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What is a Pay Period? Types, Considerations, and How to Choose | NetSuite

How you manage the structures used to pay your employees is an important decision in running your business. Structuring your pay period in a thoughtful way can help you stay compliant with tax and employment laws and consistently meet payroll obligations.

what is a pay period?

A pay period is a time frame used to calculate wages earned and determine when employees receive their paychecks. payment periods are fixed and, in most cases, recurring on a weekly, fortnightly, fortnightly or monthly basis.

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It is important to remember that the pay period is different from a work week. The workweek is a federally mandated fixed period of 168 hours, or seven consecutive 24-hour periods, that an employer must adopt to maintain compliance with the Fair Labor Standards Act (FLSA). A workweek can start on any calendar day and at any time on that day, and the FLSA allows companies to set different workweeks for different employees or groups of employees. The main purpose of a workweek is to ensure that overtime hours are paid fairly and correctly, regardless of the type of pay period.

  1. pay period vs pay date: the employee does not receive his check at the end of the pay period, but a number of days after it has ended, which is known as the Payment date. Requirements for payment dates are governed by the states, not the FLSA. The number of days an employee must be paid earned wages after a pay period ends varies by state. For example, in Massachusetts, employees must be paid within six days of the end of the pay period. HR experts recommend leaving at least five days between the end of the pay period and the pay date. This allows time for payroll to be properly and accurately prepared, regardless of holidays, vacations, unforeseen events, and ensures timely and accurate reporting requirements are met.
  2. types of pay periods

    Establishing a pay period keeps order and keeps the business on track when it comes to withholding taxes for the IRS, calculating overtime for non-exempt employees, and maintaining compliance with regulatory mandates. Within the limits of certain state laws, a business may choose a pay period of its choosing, including implementing multiple pay periods for different groups or types of employees (ie, salary or hourly wage). once established, those pay periods must remain fixed for the calendar year.

    1. daily:

      Most businesses, even the smallest, have historically not chosen to pay employees daily due to the time and complexity involved in calculating one-time withholding taxes and processing payment within 24 hours. however, there is a new generation of payroll applications (sometimes called “instant pay” or “access to earned wages” applications) designed to make daily pay periods easier and easier. These services and apps allow employees to withdraw what they’ve already earned during a pay period without waiting for a set pay date, usually for a flat transaction fee. the employee can only access wages that they have already earned.

      • Advantages: About three out of four employees want to access their earnings before payday, and daily paydays can increase employee satisfaction and potentially mitigate Financial stress: More than two-thirds of employees say they want access to wages sooner to cover bills and emergency expenses. daily pay can attract temporary workers for jobs that are hard to hire and provide the means to pay for support structures (child care, vehicle expenses, and more) that allow employees to work additional hours.
      • Disadvantages: Daily payment can be complex and expensive to implement and manage, but instant payment applications are improving their functionality to make this process easier. instant pay provider dailypay notes that some areas to consider include who pays the advance (the employer or the instant pay provider), how to withhold taxes, how to handle garnishment, or reductions in arrears if the employee has already withdrawn the wages, and how to issue pay stubs in accordance with reporting requirements.
      • Pay cycles per year: There can be up to 365 pay periods and pay days, but this will vary by employee.
      • weekly:

        weekly pay period is a popular option. the United States. The Bureau of Labor Statistics reports that more than a third of workplaces and establishments have a weekly pay period. this figure is higher in companies with less than 50 employees and in construction (where it is the dominant payment period with 75.9%), the manufacturing industry (45.4%) and the trade, transport and services industries public (42.1%). Most companies choose to align a weekly pay period with the workweek to make it easier to calculate and manage overtime pay. By establishing weekly pay periods, employees typically get paid on the same day each week, such as every Friday.

