What is a Pay Period? Pay Period Definition and Examples
May 02, 2023
Did you know that a well-defined and consistently managed pay period is one of the secrets to improved employee retention?
A company’s pay period of choice creates a ripple effect on how often employees get paid in a month and what types of resources are needed to continuously meet employee expectations.
If you’re keen on executing a solid payroll system, you’ve come to the right place. In this article, you’ll learn all about pay periods and how you can choose one that highlights both your employees’ needs and your business structure.
- A pay period is a fixed period of time that covers an employee’s work hours, overtime pay, and gross and net earnings.
- The different types of pay periods are daily, weekly, bi-weekly, semi-monthly, and monthly.
- Choosing the best pay period requires knowledge of employment and tax regulations, workweek structures, and employee preferences.
- Accuracy is key in calculating employee salaries, overtime hours, withholding taxes, and keeping employee records up-to-date.
What is a Pay Period?
A pay period is a set time frame used as a basis to calculate employees’ gross and net wages, tax withholdings, deductions, overtime pay, and paid time off (PTO).
It is a recurring payroll cycle wherein all the work hours rendered by each employee are compiled and calculated based on their hourly rate. The resulting value represents the gross wages earned.
A pay period can follow either a daily, weekly, biweekly, semi-monthly, or monthly pattern. However, not all types of pay periods suit all business types and sizes.
An example of this is how a weekly pay period is best suited for construction firms hiring wage earners. Finding the right candidates to take on heavy labor is not as easy, and so offering a payout with high frequency entices more people to take on the job.
Difference Between a Pay Period and Pay Date
A pay date and a pay period are often confused as pertaining to one and the same thing. In reality, a pay date (also called a payday) is the specific day or date when the employees’ salaries are released.
In contrast, a pay period refers to the number of days or hours completed by an employee before the pay date. A pay date will always follow the pay period. After all, there would not be anything to compute unless employees had completed a fixed number of work days.
The pay date in each company also depends on the pay period implemented by the employer.
Pay Period Types
Now, let’s take a quick look at the different types of pay periods:
#1. Daily Pay Period
A daily pay period means employees get paid once a day, 365 days a year. This also means that your accounting personnel has to prepare 365 pay stubs!
Since employees get paid every day, salaries, taxes, and other deductions are also calculated daily.
- It is suitable for temporary workers or employees hired for a job that takes a short time to complete.
- Employees are given more leeway to take on extra hours and maximize each work day to increase their earnings.
- Getting paid daily is an excellent incentive that recruiters can use to entice applicants to take on temporary job openings in the company.
- Using a daily pay period is impractical compared to its other counterparts, even for small businesses.
- Daily paychecks tend to exhaust resources and complicate the accounting process for each employee’s salary.
- It entails one-off tax withholdings, which could leave quite a heavy financial burden on employees.
#2. Weekly Pay Period
In this setup, paychecks are releasedat the end of each week.
It consists of 52 pay cycles and a relatively easier accounting process compared to a daily pay period.
- Effectively increases employee retention rates. Employees prefer receiving their paychecks at an earlier date and at more frequent intervals because it ensures more consistent funds to meet their basic needs.
- Weekly pay periods usually follow the same day in the week when salaries are disbursed to employees. As such, it enables easier calculation of gross and net wages, including any additional work hours rendered.
- Hassle-free handling of any payroll issues and flexible payments are supported when employers pay their staff weekly. The fixed pay dates and a uniform number of workdays make it easier to determine payroll accruals and implement any necessary adjustments.
- Despite enabling a flexible payment structure, weekly pay cycles can still be time-consuming and costly. This is especially true if you hire the services of third-party software to handle your payroll.
- If you have limited personnel working on your payroll, withholding taxes and other deductions every week might be impractical and tedious.
- Even with a proper budget and consistent funding, spending money each week to pay your employees can still prove to be exhaustive on your business’s expenses.
#3. Bi-weekly Pay Period
A bi-weekly pay period consists of 26 pay cycles, wherein employees are paid every other week. It also follows more consistent pay dates, the most common of which is every other Friday.
- It suits businesses with over 1,000 employees. Education, information and technology, and healthcare are some of the industries that use bi-weekly payroll.
- The consistency in pay dates enables employees to anticipate when to expect their next paycheck. Non-exempt employees also benefit from a bi-weekly payroll.
- Some months may generate three paychecks for employees. For 2023, the three-paycheck months are March and September for employees who received their first paycheck of the year on the 6th of January. Employees whose first 2023 paycheck was released on the 13th of January are to receive three paychecks in the months of June and December.
- Keen attention to the specific pay dates is crucial. Accounting for more or less than the work hours completed by an employee yields inaccurate values in their net earnings.
