What is a pay period?
What is a pay period? And why does it matter? Payroll impacts businesses and their employees alike. It shapes every financial aspect of the company, from cash flow prediction to expense reporting. That’s why it’s important to understand pay periods and how to choose the right one for you.
So what is a pay period, anyway?
A pay period is a recurring schedule that determines how often you’ll pay employees. Having a simple, predictable process ensures workers receive pay for their labor on a regular basis. It also simplifies monthly reporting requirements for expense accruals, tax deposits, and insurances.
Types of pay periods
Each pay period type has its advantages and disadvantages, especially when thinking about how to set up pay periods to work with pay dates.
In this article, we’ll cover the four most common types of pay periods:
Weekly pay period
Bi-weekly pay period
Semi-monthly pay period
Monthly pay period
What Is a Weekly Pay Period?
A weekly pay period consists of seven days. For a full-time employee, each pay period generally consists of a 40-hour work week. State overtime rules vary based on your place of business.
Weekly is the preferred pay period cycle for most hourly workers. It makes cash flow and budgeting easier. From a payroll perspective, this is the most expensive to process because there are 52 payroll cycles in the year. Payroll processing fees add up.
- Employee gets paid very often (52 pay periods)
- Budgeting and cashflow are simplified
- Payday generally occurs on a Friday, 4-5 days after the period has been closed out.
- Payroll processing fees are generally higher due to more frequent payroll cycles
- Employer accrual expense reporting happens more often
- Pay periods can often extend into the next month
Bi-Weekly pay period explained
A bi-weekly schedule consists of 26 pay periods in a year. Each pay cycle generally consists of 80 hours for a full-time employee. This can vary for any other hourly employees.
Like the weekly pay period, a bi-weekly pay period will always begin and end on a specific day of the week, usually Friday. The employer will generally deliver payroll checks to the employee on the following Friday. Bi-weekly is common for both salaried employees and hourly workers.
- Employees get paid often (26 pay periods)
- The payroll department has more time to review timecards
- Payday generally occurs on a Friday, 4-5 days after the period closes
- Payroll processing fees are still higher than other less frequent payroll options
- New employees may need to adjust to longer pay periods
- Complicates bookkeeping when compared to weekly
Semi-Monthly pay period explained
A semi-monthly schedule has 24 pay periods in a year. Each month will always have two work periods. Generally, a company may have a pay period that runs from the 1st-15th and the second pay period from the 16th-last day of the month.
Since this pay cycle doesn’t always end on the same day of the week, it can create challenges. Employees get paid on the next possible business day after the work period ends.
- Employees get paid often (24 pay cycles)
- Hours worked will always remain in the month for that work period
- Simplifies employer accrual expense reporting requirements by reducing frequency
- May not be allowed under your jurisdiction
- Can confuse employees
- The pay period often ends on a different day of the week
Monthly pay period explained
A monthly pay period consists of 12 pay periods per year. Each month will represent the total hours for that month. This is the least costly from a payroll perspective. However, it can be challenging for employees to only get paid once a month and budget accordingly. Many consultants or freelance professionals use this method.
- Great for freelance business owners or contract employees
- Simplifies accounting
- Decreases processing time
- Payroll processing fees are low due to less infrequent payroll cycles
- Cash flow prediction can be more challenging
- Some vendors or contractors may take issue with this payment schedule
What type of pay period should I use?
It’s not easy to decide what the best pay period for your type of business is. This depends on if your employees are hourly or salaried, the kind of business you operate, and who handles your payroll. Our advice is to check with your accountant or CPA and see what they think is best for you.
What is the most common pay period type?
We surveyed employers who actively use OnTheClock, and the results are in! These are the most common pay period types:
- 44% of our customer base uses a weekly pay period
- 38% of our customer base uses a bi-weekly pay period
- 13% of our customer base uses a semi-monthly pay period
- 5% of our customer base uses a monthly pay period
Based on our data, most employers believe more frequent pay periods are the best option.
Take the Stress Out of the Payroll
No matter what type of pay period you choose, the entire process is easier when you streamline time tracking. Learn more about what OnTheClock can do for your business and try it for free.