At some point, most small business owners will have the opportunity to hire their first employee. While this is an exciting moment, there are a few things to figure out before you actually expand your team. Sure, you’ll need to draw up an employment contract and you’ll probably need to learn how to make coffee for two. But perhaps the most important part of hiring your first employee is setting up payroll.
If you’re new to the world of small business payroll, the first step is to choose the right pay period for your employees. While choosing a pay period might sound complicated, it’s easier than you think—you just need the right information.
What is a Pay Period?
For payroll newbies, it’s important to understand what exactly a pay period is. Understood in the simplest terms, a pay period is a recurring period during which an employee’s time is recorded and paid. There are four different options when it comes to pay periods: weekly, bi-weekly, semi-monthly, and monthly. Some pay periods are more common than others and each comes with their own advantages and disadvantages.
A weekly pay period means that employees are paid on the same day each week and receive 52 paycheques per year. For example, employees could be paid every Friday. This payroll schedule is most common for hourly employees in the trades and service industries because work hours can vary considerably from week to week.
A weekly pay period is appreciated by employees because it means they receive their wages more frequently. However, weekly payroll is more time-consuming because it means payroll needs to be run every single week. It can also be a more expensive option if your payroll provider charges a fee each time payroll is run.
One of the most popular pay periods is bi-weekly. In this case, employees are paid every other week on the same day, resulting in 26 paycheques per year. For example, employees could be paid every other Friday. However, 26 doesn’t divide evenly into 12 months, which means that some months employees will receive three cheques instead of two. In some years, employees are given a total of 27 paycheques.
Bi-weekly pay is fairly popular among employees as it is one of the most common pay periods. Bi-weekly pay periods are less time-consuming because payroll only needs to be run every other week. However, the person running payroll must contend with the fact that bi-weekly payroll doesn’t line up as well with monthly reporting and benefit deductions may require adjustment.
A semi-monthly pay period means that employees are paid twice a month. For instance, employees could be paid on the 15th and 30th of the month. This may sound similar to bi-weekly pay, but with semi-monthly payments, employees only receive 24 paycheques per year. It’s also important to note that adjustments need to be made when a payday falls on a weekend or holiday. In these situations, most employers opt to pay their employees early.
The semi-monthly pay period is popular among employees and is one of the most common payroll schedules. This method is also favourable because it lines up nicely with monthly reporting.
Finally, there are monthly pay periods, whereby employees are paid once a month on a set date, resulting in 12 paycheques per year. This payroll schedule is fairly uncommon because a number of provinces have regulations in place that require employers to pay their employees more frequently than once per month.
For companies that are able to run monthly payroll in their province, this schedule is easy and inexpensive to manage. However, it is fairly unpopular among employees because it means longer periods of time between paydays.
Which Pay Period is Best?
From the above, it may seem like there are a lot of options when it comes to choosing a pay period for your employees. That being said, some pay periods are better for certain businesses than others. In order to find the right fit for your business, you’ll need to take a few factors into consideration.
Provincial Labour Laws and Regulations
It’s important to check the specific labour laws for your province before choosing a pay period for your employees. In some provinces, there are regulations that dictate how often employees must be paid. For example, in Manitoba, “Employees must be paid at least twice a month, within 10 working days of the end of a pay period.” This means that monthly payroll is not an option if you’re an employer in Manitoba. However, in Ontario, employers simply “must establish a regular pay period and a regular pay day for employees,” giving them more flexibility when it comes to choosing a pay period.
As a rule of thumb, keep in mind that you can always pay more frequently, but not less.
While you will probably spend a lot of time thinking about how different pay periods will affect your business, don’t forget to consider your employees’ needs as well. As you might have guessed, employees like to be paid more frequently than less. In certain industries such as the trades and service industries, weekly payroll is expected by most employees. Therefore, it’s important to think about what your employees’ expectations are when it comes to pay frequency.
Payroll Software Provider
Another factor to take into account when choosing a pay period is your payroll software provider. In Canada, there are many different payroll platforms and the time and cost of running payroll often depend on which provider you choose. For example, some payroll providers will charge you each time payroll is run, thereby making it more expensive to run weekly payroll. However, other payroll providers offer unlimited pay runs, which can save you money if you’re running weekly payroll or you frequently run off-cycle payrolls.
Similarly, some platforms are intuitive and designed specifically with the end user in mind, while other payroll platforms are geared towards those with in-depth accounting and bookkeeping knowledge.
Cheque vs Direct Deposit
Finally, there is the question of whether you intend to pay your employees via cheque or direct deposit. If you’re planning to pay your employees with physical cheques, keep in mind that this will mean a lot of your time spent writing cheques and a lot of your employees’ time spent visiting the bank to deposit those cheques. In this case, less frequent payroll may be the better option.
On the other hand, direct deposit is quick and inexpensive, which lends itself to multiple different payroll schedules.
Changing Your Payroll Frequency
At some point down the line, you may wish to change how often you pay your staff or move staff from one pay period to another. While changing your payroll frequency is possible, this process requires a good understanding of your CPP contributions. Service Canada also requires that you issue ROEs for each employee whose pay period you change. Though most payroll software providers will be able to handle the calculation changes, it’s recommended that you do not switch payroll frequencies unless you really need to.
At the end of the day, there’s no one-size-fits-all pay period. What works well for a boutique yoga studio may not work for a growing tech startup. Therefore, the best way to know which pay period is right for your small business is to ask an accounting professional like the experts at UpSide Accounting.