What is a Monthly Payroll? + Advantages & Disadvantages

A monthly payroll entails paying employees once a month, either at the beginning or end of the month. Like other types of payroll, a monthly pay cycle suits specific businesses and work setups.

It also comes with specific pros and cons, making it a must to understand how paying employees monthly can work or not for your organization.

We’ll explore the definition, advantages, and possible downsides of following a monthly pay schedule. So, without further ado, let’s get started!

Key Takeaways

• A monthly payroll schedule entails processing payroll and compensating employees once a month. It also yields 12 paychecks in a year.
• The monthly payroll model is ideal for startups, companies employing salaried workers, and freelancers.
• Some advantages of a monthly pay period include a simplified payroll process, reduced workload and operational costs, and higher accumulated salary for employees.
• The drawbacks of paying employees once a month include a complicated process for calculating overtime pay and restrictions from certain states. Low-income employees may also need help stretching their monthly budget.

What is the Monthly Payroll?

A monthly payroll is a pay period that involves compensating employees once a month. Companies that follow the monthly pay period typically pay their staff on the last Friday (or last day) of the month.

Some employers pay their employees within the first week of the month. Monthly pay periods yield 12 pay stubs or paychecks annually and entail 172 monthly work hours.

Due to its simplicity and consistency, a monthly pay period is also known as the least expensive payroll frequency to implement. Interestingly, employees prefer getting paid once a month the least because it means stretching their budget for longer periods.

Some states require employers to release at least two paychecks monthly, making a monthly pay period less ideal.

Small businesses and freelancers would benefit best from using a monthly pay cycle.

Other Types of Payroll

There are seven other types of payroll you should know about, and they are:

Daily Payroll

A daily payroll is the most exhaustive pay frequency because it requires generating paychecks every day. Daily pay cycles suit contractors such as electricians, plumbers, and carpenters.

Weekly Payroll

Employers release employee paychecks at the end of each week in a weekly payroll. Hourly wage earners often get paid weekly, which means they receive 52 pay stubs annually.

Biweekly Payroll

A biweekly payroll entails paying employees twice a month or 26 times a year. Most businesses in the US compensate workers using the biweekly model due to its cost-effectiveness and flexibility to fit both startups and companies with a larger workforce.

Semimonthly Payroll

Just like on a biweekly payroll, employees also receive their paychecks twice a month. If workers get compensated every other Friday in a biweekly pay cycle, a semimonthly payroll pays them every 1st and 15th or every 15th and the last day of the month.

Off-Cycle Payroll

An off-cycle payroll applies when processing one-time bonuses such as referral and holiday bonuses, performance-based incentives, and rewards resulting from specific company milestones.

Retroactive Payroll

Businesses use a retroactive pay period to amend specific components of an employee’s compensation in a specific pay period, which does not reflect in their paychecks. For instance, their overtime hours were not included in their latest salary.

Final Payroll

The final payroll is reserved to prepare the severance pay or last compensation for an employee leaving the company. Severance pay usually includes the employee’s unpaid wages, commissions or incentives, and unused time off.

Which Companies Are Best Suitable for Monthly Payroll?

Small companies hiring mostly salaried personnel will also find it better to compensate employees once a month. The workload that comes with this payroll frequency is simpler and easier to incorporate.

At the same time, a smaller workforce makes it easier for the payroll department to calculate all accumulated wages, commissions, and salary adjustments within a month.

In contrast, non-exempt or hourly wage earners typically have to be paid weekly, especially since they earn significantly less than salaried employees. As such, paying them once a month would be better for their budget, especially if they are only paid to fulfill short-term tasks.

Moreover, if a company hiring both salaried and hourly workers uses a monthly pay period to pay both types of employees, it will lead to a complicated payroll process. After all, hourly wage earners qualify for overtime pay, while salaried workers do not.

HR and payroll personnel will have difficulty accounting for and updating each worker's or staff member's PTO and overtime compensation.

On the other hand, freelancers or independent contractors hired to do project-based work may prefer getting paid monthly since the payout could be higher.

4 Advantages of Monthly Payroll

To help you deduce whether a monthly payroll is a good fit for your business or not, here are some of its notable advantages:

#1. Easier to Process

Your payroll personnel will only have to process a monthly payroll once a month, giving them more time to prepare and verify each employee’s completed hours, tax, and pay information.

There is also little room for error because companies can avoid dealing with multiple monthly pay cycles.

#2. Reduced Workload

Preparing employee compensation once a month means a more manageable workload for your HR and payroll departments.

Upon completing the payroll process, your staff has more than enough time to focus on other essential aspects of regulating your company’s finances.

#3. Suits Small Businesses

A standard payroll process can cost up to $100 per month. Note that this does not yet include any additional fees associated with using bookkeeping software or hiring extra staff to handle your payroll.

Imagine having to pay twice the amount for every completed payroll cycle every month. If you own a startup or a small business, the costs could take up a considerable percentage of your regular expenses and budget.

However, a monthly pay period can reduce payroll costs while also ensuring that all your employees are properly compensated.

#4. Higher Accumulated Salary

In a monthly pay frequency, salaried employees receive their regular income in full. As such, waiting a whole month to receive their hard-earned money becomes worth it since they receive a higher return.

Not to mention, employees’ accumulated monthly pay potentially doubles if they are required to work during certain holidays or if they qualify for specific bonuses and commissions from the company.

4 Disadvantages of Monthly Payroll

Like any other type of payroll, a monthly pay cycle also has specific disadvantages that, when overlooked, could lead to discrepancies in your employees’ paychecks and liabilities on your part.

