How to Create a Payroll Schedule for Your Small Business
Five Aspects to Consider When Creating Your Business’s Payroll Schedule:
1. Employees’ Needs
Typically, employees prefer to be paid more often to meet their recurring cash flow needs. While you may determine that it’s best for your business to pay employees on a monthly schedule, your staff may have difficulty budgeting with only one paycheck per month. Whichever schedule you choose, it’s essential that you’re able to consistently meet the expectations that you initially set. Missing paychecks or changing your payroll policy down the road can negatively affect employee morale and may lead your employees to question your company’s financial status.
2. Overtime Eligibility
If most of your employees are salaried — in other words, exempt from collecting overtime pay — you generally have more flexibility with your payroll schedule than if most of your employees are hourly. When your employees are eligible to collect overtime, a weekly or bi-weekly pay schedule is typically advantageous since overtime pay is calculated based on exceeding a maximum weekly threshold of hours worked. The calculation is a bit more complicated if you pay employees semi-monthly, for example, since each pay period is 86.67 hours — slightly longer than two standard 40-hour weeks.
3. Regulatory Compliance
While some federal labor laws apply to all businesses, most states have unique regulations that you’ll need to be aware of and comply with when determining your payroll schedule. Most likely, you’ll be required to set a minimum pay frequency, which you can adjust by paying more often, but not less. Additionally, your state may have minimum wage and overtime guidelines that differ from federal law. In cases where federal and state laws contradict one another, it’s usually best practice to follow the law that most benefits the employee. The Department of Labor website provides guidance for complying with wages and the Fair Labor Standards Act.
4. Company Size
Each time you process payroll, your company incurs a cost. Your processing time and the fees charged by your payroll vendor generally increase with the number of employees on your payroll. Therefore, it’s important to consider your company’s size when determining an appropriate payroll schedule. If you have numerous employees, paying them too frequently can become excessively costly.
5. Administrative Implications
If you offer your employees additional benefits like healthcare coverage or an employer-sponsored retirement plan, deductions for these benefits are typically taken monthly, so they’re easier to manage with a semi-monthly or monthly pay schedule. Additionally, since most financial reports are run monthly, having a set number of pay periods that coincide with the end of the month helps ensure that your results are more consistent month-to-month. With a bi-weekly pay schedule, on the other hand, two months each year you’ll have three pay periods instead of two.
Determining your payroll schedule is one of the most important decisions you’ll make as a small business owner, largely because it’s very difficult to change once you put a policy in place. While there are many factors to consider, the most scalable and cost-effective solution for your business operations will ultimately be determined by how many employees you have and whether they are salaried or hourly. Implementing a payroll process that runs smoothly will instill confidence in your employees, which is especially important during the early stages of your company.
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