- If there are pay periods that overlap, specifically if you have employees who are paid on different pay periods, it becomes challenging to account for each wage statement on time.
- While employees are happy to receive three paychecks in some months, it also means an added workload for your accounting and payroll teams. In the same manner, leap years tend to make the payroll process more complex and time-consuming to fulfill.
#4. Semi-monthly Pay Period
In a semi-monthly pay period, employees receive their paychecks twice a month. It entails a total of 24 pay cycles.
Generally, salaries are sent to employees every 1st and 15th or on the 15th and 30th or 31st of the month. If the pay dates fall on a weekend or a holiday, then the paychecks are released on the business day preceding the pay date.
- It offers more than enough leeway to calculate all employees’ earnings, deductions, and pay adjustments.
- Employees tend to receive higher pay since each pay period covers more work hours.
- A semi-monthly payroll embraces a more streamlined payroll schedule that benefits both employers and employees.
- Unfortunately, semi-monthly paychecks may not be convenient for non-exempt workers whenever they encounter overlapping work weeks.
- The pay dates are inconsistent, so the chances of them falling on a holiday or a weekend are high each year.
- In an effort to protect workers’ rights, the government has set a specific number of times when workers must be paid based on each pay period. Hourly employees are to be paid 52 times in a year—that’s 28 days short on a semi-monthly payroll.
#5. Monthly Pay Period
A monthly pay period totals 12 pay cycles annually. Companies following this pay period disburse employee salaries once a month.
Paychecks are given to employees either at the beginning or end of the month.
- It works best for small businesses. The workload involved in calculating salaries, PTO, and deductions is not time constricted.
- Both salaried workers and freelancers will benefit from receiving a monthly pay stub. It means they will receive their hard-earned money in full.
- The monthly payroll supports a stable income source and better budgeting for employees.
- Just like in a semi-monthly payroll, the number of times employees are paid in a monthly pay schedule mismatches the requisite pay frequencies for hourly workers.
- Not all states allow a monthly pay period. An example is Texas, which reserves monthly payroll for exempt employees only.
- Potential inconsistencies in accounting for overtime work may arise if any accrued overtime pay for each work week is not properly recorded.
#6. Fixed-Length Pay Period
If you use a fixed-length pay period, it means you have employees who follow non-traditional and distinct work schedules.
While a fixed-length pay schedule enables more freedom to choose a pay period that suits an employee’s nature of work, careful consideration should still be practiced beforehand.
Consult your state or local authorities to see whether implementing a distinct pay period is allowed. Discuss the terms with your employees and make sure to reach a sound agreement before pushing through with this type of salary arrangement.
#7. Custom Pay Period
Custom pay periods are likely to occur when an employee resigns or is terminated.
Once an employee’s work contract ends and is not up for renewal, the company issues their final paycheck. It is crucial to ensure accurate calculations for the employee’s last set of completed work hours to avoid any legal disputes.
Also, there may be specific regulations per state in terms of when final paychecks are issued. You might be required to follow a specific time frame following the employee’s last day of work or issue the last pay stub as soon as possible.
How are Pay Periods Determined?
Pay periods are determined by you, the employer. Conversely, it is paramount to consider the following key questions if you want to pick the best pay schedule that adheres to your company and employees:
- Are you hiring hourly or salaried employees, or both?
- Does your business entail hiring external or outsourced staff?
- What is your company’s size? Are you employing less than 10 staff or more than 200 workers?
- How does your business get paid for your services?
- What are the federal, state, and local laws that govern your business structure and preferred pay period?
- What payment methods do you use to disburse salaries to your employees?
What to Consider When Choosing Pay Periods
Here are additional factors to bear in mind so you can make informed decisions in establishing your payroll management system:
#1. Employment Laws and Regulations
If you’re not careful, you might end up choosing a pay period that suits your existing resources but violates specific policies in your area.
So be sure to visit the Department of Labor’s website and check which pay periods are allowed and prohibited in your respective state.
A “workweek” is a term used to describe seven consecutive periods, each comprising 24 hours. Another way to describe a workweek is as a fixed and cyclical 168-hour interval.
The FLSA uses the workweek as a basis for determining whether employers observe strict compliance when compensating non-exempt employees. A workweek does not have to follow the standard calendar week, which means employers can choose the starting day for their business and employees’ workweek.
As such, it is essential to have a reliable system in place to record any additional hours rendered by an employee that exceeds the regular 40-hour work week.
#3. Payroll Costs
Payroll costs depend on whether you need to hire additional staff or a third-party software provider. However, hiring additional personnel drills deeper holes in your regular budget.
The trick is to clearly define the problem areas that need immediate attention in your existing payroll system. Let’s say you want a pay period structure that underscores accurate salary calculations and complies with employment regulations.
