A common question that many business owners find themselves trying to answer is, “What type of pay period should I use to pay my employees?” Many business owners who have a history of business typically know what works for them. However, if you are a new business owner there are some important questions you need to ask yourself to determine the best pay period for your business and your employees.

What is a pay period?

There are several different pay period types available and each will determine how frequently your employees are paid.

A pay period determines how frequently your employees are paid. It’s important to select a pay period that is right for your business.

A pay period is a recurring time schedule that will determine how frequently your employees are paid. It is important that you have an established payroll cycle set up in order for your business to operate correctly. A dedicated payroll cycle will ensure that your employees are paid on a regular basis for their time worked and it also simplifies monthly reporting requirements for several employer liabilities including expenses, taxes, and insurance.

Types of pay periods

There are four different types of pay periods. They are as follows:

  • Weekly Pay Period
  • Bi-Weekly Pay Period
  • Semi-Monthly Pay Period
  • Monthly Pay Period

While each pay period has clear advantages and disadvantages, it can be difficult to determine which is best for your business. We’ll break down all different pay period types and delve into the pros and cons of each.

Weekly Pay Period

The weekly pay period type consists of 52 1-week pay periods. For a full-time employee, each pay period generally consists of a 40-hour work week. Keep in mind that state overtime rules vary greatly based on which state your business operates, so it is a good idea to check your state’s labor laws before deciding on a pay period type.

A weekly pay period is the preferred pay period cycle for most hourly employees because they are paid on a weekly basis. This, in turn, helps with cash flow and budgeting. From a payroll perspective, a weekly pay period is the most expensive to process because there are 52 payroll cycles in the year. This can cause payroll fees to add up very quickly.

Here are the most important advantages and disadvantages of the weekly pay period to take into consideration:

Advantages

  • Employees get paid more frequently.
  • Payday typically occurs on a Friday approximately 4 to 5 days after the pay period has been closed.
  • Management has time during normal business hours to review timecards and ensure that payroll is wrapped up by time payday comes around.

Disadvantages

  • Payroll processing fees are typically higher due to more frequent payroll cycles.
  • Employer monthly accrual expense reporting is more complicated because pay periods can frequently extend into the next month resulting in additional calculations.

Bi-Weekly Pay Period

A bi-weekly pay period, 2 weeks or 14 days, consists of 26 pay periods in a year. Each payroll cycle typically consists of 80-hours for a full-time employee. Similar to the weekly pay period, a bi-weekly pay period always begins and ends on the known day of the week. For example, the pay period starts on Monday and will end on Sunday 14 days later. An employer will typically deliver payroll checks to their employees on the following Friday. The bi-weekly pay period is commonplace for both hourly and salaried employees.

Here are the most important advantages and disadvantages of the bi-weekly pay period to take into consideration:

Advantages

  • Employees get paid often – 26 pay periods.
  • Management has time to review timecards and ensure payroll is wrapped up by payday.
  • Payday typically occurs on a Friday approximately 4 to 5 days after the pay period has been closed.

Disadvantages

  • Payroll processing fees aren’t quite as high as a weekly pay period, but still high enough due to the frequency of the payroll cycles.
  • Employer monthly accrual expense reporting is more complicated because pay periods can frequently extend into the next month resulting in additional calculations.

Semi-Monthly Pay Period

The semi-monthly pay period allows your employees to be paid 24 times per year.

A semi-monthly pay period reduces the amount of payroll processing fees you incur and allows your employees to be paid more frequently.

A semi-monthly pay period has 24 pay periods in a year. Every month will always have exactly two pay periods – consisting of approximately 86 hours each. In most cases, a company will have a pay period that runs from the 1st to the 15th and a second pay period that runs from the 16th to the last day of the month. Because this pay period cycle does not always end on the same day of the week it can cause scheduling challenges for payroll. With a semi-monthly pay period, an employee will get paid on the next possible business day after their work period ends.

Here are the most important advantages and disadvantages of the semi-monthly pay period to take into consideration:

Advantages

  • Employees will get paid more often – 24 pay periods.
  • Hours worked by employees will always remain in the month for that work period. This can help to simplify employer accrual expense reporting and reduce costs.

Disadvantages

  • Payroll processing fees aren’t quite as high as a weekly pay period, but still high enough due to the frequency of the payroll cycles.
  • An employer will have to decide when their employees will be paid. Because the semi-monthly pay period ends on a different day of the week, it can be challenging to schedule and produce paychecks in a timely manner.

Monthly Pay Period

A monthly pay period consists of 12 pay period per year. Each month will represent the total amount of hours worked for that particular month. The monthly pay period is the least costly from a payroll perspective. However, this pay period type can be especially challenging for employees to budget accordingly being that they are only getting paid once a month.

Here are the most important advantages and disadvantages of the monthly pay period to take into consideration:

Advantages

  • A great option for freelance business owners or contract employees who invoice once a month – 12 pay cycles.
  • Hours worked by employees will always remain in the month for that particular work period. This may lead to simplified employer accrual exponse reporting and reduced costs.
  • Payroll processing fees are very low due to fewer payroll cycles.

Disadvantages

  • Employer will have to determine when their employees will be paid.
  • Because this pay period type always ends on a different day of the week, it can be challenging to schedule and product paychecks in a timely manner.

What is the most commonly used pay period type?

The pay period type used from business to business will vary greatly. For customers that use Buddy Punch, we have found that the bi-weekly pay period type is the most common pay period followed by weekly. Here’s a breakdown of the pay periods used:

  • 46% of our customer base uses a Bi-Weekly Pay Period.
  • 28% of our customer base uses a Weekly Pay Period.
  • 21% of our customer base uses a Semi-Monthly Pay Period.
  • 5% of our customer base uses a Monthly Pay Period.

What type of pay period should I use?

It is difficult to say exactly what the best pay period would be for your business. The pay period type you should choose depends greatly on whether your employees are hourly or salaried, the type of business you operate, and who handles your payroll. If you’re not sure, it would be best to check with your accountant or CPA and see what they think is the best option for you.

Other factors to consider

Employment Laws

Federal and state laws also should be considered when determining pay periods. Although the Internal Revenue Service does not regulate the frequency of pay periods, some states do. Be sure to check your state’s department of labor for additional information on pay regulations.

While the IRS doesn't regulate pay periods, some states do so it's important to check with your states Department of Labor before selecting a pay period.

Employment laws should be taken be taken into consideration when choosing a pay period type for your business.

Payroll Tools & Services

As we mentioned, payroll processing can be expensive and the type of pay period you choose will impact your payroll fees. If you pay your employees more frequently, you’ll have more payroll processing fees whereas if you pay them less frequently your payroll processing fees will be less.

It’s important to determine approximately how much it would cost you to process payroll for each different pay period. You should also take into consideration the price for any software you may be using to process payroll.

No matter what pay period type you select, you need to make sure that it is right for both your business and your employees. Have your employees fill out feedback forms to see which pay period type they’d prefer. While you won’t be able to please everyone, do your best to meet the majority halfway.