A company establishes a “pay period” to schedule a specific time for employees to receive their paychecks. It also helps employees get a confirmation of their regular salary schedule. Pay periods have the record of employees’ overtime, days off, working hours, hourly pay, salaried pay, etc. Moreover, companies usually schedule the pay periods on weekly, biweekly, semi-monthly, or monthly schedules.
Are Pay Period and Pay Day the Same?
Pay periods and paydays are not the same. Paydays are the date on which the employees are given their paycheck for the time worked. Paydays are always two weeks after the pay period. On the other hand, an employee's pay period details the employee’s received amount, bonuses, awards, overtime, work benefits, etc. The Payroll Department calculates all the deductions and additions in this period so that a smooth payday can take place.
A company needs to set fixed pay periods for employees. Pay periods not only help with employees but also manage the payment time of IRS tax withholdings, regulate company policies, and calculate exempted employees’ salaries. Organizations can choose a pay period or multiple pay periods for various groups of employees, and employers may review this pay period each year.
Here are the pay periods different organizations can choose to use.
1. Daily Pay Period
Companies do not often adopt daily pay periods because of the complexity of calculating pay with the amount of extra work involved. However, these are sometimes used for contractors or freelancers. In this pay period, the salary is calculated for the working hours and given to the employee daily through apps.
Attracts temporary workers
Difficult to calculate
Financially less stressful for employees
Not time efficient for Payroll Department
May create problems when paying taxes and withholdings
2. Weekly Pay Period
Weekly pay periods are standard in manufacturing, transportation, utilities, and trade industries. The industries prefer to maintain weekly pay periods to align the worked hours in a week and simplify the employees' salary calculation.
Withholding, taxes, overtime, paid time off, etc. considerations have to be taken into account
Efficient for seasonal and tipped employees
May require HR Department to work more hours
3. Bi-Weekly Pay Period
Many private organizations and businesses whose employee number is more than 1000 prefer to choose bi-weekly pay periods for their employees. They set up a specific payday for employees to receive their salary every two weeks. The payday usually falls on Fridays.
Overtime pay calculation easier for non-exempt workers
May have problems in recording salary due to months having non-consistent pay periods
Accurate PTO, holidays, sick days, etc. records
Extra payroll for a month can be expensive
4. Semi-Monthly Pay Period
Mining and logging, financial firms, and information and technology industries most often use semi-monthly pay periods. These pay periods are standard as they have two specific pay periods, one on the first day and the 15th day of the month or another on the 15th day or the last day of the month. However, if the payday falls on a weekend, it is given a day before.
Consistent number of paydays without worrying about leap days
Complications in following the FLSA laws
Calculation of paychecks, withholdings, taxes, benefits, etc., made easier
Pay periods can co-occur with work weeks
Reduces company costs
Calculation of overtime pay becomes difficult because of the different paydays
5. Monthly Pay Period
Monthly pay periods are common among companies with a small employee number. It helps reduce costs and works excellently with freelancers and salaried employees. Employees usually get only 12 paychecks annually.
Simplified tax withholdings, budgeting, and benefits.
Paydays can fall on weekends and increase paycheck-receiving time
Convenient for business administrators because of flexible cash flow
Bank holidays have an effect on the transfer of salary
Convenient for salaried employees, freelancers, and contractors
Inconvenient for non-exempted and hourly paid employees
How Can an Employer Choose the Right Pay Period?
An organization cannot choose pay periods however they want. It can cause problems in the workplace and even cost the organization. They need to take into account different factors before considering a pay period.
Here are some factors that a company must consider before many any decisions on the pay period.
1. FLSA and Employment Laws
Each state has its own employment laws, which can specify the pay time limit sometimes. The FLSA also has laws regarding wages, overtime, and hour limits, which should be considered while choosing a pay period.
2. Type of Salary
Hourly employees may accept the occasional pay periods, but it can cause an inconvenience for salaried employees. So, various salary types of employees have to be considered when choosing a pay period.
3. Payroll Service Costs
Companies can look at a 50% cost increase with frequent payroll services. This can hamper the company’s growth and lower its profits. Moreover, payroll calculation and transfer become more challenging with third-party payroll providers who charge for every payroll service.
4. Employee Needs
Employee needs is on the priority list when choosing a pay period, as they are essential for a company’s growth. An employer must note which pay period will increase employee satisfaction, lower financial stress, and more likely help increase loyalty.
5. Overtime Pay
Employers must narrow down their list of exempt and non-exempt employees according to the FLSA overtime requirements. Companies with a high number of non-exempt employees working on hourly wages can choose frequent pay periods to comply properly with state laws. Otherwise, it can become challenging to maintain paycheck calculations, tax withholdings, bonuses, etc.
6. Tax Withholdings
Tax withholdings play the most crucial role in choosing a company’s pay period because it involves the Internal Revenue Service (IRS). IRS has specific deductions that have to be withheld from every employee’s paycheck. These deductions must be calculated accurately to avoid any error, but with frequent pay periods, the Payroll Department and the HR Department may make errors.
Moreover, the guidelines of the withholding calculation are complex and need to be submitted within a specific time. For example, in 2020, the IRS released a new updated W-4 Form which had to be completed and submitted. Even though the update focused on lessening the complexity and introducing more transparency, the calculation process and regulations remained challenging.
What is the Standard Pay Period?
The standard pay period for most employers is the weekly pay period because it decreases errors, simplifies the calculation, and is efficient for most employees. However, bi-weekly pay periods are tailing behind in the second position.