        • Advantages: A weekly pay period when aligned with a workweek can make it easier to comply with FLSA overtime pay laws. Additionally, hourly employees often prefer to be paid weekly, and weekly pay periods can improve retention and engagement in roles that may experience high turnover, as well as provide an attractive structure for temporary employees and those who they work in industries that depend on tips for a large part of their wages.
        • Disadvantages: Managing weekly payroll can be time consuming and expensive. The latter is especially true if the business relies on a third-party vendor for payroll administration, which may charge fees each time payroll is processed. When implementing a weekly system, the business must also consider how often it ensures tax withholding, benefits administration, and vacation and paid time off accounting. A human resource management system (HRMS), helps you manage human resource-related functions, such as payroll processing. An HRMs can be a good option for processing payroll on a weekly basis because it is not subject to fees for each pay period.
        • pay cycles per year: There are 52 pay cycles per year when a business adopts weekly pay periods.
        • fortnightly:

          bi-weekly is the most common length of pay period identified by the us. uu. bureau of labor statistics, with about 42% of private companies opting to pay their employees every two weeks. As companies grow, there is a propensity to adopt a bi-weekly pay period. Very small businesses, those with fewer than 9 employees, are the least likely to pay this way, while more than 70% of businesses with more than 1,000 employees pay on a biweekly schedule. In a biweekly pay period structure, pay periods end every two weeks and employees are paid biweekly on a set day, usually Friday.

          • advantages: biweekly payrolls allow constant paydays; for example, employees will be paid on Friday every other week. That consistency is attractive to employees, as is the fact that certain months have three paydays instead of two. in 2021, for example, employees paid their first check on January 1. 8 will receive three paychecks in April and October. Bi-weekly pay cycles also make it easier to calculate overtime pay for non-exempt employees, as each consecutive seven-day period can be aligned with the workweek and overtime calculated on that basis. this also makes it easy to calculate overtime when it comes to vacation, paid time off, and sick time, if your company offers it.
          • Disadvantages: Bi-weekly pay periods introduce some complexity into the accounting process because certain months will have three pay periods and pay days instead of two. Cash flow tracking and forecasting is crucial to ensure the business can cover and process the “extra” payroll in those months.
          • Pay Cycles Per Year: Because there are 52 weeks in a year, there are 26 pay periods and pay dates per year on a biweekly pay schedule.
          • fortnightly:

            With bi-weekly pay periods, pay dates are twice a month, on the same days each month, often the 1st and 15th or the 15th and the last day of the month. if that date falls on a weekend, payday is usually the previous Friday. This is the third most common option for businesses: getting ahead of monthly pay periods, but behind bi-weekly and weekly pay periods. Industries most likely to use biweekly pay periods include mining and logging, financial activities, and information systems.

            • pros: Bi-weekly payroll wins on consistency. payroll runs on the same date each month and can be more easily accommodated for odd days and leap years. Paychecks for salaried employees are often equal amounts, making payroll planning easier and helping employees better anticipate earnings. The structure also imparts a certain level of flexibility in the overall budget because payroll has to be paid only twice a month. this can also make it easier to administer benefits and deposit and withhold payroll taxes.
            • Disadvantages: Bi-weekly pay periods can present flsa compliance challenges for non-exempt employees because workweeks may overlap pay periods, making it difficult to calculate rates. Extra hours. And some states, like Massachusetts, prohibit paying hourly employees every other month or every month.
            • Pay Cycle Frequency: Employees on a bi-weekly pay period have 24 pay dates per calendar year.
            • monthly:

              only 5.4% of establishments surveyed overall by us. uu. The Bureau of Labor Statistics pays its employees once a month. monthly pay periods are more common in very small businesses with fewer than 9 employees, of which 10% reported paying their employees once a month.

              • Pros: Monthly pay periods are easy for the business to manage in terms of tax withholding, benefits, and budgeting, and can work well for businesses with salaried employees. Monthly pay periods give companies more flexibility with cash flow and simplify budgeting for future positions.
              • Disadvantages: Monthly payroll is extremely complex to manage with hourly and/or non-exempt employees and may not be allowed in some states. For example, Texas allows monthly paydays only for employees exempt from the FLSA’s overtime provisions. In Connecticut, employers are required to pay most hourly employees on a “regular payday, scheduled at least weekly.” a longer interval is only permitted with the approval of the labor commissioner.
              • Frequency of Pay Cycles: With monthly pay periods, an employee will receive a check 12 times in a calendar year.
              • There are some circumstances that may need to accommodate outside of the pay periods tracked and identified by the Department of Labor’s Division of Wages and Labor. these include but are not limited to the following.