Your options are to either hire an accountant who is well-versed in federal, state, and local tax laws or pay more and team up with a payroll software provider to literally do all the paycheck math for you.
#4. Employee Overtime
Define how you will compensate for the additional work hours rendered by your staff. What are the rates per extra hour worked?
Do your employees have the option to convert their extra hours into additional paid time off? Companies that hire hourly and non-exempt workers should prioritize a pay schedule that eases how overtime hours are calculated and added to employees’ net wages.
#5. Employee Needs
According to a 2022 national survey by the Bureau of Labor Statistics, the biweekly pay period was used by about 45.7% of private companies in the US. Meanwhile, the least common pay period in the US happened to be the monthly pay schedule, which only comprised a mere 4.4% of businesses.
This goes to show that more employees prefer receiving their salaries at an earlier date. Some employees find it a bit of a stretch to wait for more than two weeks before they can access their paychecks.
Hence, it pays to take time and discuss with your employees their specific expectations and needs paycheck-wise.
#6. Tax Withholdings
The IRS constantly updates its existing regulations on tax withholdings. The changes they implement can involve updating tax forms used by businesses and employees or even adjusting the tax deadline.
Regardless, as an employer, you should stay up-to-date with these amendments. You must also carefully assess how you can better equip your business and ensure full compliance in fulfilling your workers’ tax obligations.
#7. Tax Reporting
A company’s pay period must coincide with the tax reporting requirements enforced by the federal, state, and local governments. Special attention is also given to the work hours completed by non-exempt employees, as the FLSA strictly mandates complete and precise records of all hours rendered and wages earned by each employee.
Fortunately, the IRS has a comprehensive guide for employers on reporting federal, state, and local taxes.
Common Pay Period Mistakes
Check out the following pay period mistakes that businesses often make:
#1. Miscalculating and Paying Overtime Incorrectly
Correctly calculating employees’ salaries and overtime work is the least you can do in exchange for benefiting from their services.
It may be due to missing or adding a work day or inputting the wrong hourly rates. Regardless, mistakes in calculating employee overtime are the same as disregarding the effort put in by employees to fulfill their job.
#2. Not Depositing Accurate Employment Taxes
Inaccurate employment taxes will leave your employees with liabilities come tax reporting season. Worse, employees may end up facing serious penalties if the IRS finds huge gaps in the amount of taxes they owe.
Remember to check each of your employees’ Form W-4 to determine the proper amount to withhold from their salaries for taxes. Visit the IRS website and look for the income tax withholding table for additional reference.
#3. Not Keeping Accurate Records
When it comes to pay periods, accuracy is a must, not just regarding employees’ overtime hours and employment taxes. It is also crucial for record-keeping.
Maintaining accurate records for employee wages, hourly rates, tax withholdings, deductions, and other payroll adjustments saves you trouble in case the IRS conducts a surprise audit. Moreover, it will benefit your employee later on should they request pay stubs to apply for loans or seek to rent an apartment.
Pay Period Examples
For the purpose of this example, let’s say Sarah is a non-exempt employee who earns an annual salary of $60,500. Divide her annual salary by the number of pay cycles per pay period to determine her gross earnings.
Number of Pay Cycles
Next, let’s compute Sarah’s hourly rate and overtime pay. Assume that she completes a regular 40-hour week.
To calculate her hourly rate:
- Multiply the number of work hours she completed in a week by the total number of weeks in a year: 40 x 52 = 2,080
- Divide her annual salary by the result to yield her hourly pay: $60,500 / 2,080 = $29.09
Her hourly rate is $29.09. Based on her hourly pay, below is a visualization of her overtime rate and total gross earnings in a weekly and bi-weekly pay period.
Regular Work Hours
Weekly Payout (Plus Overtime)
How to Choose the Best Pay Period for Your Business
Choosing the best pay period for your business entails considering the nature of your business. It also means carefully assessing your employee’s needs, whether they are exempt or non-exempt.
Moreover, consider all federal, state, and local regulations on employment and tax withholdings and your business’s budget.
If you want to speed up your payroll process and make things easier for your HR department, you can always use a practical and time-saving tool such as an online pay stub generator. It lets you produce several paychecks in a short time without too much hassle, as you only need to fill out the blank fields to generate this important document.
On top of that, our pay stub generator has a built-in calculator to help you account for taxes and deductions for each employee.
Employee satisfaction, improved employer-employee trust, and well-managed business expenses all stem from choosing the most suitable pay period.
Take into account all the important factors elaborated in this blog and the different setups for each pay period. Consequently, you’ll reach a well-informed conclusion on which pay period to adopt for your business.