Definition of Pay Period
Pay periods are the pre-determined intervals when employees receive their salary or wages.
What is a Pay Period?
A pay period determines the frequency of an employee’s pay and how many paychecks they will receive in a budget year. Pay periods can be:
Pay periods are often weekly or bi-weekly. Hourly employees are usually paid weekly. Industries that employ exempt salaried workers tend to run their payroll semi-monthly or monthly. However, employers in specific industries like oil, gas, and energy use the daily rate model.
An employee’s pay frequency affects the amount of the required monthly deductions that are taken from each paycheck.
Types of Pay Periods
# of paychecks in a year
Twice a month on two specific days of the month, e.g., 15th and 30th
Every two weeks on a specific day of the week, e.g., every-other Friday
On a specific day of the week, e.g., every Friday
On a specific date, e.g., 30th
|Type||Pay Frequency||# of paychecks in a year|
|Semi-monthly||Twice a month on two specific days of the month, e.g., 15th and 30th||24 paychecks|
|Bi-weekly||Every two weeks on a specific day of the week, e.g., every-other Friday||26 paychecks|
|Weekly||On a specific day of the week, e.g., every Friday||52 paychecks|
|Monthly||On a specific date, e.g., 30th||12 paychecks|
There are advantages and disadvantages to each pay period. For example, a bi-weekly pay period might be more time and cost-efficient than one processed weekly. Still, because some months will involve 3 pay periods, it can result in more complex accounting practices.
Federal law, such as the Fair Labor Standards Act, does not mandate pay frequency. However, FLSA-covered employers must set up a regular payday. State laws, however, establish more precise rules. Most states require that employers comply with specific pay frequencies. So, before you set a pay frequency, check the state law(s) where you operate.
Why are pay periods important to a small business?
Pay periods are important to small businesses because of the impact on:
- Cash flow
- Record keeping
Small business owners must understand the different pay period options and choose the best fit for their business needs.
Paying employees weekly can be a good option for businesses with a high employee turnover rate. It allows employees to receive their pay more frequently. On the other hand, paying employees monthly may be a better option for businesses with a low employee turnover rate and a more stable cash flow.
The frequency of pay periods can impact a small business’s cash flow. For example, paying employees bi-weekly or monthly instead of weekly can result in a better cash flow for the business. These options give the company more time to generate revenue between salary payments.
Additionally, the more frequently you run payroll, the more you spend on payroll processing and administration. Weekly pay periods are more likely to be the most expensive option, while monthly pay periods are the most cost-effective.
Accurate payroll records are essential for a small business’s financial and tax purposes. Proper recordkeeping ensures that employees are paid the correct amount, taxes are correctly withheld and paid, and the company complies with state and federal laws.
Pay periods play a critical role in recordkeeping. Less frequent pay periods mean that a business has more time to prepare payroll, which can improve accuracy.
What is the history of pay periods?
Pay periods date back to the industrial revolution when factories employed large numbers of workers who were paid a fixed wage every week.
Other terms similar to pay periods that can assist you
- Incentive pay. Additional income earned on top of a base salary based on attaining documented goals.
- Under the FLSA, a workweek is a fixed, regularly recurring period of 168 hours or 7 consecutive 24-hour periods. A workweek can start on any day of the week and at any time of the day. However, it must be consistent.
Summary of the definition of pay periods
Pay periods are a crucial aspect of a small business’s operations. They impact:
- Employee morale
- Cash flow
- Record keeping
Small business owners should carefully consider the different pay period options and choose the best fit for their business’s needs. Doing so can ensure that their employees are paid on time, their cash flow remains stable, and their payroll records are kept accurately. All of these results can help your business avoid legal and financial issues.
Similar glossary definitions you must know
- Compensation. Payment made to an employee for services rendered. These payments can be monetary or non-monetary.
- Bonus. A bonus is a non-guaranteed payment given to employees outside their regular pay.
- Department of Labor (DOL). The government entity responsible for overseeing regulations related to employment.
- Total compensation/total rewards. Encompasses all of an employee’s compensation. Comprises salary, benefits, recognition, incentives, development, and well-being perks.