                fixed length:

                Some industries may have unique pay periods that do not fit into traditional weekly, bi-weekly, bi-weekly or monthly cycles. the most frequent example is education, where administrative staff and teachers are often not working in the summer months. As a result, some states allow public school districts to give teachers an option in which the annual salary is spread over 21 pay periods, roughly during their 10-month tenure, while also offering the option of receiving the payment according to a standard biweekly payment. pay period (or 26 pay periods). Often, the district will pay for the additional five pay periods in a lump sum, issued in early summer.

                custom:

                Sometimes employees will need to be paid outside of the defined pay cycle determined by the pay period, such as when they quit a job or are laid off. maintaining employee pay compliance during these events can be complex. There is no federal law that requires immediate final pay, but some states have laws governing when an employee must receive their final paycheck in these cases. For example, employees laid off in Colorado must be paid immediately, with a few exceptions. Employees laid off by their Connecticut employer must receive their full salary no later than the next business day after the layoff.

                examples of payment periods

                Let’s look at how an exempt salaried employee earning $62,400 a year would receive her paychecks over the course of the year. note how the amount on each check will differ depending on the structure chosen. It’s important to note that this calculation does not take into account payroll tax or profit withholdings.

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                Now, let’s see how two popular pay periods would play out with a non-exempt employee paying an hourly wage. if he works more than 40 hours in a given workweek, he must pay you overtime. Let’s say the work week starts on a Sunday, and to simplify further, the month in this example starts on a Sunday. The employee worked 42 hours from 1 to 7 and 38 hours from 8 to 14. Overtime for each workweek must be calculated separately, which means that even if the organization adopts a biweekly pay period, it cannot average those hours together to get 40 each week.

                At your wage of $31/hour, the overtime rate ($31/hour time and a half) is $46.50. Calculating 40 hours at $31/hour and two hours at $46.50/hour, the employee earns $1,333 during the first week. she does not work overtime during week two and earns $31/hour for 38 hours for a total of $1,178.

                If the employee is paid on a biweekly pay period, simply add the weekly pay period amounts to get the biweekly pay period amount of $2,511. note that this does not take into account tax withholdings or benefits.

                how payment periods are determined

                An organization selects the pay period structure that best suits the type of work it performs, the needs of its employees, the labor laws in which the business operates, and other factors.

                It is also important to note that the company may choose different pay periods for different types of employees. It is not uncommon for a company to pay its hourly employees weekly or biweekly and its salaried employees biweekly or even monthly. but the pay period must be applied consistently throughout the calendar year to wages earned to qualify. Organizations that must remain in compliance with the FLSA have at least two employees and an annual volume of sales or conducted business of at least $500,000, along with hospitals, businesses that provide medical or nursing care to residents, schools and preschools, and government agencies . Even when there is no business coverage, employees are protected by the FLSA if their job regularly involves interstate commerce.

                choosing the best payment period for companies

                with 42% of private companies selecting biweekly, that’s the most common pay period length in the us. uu. certain industries also tend to favor certain pay periods; For example, in construction, weekly pay periods are the dominant type of pay period, while the financial and information technology industries are more likely to implement biweekly pay periods. us data The Bureau of Labor Statistics shows that the smallest establishments tend to exhibit the greatest variety in their workers’ pay.

                When considering what pay period to enact for your business, compliance and cash flow are important. Selecting a pay period (or periods) first requires considering the types of employees working at your business (exempt (salaried) and non-exempt (hourly)) and any unique state laws that govern how they can legally be paid. Remember, in some states, it is illegal to pay hourly workers monthly or even biweekly. A business should also pay close attention to its cash flow cycles to better determine how it can efficiently meet payroll. Start-ups and smaller businesses may struggle to meet payroll obligations due to cash flow issues if they need to process payroll multiple times a month.

