also need to protect your business from potential fines and penalties that can result from errors. To reduce the risk of errors, you’ll need to make sure you correctly calculate, withdraw and pay payroll taxes and administer benefits.
You don’t need to tackle this alone.
If you’re unsure about the payroll scheduling requirements in your state or need more advice, you should consult with your accountant, bookkeeper or financial adviser.
A payroll service provider, like SurePayroll® By Paychex, can help you simplify compensation planning, payroll processing and tax management, as well as offer access to affordable HR services and benefits.
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