How Does Payroll Work When You get Paid Twice a Month?

Payroll Account

As an employee, the frequency of payroll directly impacts your budget and living conditions. Every company has a unique payroll structure. As a result, it’s essential to know your organization’s payroll cycle and how it works.

Most employers choose to pay their employees on a weekly, biweekly, semi-monthly, or monthly basis. Employees in the semi-monthly category receive their payment twice a month, usually on the 15th and on the last day of each month.

Unlike the bi-weekly payroll schedule, which has 26 payments in a year, a semi-monthly payroll schedule has just 24 pay periods. As you would expect, this affects the size of the employee’s paycheck. 

It can also lead to other factors such as calculating overtime, benefit deductions, and the likes.

What is a Payroll Schedule?

A payroll schedule is a document that shows both your pay period and your pay date. As the name implies, your pay period is the time frame you’ve worked for and expect payment. 

Your pay date, on the other hand, is the day you get paid for work done. Sometimes a time lag might occur between the pay period and pay date. This time lag is called “payment in arrears.” 

For example, if your pay period ends on a Tuesday, but the accountant pays out the check on a Thursday, a time lag just occurred. This delay occurs majorly with hourly employees because time is required to collect the number of hours worked and process payroll.

Types of Pay Schedule

There are four most common types of payroll schedules. They include;

Let’s consider them in a bit more detail.

Weekly: Here, payment is made every week and on a specific day of the week. It has the most pay periods with 52 payrolls in a year. However, because this schedule is computed every week, it is the most expensive to operate.

Bi-weekly: As the name implies, the company makes payment every two weeks, and It consists of 26 pay periods per annum. The bi-weekly pay schedule is the most widely adopted payroll schedule.

Semi-monthly: Employees receive their wages two times in a month on two specific dates. With semi-monthly employees, the payroll officer works on the payroll 24 times in a year.

Monthly: Here, employers pay their staff salaries every month, and the pay period is 12 times in a year.

How to Calculate Semi-Monthly Payroll?

We can calculate a semi-monthly payroll in several ways and from several perspectives. You can determine it based on your annual salary, your bi-weekly salary, and your daily rate.

How to determine semi-monthly pay from your annual salary

A semi-monthly payroll is processed twenty-four times a year. So to calculate the gross amount of your semi-monthly pay, divide your annual salary by 24. 

It doesn’t get any more complicated than this. For example, if you earn a gross yearly income of $144,000, your semi-monthly pay will be $6000.

How to calculate your semi-monthly pay from your Bi-weekly salary

When transitioning from a biweekly pay schedule to a semi-monthly pay schedule, your gross income per check will increase. To calculate what the exact amount will be, divide your annual salary by 24. 

You can also calculate it following this method:

Multiply your biweekly pay by 26 to get your yearly income. You’ll then divide your annual salary by 24 to get your semi-monthly payment.

How to determine your daily rate as a semi-monthly employee

Determining the daily rate for a semi-monthly employee can get a little complicated. Employees do not always work from the beginning of the month to the end of the month. 

Also, a company might bill an employee’s time to an external client or an internal account. These reasons make it all the more important to know your daily rate as an employee.

Here’s how to go about it;

Divide your gross semi-monthly pay for a pay period by the total number of days within that period. 

For example, a semi-monthly gross payment of $4,000 will equate to a daily rate of $266.67 within a 15 day pay period.

How to Treat Benefit Deductions

Most voluntary employee deductions are calculated monthly. Some of these deductions include health care coverage, life insurance premiums, payment for work-related items, and the likes. 

The migration from a biweekly to a semi-monthly will require a reassessment of when the payroll officer makes these deductions.

It might require dividing the annual premium by 24, so the respective deductions will align with the pay periods.

How to set up a payroll account? (Step by step)

Payroll Account

Introduction

It is nothing less than a milestone if you are at the stage of setting up a payroll account. You started a small business which became successful and now you are ready to employ a few people. Making a job opportunity for someone else is a big achievement but if you are doing it for the first time, you might be feeling nervous.

There are some crucial elements which need to be taken into consideration so that you can avoid fines and Internal Revenue Service penalties. This article explains in easy language how you can create your very own payroll account so that your small business can grow.

Definition of a payroll account

A payroll account is strictly used for a business and is kept separate. Rather than lumping all your expenses into your personal account, you can pay for workers with your payroll account. The cash going into the payroll account will only be utilized for payroll.