                7 things to consider when choosing pay periods

                With that in mind, select the right pay period for your business by considering factors such as state regulations, the cost of running payroll, and other factors, including the following.

                1. labour laws and regulations:

                2. working weeks:

                  Managing payroll for small businesses can be challenging. Aligning the workweek with the pay period simplifies overtime calculations and makes payroll much easier to process. According to the FLSA, each company must define a work week: a fixed period of 168 hours or seven consecutive periods of 24 hours. each workweek is separate in the calculation of overtime for non-exempt employees. For example, if an employee is paid biweekly and works 30 hours in one workweek and 50 hours in the next, he or she must be paid 20 hours of overtime in the second workweek at a rate no less than the time and one-half of his or her salary. regular rate of pay. If it is legally permissible to pay an hourly employee on a bi-monthly schedule, it is possible that workweeks overlap with pay periods, meaning there is also a chance that overtime pay will span different pay periods.

                3. payroll costs:

                  Understanding the costs associated with the process is a common payroll concern. Costs include compensation plus all employment taxes paid by the employer and the employer-paid portion of benefits. Total payroll costs can represent up to 50%-60% of a company’s total operating costs. Additionally, there are costs associated with processing payroll, especially if done through a third-party payroll service that typically charges for each payroll cycle.

                4. overtime:

                  Considering whether or not your employees are exempt from the FLSA will help you maintain compliance with overtime requirements and narrow down your pay period options. A business with many non-exempt hourly employees may be better off choosing a pay period that makes it easier to calculate and pay overtime. Biweekly pay periods can present challenges in terms of complying with state laws to pay hourly employees, as well as accurately and efficiently calculating overtime pay.

                5. employee needs:

                  Consider what pay period structure could help with employee satisfaction. About two-thirds of employees say they would like access to previously earned wages to cover bills and emergency expenses. more than half say that financial stress distracts them from their work. and the majority of employees (70%) would prefer more frequent pay and would say it would be difficult to meet financial obligations if their next paycheck was a week late.

                6. withholdings:

                  The IRS requires certain withholdings from employees’ paychecks. calculating it is complex and the orientation changes, and the payment must be made in a defined schedule, either monthly or biweekly, depending on the total tax obligation of the company. The IRS released a new version of Form W-4 in 2020 with the goal of reducing complexity and increasing the transparency and accuracy of the withholding system. replaces the worksheets on the previous form with questions designed to make accurate withholding determination easier for the employee, and has new guidance for employers on how to ensure enough federal income tax is withheld.

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                  withholding is complex and rules and processes are known to change. That’s why many companies choose to use payroll software to manage taxes and withholdings. platforms can calculate withholdings and process payroll, while also making sure it’s compliant and taking into account things like complex pay structures and multi-state business.

                7. reports:

                  Companies are responsible for recording and reporting requirements for compliance with labor laws and employment taxes. Consider how the pay periods you choose will help you better meet your reporting requirements. The FLSA requires employers to keep records for each covered non-exempt worker, which must record accurate information about hours worked and wages earned. Among the list of details that a company must maintain is the total wages paid per pay period and the date of the payment and the pay period covered. The IRS requires employers to report wages, tips, and other compensation paid to an employee by submitting the required forms. Employers who withhold federal income tax or Social Security and Medicare taxes must file Form 941, the employer’s quarterly federal income tax return, each quarter. this includes withholding on sick pay and supplemental unemployment benefits.

                  Common Pay Period Mistakes to Avoid

                  Payroll errors can result in fines and deeply dissatisfied workers. in fiscal year (fy) 2019, the us. uu. the labor department recovered $322 million in back wages owed to workers. and an average of $1,120 per employee was owed in back wages in fiscal year 2020. Some common payroll errors include the following.

