One critical question small business owners need to answer is, how often will employees be paid? Will it be every week, every other week or once a month? Before making this decision, you need to consider the size of your company, your payroll budget and whether your employees are salaried or paid hourly.
What are the most common payroll cycles?
As an employer, you set the stage for many aspects of your company, including how often employees are paid. Your responsibility is to implement a payment structure that matches your business and pays your workers on time. It’s important to understand how each payroll cycle can affect your company. [Looking for online payroll software? Check out our Best Picks page for recommendations on the payroll software we think is best.]
Here are some of the most common payroll cycles:
Employees on a biweekly payroll are paid every other week, which breaks down to 26 or 27 times a year. This is the most common payroll cycle for employers. According to the U.S. Bureau of Labor Statistics, 36.5% of employees are paid biweekly. However, this can be one of the more costly payroll cycles if your online payroll service charges per payroll run and doesn’t offer unlimited runs for one fee.
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On a bimonthly schedule, employees are paid twice a month, usually on the 1st and the 15th or the 15th and the 30th. With this option, employees are paid 24 times a year. According to the U.S. Bureau of Labor Statistics, 19.8% of employees are paid this way.
According to Rob Stephens, CPA and founder of CFO Perspective, employees who are higher-paid or salaried are usually paid bimonthly. For workers, the downside of this schedule is the potential for cash shortfalls between pay dates. To fix this problem, you can offer partial advances on your employees’ next paycheck. In terms of payroll costs, this is one of the least-expensive options.
Employees paid on a monthly payroll cycle are typically paid at the end of each month. According to the U.S. Bureau of Labor Statistics, just 11.3% of employees are paid this way. This is the cheapest schedule for payroll services that don’t offer flat fees for processing, since you have to run payroll only 12 times a year. However, this is not a favored choice for employees.
Another less-common cycle is a weekly one. According to Andrew Lyon, founder and managing partner of Focused Energy, people who work in construction or lower hourly rate establishments are usually paid this way. This can be the most expensive option because, depending on the payroll provider you pick, you may have to pay for each payroll run. If you decide to pay your employees each week, you would be best served by choosing a payroll service that charges a monthly fee for unlimited processing.
Stephens said it’s important for smaller companies to pick payroll dates that match their cash flows. The worst time to be short on cash is when payroll is due, so make sure you pick a day when your cash is higher than normal.
Does the size of my business matter?
The number of employees you have affects the cost of running payroll, because nearly all providers charge for each person you pay. So, in addition to the flat fees for payroll processing, which is either per payroll run or for unlimited payroll runs, there is a per-employee cost of at least a few dollars each. So, the larger your business is, the larger your per-employee fees are. However, some payroll providers lower the per-employee fees for businesses with larger numbers of workers.
The size of your company also determines how you need to file your payroll tax reports. Larger businesses are usually expected to file their payroll tax reports electronically. The actual payroll taxes can be filed by paper check if you wish, but reports sent to the state and the Internal Revenue Service must be e-filed. Small companies, however, are allowed to mail forms.
What is the best day of the week to pay employees?
Brandon Pfaff, CPA and tax expert for Wealthy Living Today, believes the end of the week is the best time to pay employees. He thinks Friday is the best payday because it gives employers the most business days to complete payroll processing.
When should you process payroll?
When you process your payroll is determined by several factors, including when your payday is. Typically, it takes at least a couple of days to process your payroll when you use an online payroll service. This means that, if you are paying your employees on a Friday, you are processing your payroll on Tuesday or Wednesday. You will need to confirm with your payroll provider the length of time it takes to process payroll so that you are paying your employees on time.
How much does payroll cost?
The cost of your payroll is based on a number of criteria, including the payroll provider you use and how many employees you have. Some providers charge a base fee, which is a monthly or per-payroll fee. When charged per payroll, you pay the base fee each time you run your payroll. So, if you were on a semimonthly schedule, you would pay the base fee twice a month. Base fees range from $29 to $150.
There is also a per-employee charge, which can range from $2 to $12 for each worker. Other factors include having employees who don’t all live in the same state, as well as certain payroll features, like direct deposit, automatic check signatures, check delivery or tax filing services.
If you use an online payroll service, be aware of hidden fees for customer support, maintenance and setup.
What should I use to process payroll on time?
Manually collecting and calculating your employees’ hours takes a long time. However, there are a few options for speeding up the process.
Digital tools, such as full-service payroll software, make it faster and easier to manage your company’s data by reducing the risk of human error, cutting down on the time spent processing payroll and giving you more time to focus on actually running and growing your business. You don’t have to worry about late paychecks or penalties from the IRS, either, because payroll software is programmed to meet direct deposit and payroll tax payment deadlines.
You can also hire a certified public accountant (CPA) to process your payroll for you, and although they relieve you from a load of work, they are pricier than payroll software. Depending on your tax situation, needs and state of residence, hiring a CPA can be very expensive. The average rate for a CPA is $160 to $275 per hour, according to The American Institute of CPAs survey.
What should I be mindful of when processing payroll?
When processing payroll, attention to detail can save you a lot of time and money. To ensure payroll runs smoothly, keep these items on your radar.
Make sure you classify your employees properly.
Contractors are paid differently than full-time employees. Workers must be paid according to their classification, which keeps you legally compliant and helps you avoid payroll mistakes.
Pay close attention to how you calculate overtime.
Sometimes business owners forget to pay employees for overtime, or they add overtime pay into paychecks incorrectly. Stay on top of overtime pay rates and how many hours your employees work.
Ensure you can pay employees.
According to an Intuit QuickBooks report, 43% of small business owners have been in danger of failing to pay employees. Payroll is a huge expense and has a direct effect on cash flow. When you don’t have enough cash to cover all of these costs, you run the risk of being late or inconsistent with paydays, which can lead to losing staff. “Ensuring that you have the cash to run payroll on time is paramount,” Lyon said. “So, having an accurate forecast of where cash will be over time will ensure that you are able to proactively deal with any issues before they become problems.”
Take your time calculating payroll withholdings.
You are responsible for determining your employees’ wages and understanding how much to withhold for taxes. Make sure employees submit their W-4s properly, and pay attention to income and Federal Insurance Contributions Act (FICA) tax return requirements. These are also known as FICA taxes, or the money taken out for Medicare and Social Security. Additionally, be sure to file the proper documents, like Form 941, an employer quarterly federal tax return that lets the IRS know the amount of federal income and FICA taxes you withheld.
Follow local laws.
Although the Fair Labor Standards Act (FLSA) doesn’t map out how often businesses should pay their workers, some states have their own laws about the amount of elapsed time between pay periods. Every state except Alabama, Florida and South Carolina have payroll frequency laws. The FLSA also regulates minimum wage, overtime, equal pay, record keeping and child labor.