For instance, you cannot compose checks to vendors from the payroll account because you can only do it via the main business account.

Most companies which utilize the payroll account print out the payroll summary report after each pay period comes to an end. The things mentioned in this report are deductions, net wages, gross wages of employees and taxes. Your business will remain secure, consistent and organized by having a payroll account.

Steps to create a payroll account

The following steps are the best tricks to meet all legal requirements in the payroll while saving time.

1. Get an Employer Identification Number (EIN)

Whether you are taking in one employee or 50, it is important to take the EIN from the IRS. This identification number reports documents and taxes directly to the IRS. The EIN also comes in handy when you have to submit information regarding employees to the big state agencies.

The application for EIN can be made online or you can talk to the IRS as well. EIN is also called Form SS-4 and Employer Tax ID.

2. Give attention to the paperwork of employees

The employee paperwork contains an important document which needs to be filled. This document is called Federal Income Tax Withholding Form W-4. When your employees submit this form to you, you can determine the accurate federal income tax from their checks.

You need to be meticulous and fill out all required forms accurately so that there are no mistakes. Before submitting the payroll tax, line up all lines and columns. Afterwards, check thrice to see if all lines relates to the payroll reports and financial statement. You can not afford any mistake because it will cause a loss of money and time.

3. Difference between Employee and Independent Contractor

As an employer, you need to be conscious about the difference between the two even before you add up the payroll numbers. This is a tricky step because in legal terminology, the line often gets blurred. Also know who are the part-time and full-time employees.

Resultantly, this affects how you should pay the Social Security and Medicare taxes, withhold income tax, and give the unemployment taxes. If you can grasp the difference between the independent contractor and employee, you can carry out all these legal tasks efficiently.

Knowing these differences will let you understand how much you owe each employee. If you are unable to understand the difference on your own, you can take help from the IRS by filling out the Form SS-8 first.

There can be penalties and pay interests in the long run which can cause havoc on your business so be mindful of this aspect and classify employees accordingly.

4. Local / State IDs

You need to check whether there’s a need for obtaining ID numbers in order to process and pay taxes because a few local governments and states require this form. You can talk to your state official or local government if there is a need for the additional tax ID number.

5. Document all Employee Compensation Terms

While setting up the payroll, there are some things you should ponder upon. This includes tracking the employee hours, how to pay overtime if you have given the option and handling paid time off which is not required legally but usually small businesses offer it.

These business variables are necessary to determine before you hire. Moreover, the business deductibles including retirement contribution and health plan premium has to be cut from the employee check in order to pay it

to the respective organizations. These compensation details are necessary to decide so that no disagreements arise in the future.

6. Set a Pay Period

Your employees will look forward to this day but how should you go about it? Even if you have already manually processed the pay period by deciding if it will be monthly or bi-monthly, know that this aspect is sometimes decided by the state law.

The state law mostly vouches for the bi-monthly paychecks. Moreover, the IRS demands the employer to withhold the income tax according to the time period whether the employee has worked full period or not. There are other factors to keep in mind before deciding on the pay period.

For example, when is the pay period best suitable for you? Most of the small business owners have the payroll as the biggest expense and you need to check if the payroll will bring up any cash flow issues. So pick a schedule which you are most comfortable with as an employer.

But also keep in mind the needs of your employees. Some of them might be facing financial instability if you pay monthly. Therefore, talk directly to your employee team and see what their preferences are. Remember that payroll is just for your team as they offer labor on credit.

7. Choose the method of Payroll System

Before creating the account, it is best suited if you do your research so that you can realize the number of options you have. The Payroll administration is very detail-oriented and it follows all matters accurately in a professional manner so you don’t want to seem ignorant in these matters. Usually, the choices available for managing the payroll account are outsourced or in-house.

But know that whatever choice you opt for, being the employer, the responsibility of paying, and reporting the payroll taxes fall on your shoulders. You can ask the business owners in your vicinity for tips or advice as well. It is advisable to read the reviews of successful entrepreneurs and what they have to say regarding each option.

8. Keep the Records accurate

There are some records which you should keep safe as ordered by some of the state and federal laws. For instance, the W-4 form which showcases the status of tax withholding should be kept safe for the current employees. After an employee is fired, these specific forms including the W-4 should be kept in file for 3 years.

Other such documents include copies of filed tax forms, all tax deposit amounts and dates, W-2s, etc.