                  1. Not calculating and paying overtime correctly. Most of the labor department’s collection is due to employers not paying overtime. unpaid overtime hours totaled $186 million in recovered wages in fiscal year 2019.
                  2. Not depositing payroll taxes in accurate amounts and on time. One of the biggest payroll challenges is accurately calculating regular and supplemental pay withholding. At the beginning of the calendar year, a business must decide which deposit schedule to use for Social Security and Medicare taxes, whether monthly or semiweekly, based on the total tax liability reported on Form 941 (the quarterly federal income tax return). . Penalties are imposed for arrears and increase according to how long they remain unpaid.
                  3. Not keeping accurate records. The FLSA requires employers to keep three years of pay records, and some states may require even more. Accurate records also help ensure that employees are correctly classified as exempt, non-exempt, or independent contractors so your business can maintain compliance with labor and tax laws.
                  4. manage pay periods and payroll with payroll software

                    Managing payroll is extremely complex and getting it right is absolutely crucial. it’s not something that should be left to spreadsheets. With payroll software, you can set up pay periods and accounts for different periods for various classes of employees. automates the calculation of earnings, deductions, company contributions, taxes, and paid time off. You can also process payment via direct deposit, which ensures that employees receive their pay sooner and more securely than with a paper check. Cloud-based payroll software is regularly updated so you can be sure you’re following the most current federal and state tax and labor laws. all this saves time and reduces errors. many payroll departments are moving their systems to cloud-based solutions. in 2014, only 14% of companies processed payroll with cloud-based software; that number jumped to 39% in 2018.

                    Human Capital Management (HCM) is the process your company uses to recruit, train, and retain your workforce. The benefits of a well-managed HCM strategy include higher employee satisfaction, lower turnover, and a more efficient business. Managing payments and payroll is an important part of HCM, and many people turn to HCM software that includes payroll processing for help. hcm is one of the many leading business software applications.

                    the most successful hcm software solutions connect with other modules from disparate areas of your business through what is known as enterprise resource planning (erp) by storing it all in one digital space you can better manage your data, reports and understand how one area of ​​the business interacts with and affects another.

                    another benefit of payroll software is that it can help you track metrics that show how your team is performing, like the number of payroll errors and the cycle time to process payroll, so you can set goals and improve processes. These Key Performance Indicators (KPIs) are displayed in easy-to-understand dashboards that can be made available to your team and other key stakeholders in the business.

                    Selecting the pay period(s) for your business may seem like a simple decision, but it has a significant impact on your company and your employees. The decision prepares your company to meet one of its most important obligations: paying the people you depend on. managing different pay periods, accounting for complex pay structures, and complying with state and federal laws make payroll processing complex. HCM software can help you manage the process more efficiently, as well as integrate with other areas of your business and provide vital KPIs to track your team’s performance and help employees manage HR-related documentation. such as taxes and personal contact details.

                    frequently asked questions about the payment period

                    how does a biweekly pay period work?

                    With a biweekly pay period, employees will receive their paycheck every two weeks on the same day of the week, often on a Friday. biweekly pay periods means there are 26 pay cycles a year, and two months will have three pay periods. biweekly is the most common length of pay period identified by the us. uu. bureau of labor statistics, with 42% us private establishments that choose to pay their employees every two weeks.

                    what are the four most common pay periods?

                    The four most common pay periods are: weekly, biweekly (every two weeks), biweekly (twice a month on a given date), and monthly (once a month).

                    how many weeks is a pay period?

                    The number of weeks in a pay period depends on the pay cycle adopted by the employer. in a weekly pay cycle, there are seven days. In a biweekly pay period, employees are paid every two weeks. In a biweekly pay cycle, employees are paid approximately every 15 days, unless payday falls on a weekend, in which case payroll is typically processed the day before. In a monthly pay period, employees are paid once a month, usually on the last day of the month.

                    how many pay periods are there in 2021?

                    Number of pay periods is always the same with Monthly and Bi-Monthly. but the number of times payroll is processed with a weekly or bi-weekly pay period structure can change depending on the year, even if it starts on a Friday (such as 2021) or includes an extra day (leap year).

                    There are 53 Fridays in 2021, which means if the organization adopted a weekly or bi-weekly pay period and paid employees in January. 1, there is a possibility that employees will receive an “extra” paycheck. If that’s the case, in a biweekly pay schedule, the three pay months are January, July, and December. For organizations that processed their first payroll of the year, the following Fridays, April and October will be the three payment months.

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