The employees of a business provide their services to the business in exchange for compensation. This compensation comes in the form of salaries, wages, overtime premiums, bonuses, holiday pays, sick pays, commissions, etc.
Businesses must manage and control these payments properly. Therefore, almost all businesses have a specific department dedicated to managing their employees. The department is known as the Human Resources (HR) department.
The HR department will handle all the employee-related tasks of a business such as advertising vacancies, interviewing candidates, hiring candidates, keeping personnel files, paying salaries, firing employees, and much more. While the other tasks of the HR department are equally as important, they are not as common as paying salaries and wages to employees. The function of paying employees is known as the payroll function.
The payroll function of a business is one of the most crucial functions of the HR department and the business as a whole. An efficient and organized payroll function can not only help a business reduce their costs but also help with motivating its employees.
The HR department of a business is responsible for making decisions regarding the payroll function of a business. The department makes these decisions in line with the overall view or strategy of the business. One such decision is regarding the frequency of the payments made to employees.
Frequency of Payroll
The frequency of payroll is a critical factor in the overall payroll function of the business. When deciding on the frequency of payments to employees, the HR department should choose a frequency that benefits both the business and its employees.
For example, if a business pays its employees every two months, it will be more beneficial for the business as it means the costs related to payroll function will decrease. On the other hand, this decision may not be as favorable for the employees that may demotivate them.
Commonly, most businesses pay their employees every month. However, some of these businesses have also adopted a more frequent approach to payrolls. These businesses pay their employees semimonthly or biweekly. These businesses believe that paying their employees more often can increase the motivation of employees which can also be beneficial for the business.
Businesses that operate a semimonthly payroll pay their employees twice every month. Businesses make these payments on predetermined dates. For example, a business may pay its employees on every 3rd and 18th date of the month.
With semimonthly payrolls, businesses have to prepare their payrolls 24 times in a year. Comparatively, businesses that operate a monthly payroll will prepare their payroll 12 times a year.
Often, businesses confuse semimonthly payrolls with biweekly payrolls. However, there are some subtle differences between both approaches. The main difference between the two is that businesses prepare semimonthly payrolls 24 times in a year while they prepare biweekly payrolls 26 times a year.
This is because businesses operating biweekly payrolls pay their employees every alternate week of the year. There are 52 weeks in a year which means that employees get paid 26 times, which is once every two weeks.
For example, in a semimonthly payroll, businesses will pay their employees first on the 3rd date of the month and then on the 18th date of the month. In comparison, in a biweekly payroll, businesses will pay their employees every Friday of alternate weeks.
For the calculation of the semimonthly salary of an employee, businesses must divide the employees’ monthly salary on 2. For example, if the monthly salary of an employee is $5,000, then their semimonthly salary will be $2,500 ($5,000 / 2).
Similarly, businesses can also calculate the semimonthly salary of an employee by dividing their annual salary on 24. For example, if the annual salary of an employee is $72,000, then their semimonthly salary will be $3,000 ($72,000 / 24).
For employees working on hourly rates, businesses can calculate their salaries according to their hours worked from the last time they got paid to the time of the payroll.
Advantages of Semimonthly payroll
There are a few advantages of operating a semimonthly payroll for businesses. The first advantage of a semimonthly payroll for businesses is employee motivation. Paying employees more frequently causes their motivation levels to raise. Businesses do not have to pay their employees anything extra to increase their motivation levels.
Semimonthly payrolls are also more consistent as compared to biweekly payrolls. This is mainly because the employee receives a fixed amount of salary on each payroll date. In a biweekly payroll, the employee will receive a different salary for two months of the year.
As discussed, this is because biweekly payrolls consider weeks rather than months. The consistency of semimonthly payrolls also makes them better for budgeting as compared to biweekly payrolls.
Similar to biweekly payrolls, semimonthly payrolls can also help the HR department of business reduce the chances of errors. This is because of the consistency in payments and their regular preparation. Furthermore, employees affected by these errors don’t have to wait until the end of the month to receive their compensation.
Disadvantages of Semimonthly payroll
The semimonthly payroll may also have some disadvantages. The major drawback is that due to the frequency of preparation of these payrolls, they are more costly. In a monthly payroll, businesses have to prepare the payroll 12 times in a year while in semimonthly payrolls, businesses prepare payroll 24 times. Theoretically, this can double the cost of payroll preparation for businesses.
The semimonthly payrolls can also be confusing for employees that work on hourly rates. This is because the calculation of hourly rate salaries and wages may also include overtime premiums. In these cases, businesses may have to switch to other payment frequencies for their hourly rate employees.
Some jurisdictions may also prohibit or interrupt the semimonthly payroll of a business. For example, in some countries, labor laws or employee unions require businesses to pay their employees on or before specific dates. This may complicate the semimonthly payroll system of the business.
Businesses need to pay their employees for their services. It is the responsibility of the HR department of a business to deal with employee-related tasks. The HR department must also decide the frequency of payments made to employees, for example, monthly, biweekly or semimonthly.
Businesses operating a semimonthly payroll pay their employees two times in a month. This means they pay their employees a total of 24 times within a year. Businesses can gain certain advantages due to operating a semimonthly payroll but may also have to face some drawbacks.