The ABC’s of Payroll Frequencies
As it has been taught in classrooms, webinars and seminars, and from payroll professional to payroll professionals down through the ages: Employees must always be paid. That has never been a question. What has been a question, however, is how often must you pay employees? And which is the best pay cycle to use?
Known as the payroll frequency, this wage and hour requirement is normally controlled by the state rather than the federal regulations. There are many options available to the employer including weekly, biweekly, semimonthly and monthly, depending on what is permitted by the state laws. And each of these frequencies has pros and cons to using it.
Let’s discuss each of these in turn.
Weekly: This frequency pays the employee once each calendar week on a day designated by the employer such as every Friday. It provides consistent pay cycles and pay dates for the employees and for payroll. Overtime calculations are exact and there are no compliance issues with any states. However, it does come with higher costs associated with it. With 52 payrolls a year there are more payroll processing costs; more check stock used and more vendor payments and tax deposits.
Biweekly: This frequency pays the employee every two weeks or 26 times in a calendar year. It also provides consistent pay periods and paydays. Overtime calculations are still simple since the frequency provides for two workweeks within the one payroll cycle. With the exception of only a handful of states, this method presents no compliance issues. It is definitely more cost effective than weekly since half the number of payrolls will be run and is accepted readily by employees including new hires. On the minus side it does make general ledger accruals more difficult and the costs are still high due to frequent processing. In addition, the question of fringe benefits and the two extra payrolls each year must be dealt with. Do we divide the monthly costs by two and skip the two extra payrolls or divide the yearly total by 26 and play catch up with the two extra payrolls issue must always be resolved.
Semimonthly: This payroll frequency pays the employee twice in a calendar month such as on the 15th and the last day of the month or 24 times a year. This is the one usually preferred by accounting. It makes for easy accrual calculations and budgets. It has a lower processing cost than weekly or biweekly as well. And although it is the most common type of payroll frequency permitted by the states, its biggest drawback is compliance. With workweeks broken up because it produces inconsistent pay dates and pay cycles, in terms of workweeks, it makes calculating overtime extremely difficult and time consuming.
Monthly: This payroll frequency pays the employee once per month, with only 12 payrolls per year. Obviously the biggest advantage to this method is cost savings compared with the other three methods. It is also easiest for financial interface such as accruals and budgets. But the savings gained in lower operating costs will usually be lost in greater payroll costs in calculating overtime due to inconsistent workweeks. In addition, only 12 states permit it for nonexempt employees though most states permit exempt employees to be paid monthly. It is very common for employers to pay nonexempt employees biweekly or semimonthly and exempt employees monthly to conserve processing costs.
Planning on changing your payroll frequency or at least thinking about it? Check out our webinar, The ABC’s of Payroll Frequencies, on what needs to be done to ensure your change is in compliance and handled with the maximum efficiency and the least amount of stress on employees or payroll.