Pay Period
Pay periods are the pre-determined intervals when employees receive their salary or wages.
What is a Pay Period?
A pay period determines the frequency of an employee’s pay and how many paychecks they will receive in a budget year. Pay periods can be:
- Daily
- Weekly
- Bi-weekly
- Semi-monthly
- Monthly
Pay periods are often weekly or bi-weekly. Hourly employees are usually paid weekly. Industries that employ exempt salaried workers tend to run their payroll semi-monthly or monthly. However, employers in specific industries like oil, gas, and energy use the daily rate model. An employee’s pay frequency affects the amount of the required monthly deductions taken from each paycheck.
There are advantages and disadvantages to each pay period. For example, a bi-weekly pay period might be more time and cost-efficient than one processed weekly. Still, because some months will involve 3 pay periods, it can result in more complex accounting practices. Federal law, such as the Fair Labor Standards Act, does not mandate pay frequency. However, FLSA-covered employers must set up a regular payday. State laws establish more precise rules, and most states require employers to comply with specific pay frequencies. Before setting a pay frequency, check the state law(s) where you operate.
Why are pay periods important to a small business?
Pay periods are important to small businesses because of the impact on employees, cash flow, and record keeping. Small business owners must understand the different pay period options and choose the best fit for their business needs.
Paying employees weekly can be a good option for businesses with a high employee turnover rate, as it allows employees to receive their pay more frequently. On the other hand, paying employees monthly may be a better option for businesses with a low turnover rate and a more stable cash flow.
The frequency of pay periods can also impact a small business’s cash flow. Paying employees bi-weekly or monthly instead of weekly can give the company more time to generate revenue between salary payments. Additionally, the more frequently you run payroll, the more you spend on payroll processing and administration. Weekly pay periods are typically the most expensive option, while monthly pay periods are the most cost-effective.
Accurate payroll records are essential for financial and tax purposes. Proper recordkeeping ensures that employees are paid the correct amount, taxes are correctly withheld and paid, and the company complies with state and federal laws. Less frequent pay periods mean a business has more time to prepare payroll, which can improve accuracy.
What is the history of pay periods?
Pay periods date back to the industrial revolution when factories employed large numbers of workers who were paid a fixed wage every week.
Summary
Pay periods are a crucial aspect of a small business’s operations. They impact employee morale, cash flow, and record keeping. Small business owners should carefully consider the different pay period options and choose the best fit for their business’s needs. Doing so can ensure that their employees are paid on time, their cash flow remains stable, and their payroll records are kept accurately — helping the business avoid legal and financial issues.
