If you’re a business owner setting up payroll, you might be wondering, “How often should I pay my employees?” Typically you have four options:
- Once a month
- Twice a month
- Every other week
- Every week
Twice a month and every two weeks are most common. Just about everyone has worked a job where he or she got paid every other week. But that’s not a good reason to stick with it for your own company.
If given the choice, you should always choose every week. Here’s why:
1. Your employees are happier
When you pay your employees every week, you’re showing them that you care about their cash flow in addition to your own. This improves employee morale, and happy employees are more productive employees.
2. Time sheets are more accurate
It’s a lot easier to fill out a time sheet for one week vs. two weeks or more. Paying your employees every week will force your employees to fill out their time sheets more frequently, meaning that their recorded hours will be more accurate. This is extra helpful if your business tracks labor hours against customer projects (job costing).
3. Cash flow is more predictable
When you pay your employees every week vs. every other week, you get to slice those payroll debits in half. Making smaller, more frequent payments makes cash flow more predictable. If incoming cash flows are uneven, this can be very helpful.
Personally, I prefer to get those payroll liabilities off my books as soon as possible. I never want to think I have more money in the bank than I really do.
4. Financial statements are more useful
When you pay your employees every two weeks, there are 26 pay days per year. This means that two times per year, you’ll have 3 pay periods in one month. For businesses with payrolls that make up a large percentage of their overall expenses, this distorts net income on a monthly basis. As a result, the monthly financial statements are less useful. To fix it, you could make adjusting entries in the accounting system, but few small business owners have the time for that.
To avoid this problem altogether, you could pay your employees twice a month, but with that schedule, filling out time sheets becomes a real pain (the number of days changes from one pay period to another).
If you pay out your employees every week, you’ll have 52 pay days per year. This gets you 8 months with 4 pay days and 4 months with 5 pay days. More frequent, smaller pay days spread out the variance between the months. This makes the monthly financial statements more useful without having to spend extra time doing adjusting entries.
5. It isn’t that much extra work
With modern payroll services such as Gusto, logging in to enter hours for your employees and contractors is a breeze. At my previous firm, Cloudsourced Accounting, I processed payroll for my employees in 6 minutes a week. Really!
A version of this post was originally published at www.blakeoliver.com.