A payroll cycle, or pay cycle, is the frequency at which a company pays its workforce.
A payroll cycle ensures employers pay employees regularly. A pay period is the length of time covered by one paycheck and one payroll cycle. Employees receive paychecks on a consistent, predetermined payday at the end of each payroll cycle.
A payroll cycle is typically maintained and administered through a company’s human resources or accounting department. Companies use payroll cycles to ensure fair compensation to employees and correct payroll reporting.
Off-cycle payroll vs. full payroll cycle
A full payroll cycle, or regular payroll cycle, occurs when the employer pays employees’ wages in full on the company’s official payday.
Off-cycle payroll occurs when employees receive additional payments outside the regular payroll run. Off-cycle payments might happen when an employee requires additional payments before the next regular payday.
Payroll cycle types
Employers determine the type of payroll cycle depending on a jurisdiction’s employment laws, the company’s reporting preferences, and employee type. The most common types of payroll cycles include the following:
Weekly pay cycle
With a weekly pay cycle, employees receive a paycheck once a week for 52 total payments each year. Typically, paychecks are administered to employees every Friday.
Weekly pay cycles accommodate employees with irregular schedules or employees with overtime; however, this method is more expensive and time-consuming for HR teams to manage.
Bi-weekly pay cycle
A bi-weekly pay cycle pays employees every two weeks, with 26 pay periods annually. Employees typically receive a paycheck on every other Friday.
A bi-weekly pay schedule is easier and less expensive to administer than a weekly cycle, but it also makes taxes and deductions more difficult to calculate.
Semi-monthly pay cycle
Employers using a semi-monthly pay cycle pay their employees twice a month, for a total of 24 paychecks a year. Typically, payroll occurs on the 1st and the 15th or the 15th and the 30th of every month.
Semi-monthly pay cycles create more stability in employee payments and make deductions for monthly recurring expenses easier to manage. However, overtime and commission for hourly employees are more complex to calculate as some weeks get split between two paychecks.
Monthly pay cycle
Employees on a monthly pay cycle receive paychecks once a month, for 12 payments each year. Payday typically occurs on the last day of the month.
A monthly pay cycle is typically the easiest method for HR teams to administer, and it helps streamline taxes and deductions. Because payments occur less frequently, managing a monthly payroll method may also cost less for businesses.
However, employees must wait longer between payments on a monthly pay cycle, which makes it more difficult to budget and manage expenses.
What is the most common payroll cycle?
Payroll cycle frequency varies by industry and country.
In the United States, the bi-weekly pay period is the most common type of payroll cycle. Some employers opt for a semi-monthly or weekly payroll cycle.
Most countries in Europe, the Middle East, Africa, and the Asia-Pacific follow a monthly payroll schedule. Many Asian countries pay employees monthly, including India, Hong Kong, and China. Canadian regulations allow employers to choose how often they pay employees, as long as payroll follows a consistent and recurring schedule. Employees in Brazil must receive pay at least once a month, as well as a 13th-month bonus.
How to choose a payroll cycle
How an employer chooses a payroll cycle depends on several factors, and it only gets more complicated for companies that pay international employees. Employers must consider their company policies, potential collective bargaining agreements, and local employment laws.
Use the following guidelines to determine which type of payroll cycle may be the best fit:
Research local employment laws
Many countries regulate how often employers should pay their employees and establish requirements for payroll.
For example, in the U.S., the Department of Labor (DOL) enforces the Fair Labor Standards Act (FLSA) for labor laws and standards. The FLSA requires payment of minimum wage, overtime pay for employees working more than 40 hours a week, and accurate information identifying the employee, hours worked, and wages earned.
Employers must understand local labor laws and ensure compliance with those regulations when planning payroll periods.
Consider payroll costs and business cash flow
Money must be available for a business to pay its employees. Ensure there are enough funds in any given pay period to account for all employee payroll costs, which includes wages, salaries, bonuses, commissions, and other payroll items.
Check industry competition
Many industries may share a common payroll cycle, and talent may expect a specific frequency when searching for a job. A business administering payroll once a month may not attract employees who are used to shorter pay cycles commonly associated with that industry.
Prioritize employee needs
Employers should consider employee needs and preferences when determining their pay cycle frequency. In many cases, employees prefer paychecks on a weekly or bi-weekly payroll cycle that provides more regular access to their wages.
What are the four steps of running payroll?
A business' payroll process is critical for ensuring employees receive accurate, on-time pay. We outline general payroll administration steps below:
1. Calculate the employee’s gross pay.
Gross pay includes the wages an employee earns and any bonus pay, commissions, or additional reimbursements.
Determine the gross pay by multiplying the employee’s hourly rate by the hours worked during a pay period. For salaried employees, take the annual income divided by the number of pay periods in a year.
2. Determine their pay deductions.
Taxes and payroll deductions vary by country but may include income tax, social security contributions, medical premiums, retirement contributions, and wage garnishments.
3. Calculate their net income.
Calculate the net income by subtracting all determined payroll deductions from the employee’s gross pay.
4. Pay the employee.
Distribute the net pay to the employee at the end of each payroll cycle in the form of paycheck, cash, or direct deposit payments.
The role of HR in managing payroll cycles
HR teams are crucial in running a smooth, effective, and timely payroll cycle. Managing a payroll cycle means determining a compliant and effective pay cycle, calculating employee pay, processing payroll, and reporting withholdings to government bodies.
Payroll cycles help employers and their HR teams pay their employees accurately and on time. A well-run payroll system contributes to a positive employee experience and affects employee retention, engagement, and productivity. Plus, a better employee experience results in a functional and prosperous business.
Well-managed payroll cycles are critical to talent retention and employee morale and important for maintaining global payroll compliance with local employment laws and regulations. Employers and their HR teams must ensure compliant employee payroll and practice extra vigilance when paying talent in multiple countries.
Many companies outsource global payroll to a trusted payroll partner to simplify the process, reduce overhead, and mitigate noncompliance risks.
Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2023 Velocity Global, LLC. All rights reserved.