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:
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 16th 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.
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.