When setting up your payroll, another decision you have to make is paying employees as often as weekly, bi-weekly, semi-monthly or monthly. Your choice has ramifications for your accounting department — and for your employees.
The first challenge is to make sure everyone understands the terminology, including the employees. If the employees are confused, you will spend hours in staff time later explaining to frustrated employees who didn't set aside enough money to pay bills.
Most confusion comes when explaining the difference between a bi-weekly and semi-monthly system.
How Bi-Weekly Pay Works
Under a bi-weekly pay approach, employees receive a check every two weeks, or 26 paychecks per year. Typically employees receive the check on a specific day of the week, such as Friday. There are two months during the year when employees receive three paychecks.
The biggest drawback to the bi-weekly scheme is that it doesn't coincide with calendar months and can be confusing not only to employees, but to accounting departments.
Furthermore, bi-weekly pay runs can cause havoc to monthly budgets and costing analysis. Given that there are 52 weeks in a year, these weeks do not necessarily divide themselves neatly into 12 months. There will be certain months in the year where three pay runs are required within one calendar month; this can complicate any budget or costing estimate that is done on a monthly basis, as is the norm.
How Semi-Monthly Pay Works
On a semi-monthly system, those same employees are paid slightly less often — 24 times — and receive slightly larger checks.
Although it is an elementary point, it needs to be made to employees — under either system the employee will get the same base annual salary, which is simply divided by either 26 or 24 to determine the pay checks.
Deciding on the Best Option
That confusion can be minimized by an online payroll service, which puts payroll accounting nearly on auto-pilot. There is a cost difference in performing payroll more often; see our price calculator to calculate the difference for your business.
From the employee perspective, the semi-monthly payroll run is the easiest to calibrate against monthly living expenses, although many prefer the slightly more frequent paychecks.
The key is to make sure employees are told upfront exactly what the payroll frequency is and to make sure there is absolutely no confusion so they can coordinate their bill paying accordingly.
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