Pay Periods: Everything You Need to Know
Imagine working for someone who says they’ll pay you whenever they get around to it. And sometimes they don’t get around to it for weeks or even months. Chances are you wouldn’t be willing to put up with all that uncertainty—and your budget wouldn’t like it either. This situation is only hypothetical (we hope), but it shows why regularly scheduled pay periods are such an important part of a successful relationship between employers and employees. Established pay periods help keep compensation running smoothly and ensure that everyone has the same expectations about when workers get paid.
Whether you’re choosing a pay period for your new business or considering changing your company’s pay schedule, this article will explain all the basics about pay periods: what they are, how they work, the advantages and disadvantages of different kinds of pay periods, and more.
What Is a Pay Period?
A pay period, also called a pay cycle, is a regularly scheduled period of time when workers earn money that will be paid on their next paycheck. Each pay period has a start date and an end date. Except for periodic or temporary work, when one pay period ends, the next one begins.
Companies may choose from different kinds of pay periods, depending on the pay period calendar they decide to follow: weekly, semimonthly, etc. Some companies have different pay schedules for different kinds of employees, such as one pay period for salaried employees and another for hourly workers.
What’s the Difference Between a Pay Period and Pay Date?
A pay date is the date when paychecks are distributed or direct deposits are made to pay employees. Pay periods typically end a few days before the pay date. This gives employers time to gather records about the hours employees worked and then process payroll. For example, employees who work during a pay period that runs from May 1–15 might be paid on the pay date of May 20.
The pay date is also the date that appears on an employee’s paycheck.
Different Types of Pay Periods
Most organizations choose from these four pay period options when deciding how to pay their employees:
Weekly (once per week; 52 times per year)
- Advantages: This schedule makes it easy to calculate hourly employees’ time worked and overtime—and employees like being paid so often because it provides a steady cash flow.
- Disadvantages: It’s time-consuming and costly to run payroll so often.
Biweekly (once every two weeks; 26 times per year)
- Advantages: It’s no more complicated than tracking time weekly, and it requires less effort and expense.
- Disadvantages: Payments for benefits and taxes don’t align with this payroll schedule. Also, about once every 10 years, leap year complicates things by necessitating a 27th paycheck.
Semimonthly (twice per month; 24 times per year)
- Advantages: With salaried employees, this schedule is simpler and less expensive to administer than a biweekly schedule due to fixed dates, fewer pay periods, and aligned timing with payments for benefits and taxes.
- Disadvantages: It can be harder to accurately pay hourly workers for regular hours worked and overtime because pay periods are an irregular length and workweeks don’t always align with them.
Monthly (12 times per year)
- Advantages: The simplest, least expensive, and least time-consuming option because payroll is run less often. There are fewer benefits payments, and some may not require an escrow account.
- Disadvantages: Many employees dislike being paid so infrequently and may find it hard to manage their budget.
How Pay Periods Are Determined
Federal law requires employees to be paid at regular intervals. In most cases, employers are free to choose whatever pay period they like, but some states have regulations that limit their ability to do so. Before selecting a pay period, it’s important to check local requirements in each state where your organization has employees.
Which Pay Period Is Best?
Biweekly pay periods are the most common type in the U.S., used by 36.5 percent of private businesses. But that doesn’t necessarily mean a biweekly pay cycle is right for your organization. Each company has to figure out which pay period option makes the most sense in their unique circumstances. There’s no single right answer for everyone.
In addition to following applicable regulations, employers usually choose their pay frequency by weighing the characteristics of their employees, including their desire to be paid often, against the company’s cash flow and the expense incurred each time payroll is run. Often, employers settle on a pay period that is common in their industry or location.
Pay Period Considerations for Hourly and Salaried Employees
Hourly wage earners like construction workers and restaurant staff tend to be paid more often, while salaried workers are usually paid at less frequent intervals.
Weekly or biweekly pay periods are popular among companies that have many non-exempt hourly employees. It’s easier to track hours worked and calculate overtime when the pay schedule aligns with the calendar workweek. If a company with hourly workers chooses a semimonthly pay cycle instead, pay periods will have different numbers of days and will often end in the middle of a workweek, complicating matters.
Organizations that primarily employ exempt salaried workers often choose semimonthly pay periods. With no overtime pay to consider, semimonthly salaried pay is simpler to administer for the reasons listed above.
Using monthly pay periods to pay salaried workers offers similar advantages for employers, but monthly pay is often unpopular with employees so fewer companies choose this option. Monthly pay is more common—and accepted—among executives.
Making the Right Decision
Choosing the right pay period is critical to your organization’s success. As you consider your options, get professional advice from an accountant or CPA to help you make a wise choice.
Whichever option you choose, well-designed time-tracking and payroll software can help ensure accuracy and compliance while saving time and effort. Even the hypothetical boss we mentioned who only does things when he gets around to it could see the wisdom in that.