5 Pay Cycles & How to Choose the Best One for your Business
Payroll management is an essential component of any business. When your employees get paid on time, they feel valued for their work and get equipped to handle the vagaries of living. The frequency with which you pay an employee for their work is called the pay cycle or the payment schedule. It will cover the time an employee worked, for which he will get issued wages.
A consistent pay cycle is crucial for both the firm and the staff. It eliminates the unnerving unpredictability that will otherwise plague an employee – the fear of not being able to pay bills, make rent, or meet other living expenses. Not adhering to a fixed payment schedule can be dicey for a business since it will affect the company’s reputation and lower productivity. Over time, it can also impact employee retention and attrition rates.
Types of Pay Cycles
There are five most commonly used pay cycles across the US. Employers can pick the one that suits their organization the best. Let us quickly discuss each of them.
1. Daily
Imagine having to deal with making payments regularly! The daily pay cycle is not very popular as it means issuing paychecks at the end of every day. It can become a hassle for the organization to account for payments daily. But it becomes a necessary approach in some cases. For example: if an employee is financially troubled and requires wages to cover living expenses.
Pros:
• Very resource-intensive
• The least commonly used pay cycle in the US
Cons:
• Suitable choice for workers who may require daily payments
2. Weekly:Number of paychecks a year: 52
In this cycle, you will have to pay your employees at the end of every week. It often gets set for hourly employees or workers whose schedules vary. If you are a freelancer, you might wish to choose this cycle to ensure your payments don’t get delayed. You may then use a free paystub maker to generate your payment records accordingly.
Pros:
• Suitable for hourly workers
• Preferred by freelancers and contractors
Cons:
• Expensive due to the high number of pay periods
• A significant time investment required by the payroll team
3. Bi-weekly: Number of paychecks a year: 26
A bi-weekly cycle entails paying your employees once every two weeks. You will need to send out the payment on a fixed day of the week. A vital consideration in a bi-weekly cycle is the bonus pay period. Not every month has four weeks, so across the 52 weeks in a year, you will have to make a bonus payment during two months. Employees covet it since it means extra income during those two months. However, businesses may find it bothersome to deal with the additional reporting and accounting.
Pros:
• Easy to calculate overtime
• Less expensive and time-consuming than weekly cycle
Cons:
• Trickier to calculate deductions for benefits
• Bonus pay periods can be challenging for the company
4. Semi-monthly: Number of paychecks a year: 24
This cycle needs you to send out payments twice a month on predetermined dates. Many employees choose dates like the 15th and the 31st. It seems similar to a bi-weekly cycle but is not limited to a fixed day of the week. If the chosen dates fall on a weekend, you will have to pay your employees the Friday before or the Monday after. It is one of the most common pay cycles in the US.
Pros:
• Less expensive due to the reduced number of pay periods
• Easy to calculate benefits for insurance premiums since these get charged monthly
Cons:
• Pay periods can be tricky to navigate when the payday falls on a weekend
• Not suitable for hourly workers
5. Monthly: Number of paychecks a year: 12
The monthly schedule involves paying employees at the end of every month. It amounts to twelve pay periods in a year and works well for large businesses as it cuts payroll processing costs. It may not be ideal for small businesses as it involves heavier regulation than the other schedules. Many professionals may also struggle to budget every month.
Pros:
• Cheapest payroll costs as processing limited to only once a month
• Suitable for large enterprises
Cons:
• It can be difficult for some employees to meet expenses
• Many US states do not support a monthly pay cycle, requiring employees to get at least two paychecks every month
How to Choose the Right Pay Cycle for your Business
So, which of these pay schedules will work the best for your organization? While making this significant decision, you should consider a few aspects.
• Assess the types and number of employees
Does your firm have more hourly employees or salaried ones? The former will find daily or weekly payments beneficial. But a semi-monthly or monthly approach will fit salaried workers better. You can use different pay cycles tailored to the kind of employees at your firm.
• Consider overtime payments
Do your employees frequently work overtime? In the US, federal law mandates that overtime gets calculated weekly. It applies irrespective of the pay cycle you choose. So, if you have to manage lots of overtime wages, it makes better sense to stick to a weekly pay cycle to simplify payroll. Some online paystub generators like StubCheck.com offer enhanced paystubs that let you easily account for overtime pay, bonuses, vacation pay, etc. It streamlines the process of creating checkstubs while ensuring error-free records.
• Review the pay cycle laws in your state
Most US states have some laws that decide the pay cycle. Usually, you are mandated to make at least semi-monthly or bi-weekly payments. For instance, California requires a business to pay its employees using a semi-monthly cycle. It is straightforward to settle on a suitable pay cycle if your firm operates in a state with such laws.
Some states in the US have more detailed laws. For example, workers in Michigan get paid according to a cycle that gets decided by their occupation. If you work in the hand harvesting of crops, you must get paid on or before the second day after a workweek.
A few states like Alabama, Florida, and South Carolina have no pay cycle laws. You can view the regulations for your state on the website of the Department of Labor.
• Check if cash flow is sufficient
The cash flow is a prerequisite for deciding the appropriate pay cycle. You can hand out payments only when you have sufficient cash in your business account. A daily or weekly pay schedule will require more cash flow reserves. The pay cycle you choose should ensure that you have adequate cash for your business expenses.
• Consider payroll costs
Payroll management is a considerable business expense. Not only do you have to process wages but also conduct accounting, bookkeeping, checkstub creation, and payment for financial software, etc. If you choose a pay cycle with frequent payments, such as weekly, you will incur higher costs. It is vital to consider the budget you have set out for payroll.
Are there any Federal Laws for the Pay Cycle?
Federal laws in the US do not dictate the pay cycle that an employer must choose. It is left to the states to decide. However, federal law does mandate that you maintain a consistent pay frequency. So, if you have been paying the workers weekly, you cannot abruptly change it to a monthly cycle. It is legal to alter the payment schedule if you make a permanent change for a legitimate business reason.
Of course, it is perfectly legal to use different pay cycles across locations or departments. You only have to ensure that you pay overtime, keep the schedule consistent, and avoid recurring delays. It is wise to discuss things with a payroll specialist to determine the best cycle for your organization, keeping in mind taxes, employee benefits, and processing. A paystub generator free and financial software can assist you in streamlining the payments in each period.
Selecting and adhering to a suitable pay schedule is a task that will serve your business well. It will keep your accounts well funded while ensuring the staff gets paid on time and is satisfied with the job. It is a small but mighty step toward building a successful and profitable enterprise with a motivated workforce.