9. Note down your Employee team information

Another responsibility which you need to bear as an employer is to keep track of the specific details of the employees so that you can file reports and submit taxes properly.

The details which you need to look out for are: Full name, the dates for the starting of employment and termination both, date of birth, current residence address, tax filing number or the Social Security number, Form I-9 so that you can determine the eligibility to hire the person and W-4 for employees whereas W-9 for the independent contractors.

10. How to run payroll

After collecting all the documents and information, the time for running payroll arrives. According to the payroll system that you chose, you will either have to submit information to the accountant or enter it on your own.

11. Report the Payroll taxes

On annual or quarterly time periods, you need to provide some of the payroll tax reports to the suitable authorities.

In order to know the process of doing this, you can visit the Employer’s Tax Guide by IRS which reveals clear information and instructions on the requirements for filling the federal taxes. Or you can go to the state tax agency to know about the tax filing specifications.

Conclusion

Be a disciplined employer by fulfilling all regulatory and legal responsibilities through the payroll account. You can save a big chunk of your time and efforts as well. If you want to be more effective with your payroll, then follow some practices which successful owners rely on.

For example, process the payroll punctually each time. If you process it daily, not only will your employee team be satisfied but there will be no chance of underpaying or overpaying.

Payroll account guarantees consistency because you only have to deposit the money which is sufficient for covering payroll. One can easily know about the payroll expenses which means you do not have to be anxious about any overdraft.

The Difference between Semimonthly and Biweekly Payroll

Payroll Account

Businesses hire the best of the employees as they know human capital is the most important asset for any company. For some businesses, the payroll expense can be the highest incurring expense monthly. Employee salaries and labor wages are decided upon employment contract terms signing.

Therefore, the total gross income of the employees is predefined. It’s a common phenomenon with large businesses to have a large number of hourly based workers and a small group of high-pay fixed salary employees.

Payroll accountants need to calculate various components of employee salaries such as hours worked, advance and deductions, tax deductions, total payroll budget, etc. So the take-home or net pay will differ for these categories of employees.

Employers can choose payroll frequency differently. There are four types of payroll frequencies that an employer can choose from:

1. Monthly
2. Semimonthly
3. Biweekly
4. Weekly

Two terms semimonthly and biweekly are often used interchangeably and considered the same. The minor difference between the two terms can be defined as:

“Semimonthly means occurring twice a month, and biweekly means occurring after two weeks”.

Payroll data and frequency selection can change the payment terms for the employer and employee. A payroll date is a date when employees receive a salary through check or direct transfer to their accounts.

An employer can choose any payroll frequency but seasonal holidays and business conditions demand to choose the right option that suits both business and the employees.

We’ll list key similarities and differences between semimonthly and biweekly payroll frequencies.

Pay Cycle and Payday:

Semimonthly: with semimonthly payroll, employees get paid twice a month that implies 24 paychecks per year. These checks can be processed as the first check on the 15th or 16^th of each month and on the last day of the month. With this method the payday may fall on a working day or on a holiday.

Biweekly: with this frequency employees get paid after every two weeks that implies 26 paychecks per year as there are 52 weeks in a year. The payday normally is set at the last working day of the week i.e. Friday. The payday with this method is usually the last working day of the week unless that day happens on a national holiday.

With both options, the payday will be different. The numbers of paychecks for the year are also different.

Paycheck Amounts:

Let’s suppose an employee makes $ 48,000 per year. The amount received in total for the year will be the same, but it will be different for each payment.

With a semimonthly payroll frequency, the employee will receive $ 2,000 in each paycheck. With a biweekly payroll, the employee will receive $ 1846.15 per paycheck. Although the total salary received in a year remains the same the paycheck amount differs.

So if the total yearly salary remains the same, why does it need to be figured out which payroll frequency to choose?

There are many repercussions for both employees and the employer in short-term or on monthly choices between these choices. We’ll discuss a few of these key points.

Implications for Salaried Employees:

Salaried persons sign a contract for predefined terms and conditions for usually a longer period. So their monthly or annual payroll amount does not get affected.

The only difference arises with the calculation of overtime hours and if there are any advance salary deductions. As there will be two months with three biweekly payments in a year, the net income for the salaried person will differ in those months.

Implications for Hourly Based Employees:

Biweekly payroll frequency is easier to manage for hourly based employees. As the calculation, in this case, is straightforward with 10 working days and 40 working hours.

