Why it pays to think about how often you pay your small business's employees

By Reed Richardson

For many start-ups and even some established small businesses, just being able to pay the bills and generate a little extra profit is a big enough challenge. As a result, seemingly innocuous questions like when and how often to pay out that money in salary-to owners, partners, and employees-often doesn't get much thought. But it should, because a company with a poorly executed pay system can easily run into legal trouble as well as send frustrated workers heading for the exits.


Even if your company is small now, think big

"Payroll is all about setting expectations," explains Bryan Dear, a former CPA who owns The Payroll Department, Inc., a payroll processing company located in Durango, Colorado. "So why not set it up in the right way from the start, so you won't have go through a painful transition to something else later on?" To that end, Dear recommends settling on a payroll system that is both simple and routine, yet flexible enough to adapt and grow as your small business does. "We find that paying every two weeks seems to work well for most of our smaller business clients," notes Dear. And he's someone who follows his own advice-his own company's payroll system is biweekly as well.


Putting some forethought into your small business's pay periods can become particularly important if you ever anticipate having a mix of exempt and non-exempt employees working at your company. That's because many states have different pay rules regarding salaried versus hourly workers, especially when it comes to tracking and paying overtime. Also, many states have specific rules dictating the maximum "holdback" period, or how long a business can wait to pay its employees after the pay period has ended.


For entrepreneurs just starting out or if your small business still handles payroll internally, it would be worthwhile to check out the U.S. Chamber of Commerce's payroll guidelines[1] and state-by-state payroll toolkit[2] to get a sense of the pay period and holdback rules in your state. In New York, for example, the state mandates that hourly workers must be paid weekly, most other salaried employees at least semi-monthly, and salespeople no less than once a month. Illinois requires employers to pay at least biweekly or semimonthly and limits the holdback period to 13 days. Florida, though, leaves decisions about pay and holdback periods completely up to the business's discretion for all types of employees.


Pick a day or pick a number

Perhaps the most fundamental decision regarding your small business's pay periods involves whether or not to follow a weekly or monthly calendar. A weekly pay calendar means that your company's pay periods will always begin and end on the same days of the week and that payday will likewise always be on the same day of the week, usually five to seven days after the pay period ended. A typical biweekly pay schedule might begin on a Monday and end 14 days later on a Sunday, with the eventual payday for those two weeks of work falling on the Friday five days after that. These workweek-based pay periods offer the benefit of making paydays very predictable for both the employees and the small business owner. More importantly, if your small business also includes hourly workers, a workweek-based pay calendar makes it much easier to track hours in easy, repeatable amounts because your company's pay period will always align with the traditional workweek, unlike semimonthly or monthly pay periods, which can begin and end of any day of the week.


Monthly or semimonthly pay periods work fine for a staff of all salaried employees, but if you have to account for overtime a pay period that ends mid-week can make life difficult. And precisely because a pay period will occasionally end on a Thursday or Friday, Dear notes on his company blog[3] that businesses would be wise to stretch out their paydays a few extra days to account for federal holidays and the resulting three or four-day weekends. "If you do choose semimonthly," he writes, "consider a delay of seven days between the period end date and the check date to give your organization enough time to process your payroll."


Yet despite the somewhat limited appeal of a month-based pay schedule, it still has some advantage over a workweek-based system. For one, a semimonthly pay period means your company will never face a situation where payday comes a day or two before the 1st of the month, as can occasionally happen if you pay biweekly. For small companies with very volatile cash flow, having payroll, vendor bills, and overhead payments all going out around the same time can make for at least one or two close calls during the year.


Likewise, a small business using a month-based pay system will never encounter the unique problem facing some companies at the end of 2009-what to do when their weekly pay schedule falls on the yearly calendar in such a way as to create an extra-27th or 53rd-pay period. Thanks to the difficult economic times, many workweek-based companies might be tempted to simply skip this pay period, but, as one might imagine, such a decision needs to be accompanied by a careful explanation of why and how this will work or else employees could grow angry or feel cheated. Or, to avoid this dilemma, companies could pay the extra check as gesture of goodwill, even though it might tangle their 2009 finances a bit.


When does it make sense to outsource payroll?

Entrepreneurs often find themselves wearing a lot of different hats while running their small businesses and for companies just starting out it's not uncommon for the owner to also play the roles of bookkeeper and paymaster as well. But as a company grows, it can be increasingly difficult to carve out time to handle administrative tasks like totaling up employee hours and cutting checks. And though employees of small businesses tend to pitch in wherever they're needed and be more forgiving about mistakes, it only takes a few missed paydays to burn through whatever sense of willing sacrifice those workers bring to work each day. So, a small business owner would be wise to recognize-ahead of time-signs that they might be ready to handoff payroll to an outside firm.


"Within its first two or three years, a small business will usually get some kind of tax notice," Dear points out. And even if that letter from the IRS isn't an audit notification, he explains "That's the point when many of my small business clients have decided ‘I'm just not going to do this anymore.'"


Another common tipping point indirectly involves recruiting and hiring. If you find your company is having an increasingly difficult time attracting new talent because it lacks many of the health and retirement benefits found at larger businesses, this might be a subtle signal that your in-house payroll system is out-of-date or overmatched. While it's true that many do-it-yourself payroll software programs can handle more complicated paycheck deductions like health care premiums, cafeteria plans, vacation time, and 401(k)s, adding a simple thing like direct deposit for your employees can still prove difficult without outside help. But if you think that outside help could be your tax preparer or accountant, you might think again.


"In my experience, most CPAs don't want to deal with payroll," explains Dear, adding "and even if they do, they aren't able to do direct deposit." Fortunately, there is now a plethora of outsourcing options-from large banks and business service conglomerates to small payroll processing firms-that can quickly and easily accommodate your payroll needs for a reasonable fee. And come tax time, these outside payroll processors can really pay dividends, as they're more up to speed with the latest changes in tax law and make far fewer filing mistakes than business owners who go it alone. In the end, how and when you pay your employees is about more than just paychecks, Dear says. "It's also about eliminating one additional issue for you to worry about, so you can focus more on running your business."


# http://www.uschambersmallbusinessnation.com/toolkits/guide/P05_4111
# http://www.uschambersmallbusinessnation.com/toolkits/guide/P05_4109
# http://blog.payrolldept.biz/2009/04/13/picking-a-pay-period-and-check-date/

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