What Is a Pay Period? How are Pay Periods Determined?
Why Pay Period Matters to Employers and Employees
When you set up your payroll system for your business, one of your first tasks is determining how often employees get paid. Your business can set up different pay periods for different classifications of employees, salaried vs. hourly employees, for example. Just be sure to pay all of the same types of employee (salaried, for example) the same way.
What is a Pay Period?
A pay period is a recurring length of time over which employee time is recorded and paid.
Examples of pay periods are weekly, bi-weekly, semi-monthly, and monthly.
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. This gives the payroll clerk time to calculate pay for these employees.
A bi-weekly (every other week) pay period results in 26 paychecks in a year. Some hourly employees are paid bi-weekly, and some salaried employees are too. In some years, a bi-weekly payroll system might result in an additional pay period.
A semi-monthly (twice a month) pay period results in 24 paychecks in a year. Usually, salaried employees are paid semi-monthly.
A monthly pay period results in 12 paychecks in a year. Almost all monthly pay periods are for salaried employees.
The number of paychecks in a year is an important distinction in calculating total gross pay for a year.
Pay Period "Leap Years"
Some years have an extra pay period for some employees. This is called a "pay period leap year." This phenomenon only affects salaried employees who are paid on a bi-weekly basis. Depending on when the last pay period falls in the year, it's possible to have a 27th pay period in the year.
If you can catch the issue early enough, you can divide the employee's annual salary by 27, instead of 26. If you can't catch it in time, you'll have to make some adjustments. This article on Pay Period Leap Years explains your options for dealing with this extra pay period.
Pay Periods for 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 may be paid bi-weekly. The timing of the pay period doesn't matter, as long as the employee receives the full amount of their annual salary.
Pay Periods and Overtime
If you have employees who are eligible for overtime, you will need a way to track and calculate the overtime pay. Some employers don't put overtime in the pay period when it's earned but they wait until the next pay period to add the overtime.
Another alternative is to delay the payment for a few days. For example, let's say Week One's payroll period ends on a Friday. You can wait until the next week to distribute paychecks for Week One's payroll, to give time to calculate overtime.
It's always best to pay overtime in the pay period when 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 can put overtime in the next pay period. For example, Bob earns 3.5 overtime hours in Week One. If possible, put the pay for those overtime hours in Week One, but you can put those hours in Week Two.
Why is Pay Period Important?
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, like Gusto, charge per paycheck. And a payroll processing service will also charge per transactions. This article describes some factors you might want to consider in deciding how often to pay employees.
Some employers would rather pay less frequently to keep their payroll costs low.
But employees would rather get paid more frequently. It's more difficult to budget if you have a longer time between getting paid.
Most employers pay salaried employees on a monthly or semi-monthly basis and hourly employees on a weekly or bi-weekly basis.
Pay Periods and Employment Laws
One more small wrinkle: Federal and state laws also come into play when determining pay periods. Although the IRS does not regulate the frequency of pay periods, some states do. Check with your state's department of labor for information on pay regulations.