With a semimonthly method, the calculation is done for 15 or 16 days alternately as the month day’s change. Also, the payday changes that may fall on a working day or on a holiday.

The Choice for the Employer:

As an employer deciding between payroll frequencies will usually depend on the employees’ contracts nature.

Hourly based employees usually prefer to be paid on a weekly or biweekly basis, and fixed salaried employees prefer semimonthly and monthly paychecks. Employers should consider the following key points before deciding on the payroll frequency.

• Compliance With Law:

Local and national labor laws will dictate the terms of payroll frequency. Certain regulations call for weekly payroll payments to workers. However, all of these regulations require employers to follow a consistent approach throughout the year.

• Employee Categories:

The number of employees in each category such as hourly based and fixed pay will also play a crucial role in the decision. Hourly based employees usually prefer shorter paycheck cycles. The employer may choose different paycheck cycles for both categories provided the practice remains consistent.

• Payroll Costs and Budgets:

Using payroll processing services come with fees and charges. Many online payroll processing service providers and banks charge for payroll processing on a transaction basis.

With biweekly frequency, the payroll checks are paid thrice for two months in a year. The management should carefully arrange the budgets for those months.

• Consistency Factor For Business:

Both payroll frequencies get consistent with time. However, the semimonthly payroll falls on a particular date that can be a holiday. Biweekly payments are processed on the last day of the week, which makes for the payroll processing easier.

With both payroll frequency choices eventually, the total yearly payroll amounts will be the same, the short-term implications differ, though.

Employers, fixed and hourly salaried employees all have their considerations for both these choices. So it’s wise to elaborate on the pros and cons of both choices against each of the participants separately.

Tax Consideration with Payroll Frequency:

Tax liability for the employees is calculated for the total yearly income. With predefined employment contracts, the total yearly salary is supposed to remain the same. Hence the total tax liability will remain the same with any payroll frequency.

However, for any additional one-time bonuses, the total tax liability can be adjusted at the year-end. Similarly, any other deductions for social security or retirement fund contributions are straightforward calculations.

The only difference will be the effects of deductions in the short-term as higher payroll frequency means a lower paycheck each time.

Pros and Cons of Semimonthly Payroll Frequency:

Semimonthly payroll frequency is usually preferred by fixed salary employees. Its benefits include:

• Uniform paycheck payments over the year i.e. 24 payroll payments in a year and 2 per month.
• Low processing costs over the year
• Budgeting and planning is easy for the employer
• It’s easier to manage for both employers and employee if they have payroll deductions such as advance pay, health allowance, etc
• Employees receive larger paychecks in comparison to biweekly payroll

Some limitations of using the semimonthly payroll frequency:

• This payroll frequency is not preferred by hourly based salary employees
• Overtime calculations with semimonthly payroll frequency get complex and complicated
• As the payday changes with weekdays, this frequency is less consistent
• Hourly based salary employees such as laborers form the large portion of the total payroll processing, employers and accountants would prefer an easier processing

Similarly, the biweekly payroll processing frequency has its pros and cons.

Pros and Cons of Biweekly Payroll Frequency:

• Biweekly payroll processing is a consistent approach as each payday usually set at the last working day of the week
• Even workweeks mean simpler overtime calculations
• Hourly based salaried employees prefer paychecks on a biweekly or weekly basis on a consistent last working day
• Additional or part-time hiring is easy with weekly or biweekly payroll processing
• Employers need smaller cash budgets as biweekly checks are smaller as compared to semimonthly

Some limitations of the biweekly payroll frequency:

• Employees receive fewer payroll amounts as the total yearly pay gets divided with a fractionally larger figure
• The employer needs to plan for extra frequency for two months of the year
• Employees may not like it if they have a deduction in the payroll check as it already offers less amount than semimonthly or monthly payroll check
• If there is a large number of employees on hourly based salary, biweekly calculations for salaries get difficult and time-consuming

The employer can choose between any payroll frequency depending on the employees’ strength and job contracts. The regulatory compliance demands for a consistent approach throughout the year and reports any changes in the policy to the regulatory authorities and employees.

In a large organizations, the management may decide to opt for different payroll frequencies for fixed-pay management staff and biweekly frequency for hourly-based employees. Employers need to plan carefully for budgeting and cash arrangements.

Hourly based employees with overtime hours prefer the weekly or biweekly payroll and fixed-salary employees prefer monthly or semimonthly payroll frequencies.