Payroll Cycle: Definition, Types & How to Choose One

Payroll cycle is the defining factor that prompts a stable flow of steps in accounting for all employee wages, taxes, and benefits. It’s akin to a roadmap you follow so you don’t miss anything in your accruals and expenses.

Some might argue that a payroll cycle flowchart does not leave that much of an impact on your HR and accounting processes. In reality, businesses of all sizes would benefit greatly from a solid structure to tie everything together.

This article will give you an in-depth look into what a payroll cycle is all about and why it is paramount to fulfilling your payroll responsibilities more efficiently.

So, let’s jump straight into the action!

What is a Payroll Cycle?

A payroll cycle denotes the period or length of time at which a pay period occurs. It’s time between payrolls and serves as a guide for when employee salaries are to be prepared and created.

A regular payroll cycle could follow different timelines, such as daily, weekly, bi-weekly, semi-monthly, or monthly. There are also other payroll cycle types like retroactive, off-cycle, and final payroll.

The Importance of Payroll Cycles to HR Leaders

Whether you’re a CEO, accountant, or HR manager, understanding the importance and the different types of payroll cycle effectively takes a huge load off of your plate.

Think about it, if you hire 5, 10, 20, or more than 50 employees, you also need to adopt a more elaborate process to ensure they are all properly compensated. When you factor in all other expenses and liabilities in your operations, missing payments and deadlines is not an option.

At first glance, a simple reference in the form of a payroll cycle may not seem like much. However, payroll errors are not to be taken lightly. Mistakes committed in payroll could possibly cost billions of dollars.

In 2022, the IRS reported over 5 million penalties for payroll tax errors which amounted to over $13.7 billion. Other common payroll errors observed by the IRS include inaccurate record-keeping, missing pay, miscalculated employee work hours, and failing to provide employees with their W-2 forms.

These are all errors that could be prevented if employers had a strict payroll schedule to adhere to in the first place.

Types of Payroll Cycle

The frequency at which you need to prepare employees’ salaries depends on when you calculate the payroll cycle.

It is essential to know that the variations of payroll cycles are subdivided into two major categories: normal and irregular pay cycles.

Normal pay cycles are aligned with the days and weeks when work was completed by employees. It is continuous and adheres to applicable federal and state regulations for tax adjustments and employee benefits.

Irregular pay cycles pertain to either one-time payments or adjustments done to wages. For instance, the pay is not part of the regular pay cycle, or it is set to be released once only.

#1. Daily Payroll Cycle

Daily payroll cycle meanspaying employees, well, daily. It entails calculating employee salaries and tax withholdings accrued in 24 hours.

Benefits

This schedule is ideal for carpenters, electricians, plumbers, and construction workers. It is also a great option if you are experiencing difficulties hiring workers to fill temporary job positions.

Another scenario where a daily pay period would be appropriate is when employing additional personnel to handle a specific task only or work on short-term arrangements.

Calculating holiday or weekend pay is not necessary with this type of payroll cycle. Workers can access the wages that they’ve worked hard for much earlier.

Disadvantages

Daily payrolls also mean calculating tax withholdings and making adjustments for garnishments in 24 hours. Such a feat is a lot more complicated than it seems.

Managing up to 365 pay cycles will be costly without the help of payroll software to streamline the process.

#2. Weekly Payroll Cycle

A weekly payroll cycle means employees are paid at the end of each week, or 52 times a year, more precisely.

Benefits

Paying employees weekly is a top choice for companies with 50 employees or less. It is easy to set up reminders and notifications for processing payments because it takes place on the same day each week.

In case you need to calculate overtime pay or pay your workers on an hourly basis,the weekly cycle effectively standardizes preparations for the succeeding payrolls.

Disadvantages

The disadvantage to a weekly payroll cycle is the added costs needed to keep all processes well-regulated. At the same time, accounting for employee benefits and accrued payroll is also more rigorous since you must ensure you continuously abide by the regulations for proper tax withholdings.

#3. Bi-Weekly Payroll Cycle

This type of pay cycle follows a setup wherein employees are paid every other week. That’s twice a month, or 26 pay periods each year.

Benefits

The bi-weekly payroll cycle is quite common and popular in the US and in companies with a larger number of employees. Most employees prefer a bi-weekly pay schedulebecause it is easier to keep track of the next time they receive their salaries.