The four biggest detriments that a monthly pay cycle could bring to your business include:

#1. Financial Strain

Budgeting salaries for a month can be financially straining for employees who earn just enough every pay period. It is also worth mentioning that employees have different financial and household situations.

Some have dependents, while others have additional expenses such as court-ordered payments and existing loans to account for in addition to their basic necessities. That said, some employees may feel compelled to take on freelance jobs to earn extra income.

New recruits may also have to wait longer to receive their first pay.

#2. Complex Payroll Process for Overtime Pay

To calculate overtime pay, multiply the worker’s regular pay rate by 1.5. Next, multiply the resulting value by the employee’s total overtime hours rendered in a week.

The formula described above may seem simple at first. Still, it gradually becomes even more complex if companies must calculate the total overtime hours of two or more employees in a month.

Without payroll processing software and tools, inconsistencies in calculating overtime hours rendered on specific weeks are possible.

Employees may find that their overtime pay was not reflected in their paychecks, leading to additional work for the payroll department in the next pay period.

#3. Not Accepted in Some States

Only 23 out of all 50 states in the US allow employers to use a monthly payroll structure to compensate their employees. These 23 states are as follows:

• Alaska
• California
• Colorado
• Delawar
• Hawaii
• Idaho
• Illinois
• Iowa
• Kansas
• Michigan
• Minnesota
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• North Dakota
• Oregon
• South Dakota
• Texas
• Utah
• Virginia
• Washington
• Wisconsin

Employers must also check for additional policies in their state that may affect their payroll management process if they choose to pay their staff only once a month.

#4. Reduced Retention Rates

Not all employees favor receiving compensation once a month or only 12 paychecks in a year. A greater percentage of US workers still prefer getting paid more frequently.

While some may have the option of taking freelance work, others may find it more practical to look for other full-time work opportunities that pay employees at least twice a month.

After all, getting paid twice a month is ideal for employees who only make an average amount because it allows them more leeway to budget and adjust their living expenses.

Employees in managerial and executive positions may be the only ones who find a monthly payroll accommodating to their regular expenditures.

When Companies Should Avoid Monthly Payroll

To help you decide whether to push through with paying employees once a month, listed below are a couple more situations wherein the use of a monthly payroll cycle may not be the ideal choice:

Hiring Non-Exempt Workers

Companies should avoid implementing a monthly payroll model if they hire non-exempt employees. A weekly or bi-weekly pay cycle is more suitable for hourly wage earners.

This method makes it easier for employers to keep track of their workers’ weekly hours, and employees can regulate their living wages more efficiently.

Expanding Their Current Workforce

Employers with a steadily growing workforce must consider a pay period that divides the workload for their HR and payroll personnel. A semi-monthly payroll may be a good fit since it allows room to monitor and regulate employees’ salaries and pay adjustments.

Conflicting State Payroll Regulations

If a business is based in a state that does not allow monthly payroll, it must comply and switch to the pay periods permitted by the regulations governing its area.

Otherwise, they may face severe penalties or be forced to cease operations for not adhering to the state’s paycheck requirements.

How to Get Started with Monthly Payroll

If you find that a monthly payroll suits your business structure and budget the best, then here are a couple of steps to help you get started with managing your payroll:

#1. Set up a Payroll System

Setting up a payroll system entails following federal and state payroll regulations and creating clear guidelines to oversee the payroll process.

If you haven’t already done so, apply for an Employer Identification Number. It will be handy when filing payroll and income taxes.

You must also decide whether to use payroll software or online tools such as a pay stub generator or a template for employee tax forms. Using a combination of both online tools and payroll software is a cost-effective way to cut costs and maximize your resources.

#2. Differentiate Between Salaried and Hourly Employees

Next, classify your employees based on whether they are paid per hour or compensated at a fixed rate.

If your state's payroll regulations allow you to use a monthly payroll model, ensure that your payroll system accommodates your non-exempt employees’ specific demands.

#3. Calculate & Pay Salaries

Once you’ve finalized your payroll system, calculate your employees’ monthly salaries, withholding tax amounts, and deductions accurately.

Remember to verify your payroll calculations and documentation before finalizing everything and depositing salaries into your employees’ accounts.

Final Thoughts

A monthly payroll period has its fair share of advantages and drawbacks. As such, you must always uphold your employees’ needs and consider your business structure to confirm whether a monthly pay cycle benefits your operations.

You can also explore other monthly payroll samples used by established companies as a reference. Better yet, check out our other payroll articles for more guidance on how to run and manage your payroll more effectively.

Monthly Payroll FAQ

#1. What is payroll frequency?

Payroll frequency is the consistency with which employers disburse employee salaries. Employers can pay their staff weekly, biweekly, bimonthly, or monthly, depending on the size of their company.

#2. Can I change pay periods?

Yes, you can change your pay period. However, you must also be mindful of the steps you need to take to implement the changes in your payroll process.

These steps include reviewing and updating specific labor or payday regulations you have to follow and having your payroll team update your payroll system. You must also take note of the new payroll deadlines that apply to your new pay period.

Finally, inform your employees of the changes and explain how the new pay period will affect their pay frequency and salaries.

#3. How does monthly pay work when you start a new job?

If you start a new job that pays employees monthly, you will only be paid a prorated salary. The prorated salary is based on the number of work hours you have rendered within the pay cycle covered by your start date.

In other words, it is a percentage of your full-time pay. For example, if you started working in the middle of the month and were only able to complete 25 out of the average 34.3 monthly working hours, then you would be compensated for 25 hours' worth of work.