To the casual bystander, these two options may appear to be “basically the same,” however, employers should know the difference and employees have to understand how they are paid to prevent any misunderstandings.
There are several differences:
- Frequency of Payroll
- Processing of Salaried Employees
- Processing of Hourly Employees
Understanding the differences and the consequences allows entrepreneurs and small business owners to make the decision about what payroll setup best suits them and their workplace. The amount of small business taxes and payroll taxes will be essentially the same, however there may be a difference in payroll services and payroll fees.
Frequency of Payroll
In a bi-weekly payroll setup, employees are paid every two weeks on a specified day. That means, with 52 weeks in a year, employees will receive 26 checks. There will be two months every year when employees receive more than two paychecks from their workplace. Small business owners have to work with bookkeepers and accountants to keep monthly accounting reports accurate.
In a semi-monthly payroll setup, employees received two payroll checks each month, usually on designated days like the 15th and last day of the month. That means employees received 24 paychecks from work. It does not matter if there are 28, 29, 30 or 31 days in the month.
Processing of Salaried Employees
Salaried employees are easy to process in both scenarios. The difference being that the annual salary is divided into 26 segments in a bi-weekly payroll or into 24 segments in a semi-monthly payroll. The same goes for the sharing of benefits and health care expenses. Payroll taxes and deposits are calculated on the payroll amount until limits are reached and then the deductions and taxes are recalculated.
Processing of Hourly Employees
Since hourly employees are paid for the hours they work in their jobs over a given period, paying them on a bi-weekly basis means there must be a tracking mechanism in place. Small businesses usually establish a time record process that must be adhered to during an employee’s employment in the workplace. Payroll taxes are calculated based on the pay and deductions for benefits and health care deducted on a 26-pay period basis.
Payroll services like The Payroll Department will tell you that calculating payroll for hourly employees is more complicated in a semi-monthly payroll setup. Since there are a varying number of days in each month, a time card submission process of turning in time cards every Friday – or Tuesday – or whatever, will not work. There will be some paychecks in which employees will receive pay for 12 days and others, for 13 days.
Some employers pay workers an estimated amount every pay period and then make adjustments for actual hours and overtime on the following pay period. This creates adjustments on every paycheck every pay period including for payroll taxes. This practice is time-consuming and complicates the tax reporting and deposits, thereby increasing the likelihood of errors. Not only that, but if an employee quits, they may never reimburse any over payments.
The most common solution for leadership in workplaces with hourly employees is to set up a calendar of time card submissions. That, in addition to a lag time of at least a week for processing the payroll means employees are paid in arrears. That solves some of the adjustment issues and potential for errors, but it means new employees can go several weeks before they receive that first paycheck.
There are definite pros and cons of using each of the payroll systems, and the decision is up to each small business owner. If you want help to sort out which is best for your business, call Teresa Ray at The Payroll Department. For more than 25 years, she has been helping small businesses with payroll services and making decisions about payroll issues.
-Elaine of the Payroll Department Blog Team