Some industries where bi-weekly payments are suitable include healthcare, hospitality services, education, sports, and entertainment.

The accounting process for overtime pay and holiday pay is more straightforward, considering that the cycle consistently follows a chronological work week.

Disadvantages

Contrastingly,a bi-weekly payroll cycle creates higher expectations for ensuring all salaries and accruals are calculated with more precision.

#4. Semi-Monthly Payroll Cycle

In a semi-monthly pay cycle, companies pay employees twice a month, which is equivalent to 24 payouts a year. This particular cycle is often confused with a bi-weekly payroll.

How does a semi-monthly pay cycle differ from a bi-weekly one? A semi-monthly payroll cycle follows specific dates in a month for when salaries are released to the employees.

These dates can either be on the 1st and 15th or the 15th and 30th/31st of every month. Meanwhile, a bi-weekly cycle follows fixed days in a given week. For example, salaries are released every Friday or Saturday.

Benefits

Most companies with a large workforce use the semi-monthly payroll cycle because it provides ample time to generate funds to meet both pay schedules each month. Also, it enables large businesses to establish and retain a consistent flow of cash.

Disadvantages

Given that a semi-monthly cycle carries out payrolls twice a month, it also entails calculating tax withholdings and salaries for an increased number of days. The workload will double, so there must be efficient and reliable accounting practices in place.

There might also be challenges in terms of complying with FLSA because pay schedules in semi-monthly cycles tend to clash with the work week. The specified dates when salaries are sent to employees do not always fall on a weekday.

#5. Monthly Payroll Cycle

Employees are paid once a month in a monthly payroll cycle, or 12 times a year. In this cycle, payouts typically comprise a higher amount since there are more work days accumulated in calculating the total earnings of each staff member.

Benefits

It is suitable for small businesses because, despite calculating for more work days and possibly higher accruals, there are fewer employee records to work on.

That said, accounting for payroll accruals and allocating for the company’s expenses is simpler.

Disadvantages

Unfortunately, non-exempt employees may not benefit from a monthly payout. It all depends on the state regulations. Some states do prohibit work setups with non-exempt employees, while other states require employers to compensate hourly wage employees weekly.

Other Types of Payroll Cycles

Besides the usual payroll cycles like bi-weekly and monthly, there are also other types of payroll cycles, which we’ll talk about in the following section!

Retroactive Payroll

A retroactive payroll is implemented whenever there are missed salaries from the previous pay period. There are various reasons why a retroactive payroll is carried out.

The employee may have worked overtime or received a salary increase within the pay period, but it was not reflected in their paycheck. Such discrepancies must be adjusted immediately to ensure all accrued salaries and payments are properly accounted for.

It is best to limit the need to use retroactive payroll cycles to avoid complications in the company’s financial reports and accounting processes.

Off-Cycle Payroll

Off-cycle payrolls cover disbursed payments to employees that do not follow the regular payroll within the organization. These are typically done when employees are granted one-time bonuses.

Holiday, referral, annual,and milestone or performance-related bonusesare examples of one-time bonuses.

Off-cycle payouts are also applicable when there are expense claims that need reimbursement.

Final Payroll

The final payroll is done when an employee leaves the company. All accumulated wages, unused paid leaves or paid time off, commissions, and allowances are calculated and disbursed to the employee as their last compensation from the company.

Employers are required to follow a specific and adequate time period to process all payments owed to the employee. Each state has different regulations on the prescribed timeframe to process final payouts.

Most companies require a minimum of two weeks to process an employee’s severance pay. In some instances, companies require the resigning employee to complete a clearance form before their last salaries are released.

They may also ask the employee to return office equipment issued to them, such as a laptop or a company phone, or surrender their company ID.

Steps in Payroll Cycle

Now, let’s talk about the specific steps you need to follow to successfully implement a systematic payroll cycle.

#1. Employee Information Update

Your employee information must always be up-to-date. This way, you withhold the correct taxes, use the correct rates as a reference in calculating their salaries or wages, deduct the correct amount for health insurance premiums, and include any PTO, increase, or bonus accordingly.

Employee information is also where you will see the status of their employment. Are they tenured staff or newly hired personnel? Are they entitled to an annual or performance-based increase?

A consistently updated employee database is key to implementing a smooth-flowing and error-free pay cycle.

