How Are Pay Periods Determined?

When you set up a payroll system for your business, one of your first tasks is to determine how often employees will get paid. You may utilize different classifications of employees (salaried vs. hourly employees, for example), and each has a unique set of rules. First and foremost, be sure to pay all employees of the same type in the same way.

A good understanding of pay periods is essential to make sure employees are properly paid, and to keep your business operating smoothly. Here we cover the basics of pay periods, how different types operate, and how to deal with potential payroll hurdles.

What Is a Pay Period?

A pay period is a recurring length of time over which employee time is recorded and paid for. Examples of pay periods are weekly, biweekly, semimonthly, and monthly.

• Weekly: A weekly pay period results in 52 paychecks in a year. Hourly employees are often paid weekly. Sometimes these employees are paid a week in arrears. That is, they record and turn in their time sheets at the end of one week, and are paid for that time a week later. That gives the payroll clerk time to calculate pay for these employees.
• Biweekly: A biweekly (every other week) pay period results in 26 paychecks in a year. Some hourly employees are paid biweekly, as are some salaried employees.
• Semimonthly: A semimonthly (twice per month) pay period results in 24 paychecks in a year. Salaried employees are typically paid semimonthly.
• Monthly: A monthly pay period results in 12 paychecks in a year. Almost all monthly pay periods are for salaried employees.

Gross Pay

It is important for both employers and employees to understand their pay period when estimating or calculating total gross pay for a year, as it factors into tax filings, deductions, and earnings expectations in general.

For salaried employees, annual gross pay is simply their salary; monthly gross pay is that salary divided by 12. For employees who earn hourly wages, gross pay is calculated by multiplying the number of hours they work by their hourly wage (plus any adjustments for overtime). The distinction is clear when considering that gross pay for a salaried employee will be consistent from one pay period to the next, while for an hourly employee, paychecks in different pay periods can be quite varied.

Leap Years

Depending on how the employer has set up payroll, and when the last pay period falls, some years have an extra pay period. This is called a "pay period leap year," a phenomenon that only affects salaried employees who are paid on a biweekly basis, resulting in a 27th pay period in the year.

There are options for dealing with this extra pay period. If you can anticipate the issue and provide fair notice, you can divide an employee's annual salary by 27, instead of 26, or by 53 weeks instead of 52. If you can't catch it in time, you may have to make some adjustments after the fact. Some employers simply allow the extra pay period and take the loss in payroll.

Salaried Employees

Salaried employees are paid based on an annual amount, divided by the number of pay periods in the year. So, if your salaried employees are paid monthly, each salaried employee's annual salary would be divided by 12. Some salaried employees get paid every other week, and others biweekly. The timing of the pay period isn't typically an issue, so long as the employee receives the full amount of their annual salary.

Overtime

If you have employees who are eligible for overtime, you will need a way to track and calculate the overtime pay. Labor regulations require that overtime pay meet a certain threshold, and that be applied to the same pay period in which it's earned.

Most payroll software and payroll services have an easy way to calculate regular pay and overtime.

If you are doing your payroll by hand, you may be able to delay paying overtime until the next pay period, but only to allow extra time for calculations and accounting—not to apply overtime pay to a different period in which it was earned.

Payroll Services

The process of paying employees is expensive. It takes time (which must be compensated) to perform pay calculations, even with payroll software or an online payroll system. These online systems charge per paycheck, and a payroll processing service will also charge per transaction.

There are a few factors you might want to consider when deciding how often to pay employees. Opting for shorter pay periods (and therefore more frequent payments) will likely please your employees, but making more frequent payments means that payroll will be more costly, which may make budgeting more difficult.

Most employers pay salaried employees on a monthly or semimonthly basis, and hourly employees on a weekly or biweekly basis.

Employment Laws

Federal and state laws come into play when determining pay periods. Although the IRS does not regulate the frequency of pay periods, most states do. In California, for instance, the frequency of employee pay is regulated according to the calendar date, with different rules that apply to different industries. Some states carve out special provisions to protect certain types of employees, such as Rhode Island, which gives childcare workers the ability to choose how often they are paid.

Check with your state's department of labor for information on pay regulations where you operate.

The Bottom Line

Understanding the distinctions among pay periods and how they fit your business model will be fundamental in making larger financial decisions. The good news is that once you decide on a method and start working with it, payroll is not that tricky, and there are many resources available to solve any issues that come up.