January 21, 2021 | by Mark Wald
With so many online payroll services available, setting up payroll seems like an easy item to check off your list. However, you need to answer several key questions before setting your payroll schedule. Let's take them one at a time.
Do You Pay Your Employees a Salary or an Hourly Rate?
Typically, salaried employees get paid semi-monthly (for example, on the 15th and on the last day of each month) and hourly employees get paid biweekly (every two weeks). That might sound like the same thing, but it's not: "Semi-monthly" means twice a month, or 24 times per year. "Biweekly" means every two weeks, or 26 times per year.
While salaried employees typically earn the same amount each semi-monthly period (and usually aren't required to submit timesheets), businesses generally choose to pay hourly staff biweekly because it's intuitive for hourly staff to submit timecards every Friday. That not only keeps things simple and consistent for the hourly employee, but also makes it easier for the employer to calculate overtime compensation for staff who are not exempt from overtime compensation rules.
Do You Have to Use One of Those Schedules?
No, but it's usually the most practical approach from the perspective of both the payroll services provider and state labor laws. For example, California law requires that businesses pay their employees no less frequently than twice a month in most cases. In other words, with few exceptions (such as car sales associates who work exclusively on commission), paying your employees just once a month isn't an option for California employers. Even if your employees don't seem to mind, the state of California has specific pay period timing rules and corresponding penalties for not complying.
Since very few occupations in California require weekly pay (farm labor contractors being a rare exception), there's rarely a good reason for California employers to pay their staff more frequently than biweekly. Performing payroll functions more often than biweekly increases admin costs, with no additional benefit to the employer. Therefore, the semi-monthly and biweekly pay cycles have become the standard by default. Besides, most American workers are used to that cadence, so why deviate from it?
How Long Can You Wait to Pay Employees for Time Worked?
Again, this is dictated to some extent by state laws. In California, companies must pay their semi-monthly employees no later than 10 days after the last working day of the pay period, while other payroll periods such as weekly and biweekly must be paid within seven calendar days of the end of the payroll period within which the wages were earned.
For employers on a semi-monthly schedule, that typically boils down to one of the following approaches:
Option 1 seems the simplest. However, it poses challenges for employers to prepare and adjust payroll runs for new hires, terminations or compensation changes, as well as collecting timecards or calculating overtime before processing payroll for each period in real time. Options 2 and 3 still comply with the law while giving employers more time to perform the processing work before payday.
Employers on a biweekly payroll schedule tend to pay their staff every other Friday — either for the past two weeks of work ending that Friday, or for the two weeks of work ending on the previous Friday. Again, opting to pay hourly nonexempt staff one week in arrears can avoid unnecessarily tight turnaround deadlines on payroll data processing. In other words, employees' work for the two weeks ending this Friday is typically paid next Friday. That gives the employer time to review and approve all employee timecards and enter the data into the payroll system before the Tuesday or Wednesday deadline for processing to get employees paid by the following Friday.
Some employers estimate their employees' working hours for the last few days of a pay period and process the payroll run in advance. That approach puts money in each employee's pocket sooner. But it also creates extra work for the employer, not to mention the possibility of paying employees more than they have actually earned in the current pay period. That's why most employers avoid this option.
Is There Anything Else to Consider?
Although the basics of payroll compliance are pretty standard nationwide, there are important differences from state to state regarding how promptly and how often employees must be paid as well as conditions for final pay of terminated employees and other considerations. A host of regulations covering overtime pay also vary from state to state.
California employers must also account for sick time and paid vacation time and are required to report that activity accurately each pay period on each employee's paystub. It might also make sense for a business to include expense reimbursements together with employee wage compensation through the same payroll processing cycle instead of having to issue separate reimbursement checks to each staff member who submits an expense report. This strategy can be more efficient. It also keeps all compensation information in one place on the employee's paystub and helps prevent employers from incorrectly issuing 1099 reports to their employees for reimbursed expense activity.
Depending on how and when your staff typically work, some industries have an opportunity to further optimize their payroll schedules by customizing the official start and end of their work weeks while also complying with all federal, state, and local employment laws.
With all of these things to think about, your best bet before contracting with a payroll services provider is to consult with your bookkeeping and controller services provider. They can refer you to the payroll services provider that's the best fit for your specific business and advise you on the different payroll date options you'll need to consider. They'll likely also be able to leverage their partner relationships to save you money too!
At Supporting Strategies, our experienced, U.S.-based professionals use secure, best-of-breed technology and a proven process to provide a full suite of bookkeeping and controller services. Are you ready to learn how you can move your business forward? Contact Supporting Strategies today.
Mark is managing director of Supporting Strategies | Santa Monica, CA.
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