#2. Hours Worked Calculation

Calculating the hours worked by each employee determines how much they have earned in a given pay period. For instance, an employee is expected to complete 40 work hours each week.

However, they filed for a two-day sick leave during the week and thus were only able to complete 24 hours. This will factor in when calculating the amount that will reflect on the employee’s paycheck.

Payroll cycle accounting for hourly wages applies to both non-exempt and salaried employees.

Whether you calculate hours worked manually or by using automated timekeeping, it is crucial to verify that all accumulated hours for each employee are correct at all times.

#3. Calculation of Deductions

Next, you have to factor in the necessary deductions on your employee’s paycheck. Deductions include federal and state tax withholdings and insurance premiums.

Deductions take up an integral part of an employer’s responsibilities. One minor mistake could potentially be detrimental to your business and your staff.

Check with your local tax authorities for any specific regulations on tax deductions. Consult with your staff when verifying their files and documentsto ensure there are no discrepancies in their taxes and benefits.

#4. Payment Processing

Before you start the payment processing, you need to confirm that all the information and amount indicated in your employees’ paychecks are correct.

This is the final step before depositing or printing paychecks for the completed pay cycle. It doesn’t matter whether you need to verify twice or three times.

At the end of the day, you want to disburse and withhold the correct amount according to the number of hours worked by your staff and the taxes they are obligated to pay.

#5. Accounting

This step depends on the payroll cycle and processes implemented in the company.

After depositing your employees’ salaries into their respective accounts, it’s time to fulfill other responsibilities related to managing payroll.

This could include sending tax and payroll reports to the proper authorities to show that the company abides by local and federal regulations.

The idea is to provide proof that your company regularly pays taxes and provides proper compensation to all your workers.

How to Choose a Payroll Cycle

Now that you know the importance of having a payroll cycle in your company and identifying the different types of pay cycles you can use, here are some additional pointers to help you choose the best one for your operations:

• Nature of work. Consider the nature of work and how you pay your employees. Hourly wages are best suited for daily, weekly, and bi-weekly pay cycles. This is due to state-specific rules on non-exempt employees. If you are employing salaried workers, a semi-monthly and monthly pay cycle are your best options.
• Employee needs and benefits. You need to check whether you need to make necessary arrangements in your pay cycles to address any concerns and needs of your employees. Depending on the size of your company and the work arrangements, some employees might prefer accessing their wages at an earlier date rather than waiting for two weeks or more before receiving their salaries.
• Tax withholdings. See to it that you verify all documents and forms in your employee database. Your pay cycle must adhere to payment schedules, guidelines, and changes in the regulations declared by the IRS. This applies to both withholdings from employees’ salaries and tax liabilities accrued by your business.
• PTO and bonuses. Keeping track of accrued PTO and bonuses should be congruent with your pay cycle. For example, your employees are subject to having their paid leaves renewed once they reach their annual anniversary in your company. Or, they are to receive an additional percentage to their current salary once they become tenured employees. All paid time off and bonuses should reflect accordingly on your employee paychecks and align with your chosen pay cycle.
• Payroll costs. Payroll costs will depend on whether you want to use payroll software or hire additional HR and accounting staff to oversee your payroll cycle practices. Companies that employ over a hundred employees and prefer semi-monthly or monthly pay cycles will definitely benefit from using automated payroll systems.

Final Thoughts

Choosing and implementing a payroll cycle for your employees depends on their nature of work and the size of your company. Also, the payroll cycle you follow will affect how money flows in and out of your business.

Always see to it that your payroll cycle coincides with your tax payment deadlines and that you are capable of generating more than enough funds to keep your operations and pay cycle going smoothly.

Key Takeaways

• A payroll cycle determines the length of time at which a pay period takes place. It is a key factor in calculating employee wages, salaries, taxes, and benefits.
• These are daily, weekly, bi-weekly, semi-monthly, and monthly pay cycles.
• Irregular pay cycles apply to payments deposited only once to employees, such as retroactive payroll, off-cycle payroll, and final payroll.
• All employers should see to it that all employee information is up-to-date all hours worked, and deductions are accurately calculated before paychecks are deposited.
• In choosing a payroll cycle to suit your business, you must always consider the nature of work, your employee’s needs, and expectations, PTO and bonuses, tax withholdings, etc.