When it comes to running a small business, hiring your first employee is one of the most exciting milestones you’ll achieve. But along with starting a new team comes the daunting task of setting up a payroll schedule. While this may sound fairly straightforward, choosing a payroll schedule comes with a number of legal and practical implications for both employees and employers. It’s also wise to pick the right pay frequency right from the get-go, as changing your payroll schedule down the line can be a bit tricky.
To help you figure out how to choose a payroll schedule for your small business, we’ve broken the process down into just three simple steps.
Step 1: Learn About the Different Payroll Schedules
You’ve heard of bi-weekly payments, but what about semi-monthly? There’s more than one option when it comes to payroll schedules, which is why it’s important to learn a bit more about each option before committing to one.
The four most common payroll schedules in Canada are:
Employees are paid on the same day each week and receive 52 paycheques per year. This payroll schedule is most common for hourly employees in the trades and service industries because work hours often vary from week to week.
While employees often appreciate being paid more frequently, weekly payroll can be tough for accountants and bookkeepers to manage because is more time-consuming than less frequent payroll schedules. It can also be a more expensive payroll option if your payroll provider charges each time you run payroll.
Employees are paid every other week on the same day (ex. Fridays) and receive 26 paycheques per year. However, because 26 doesn’t divide evenly into 12 months, two additional paycheques are required each year. In some years, employees are given 27 paycheques.
Bi-weekly pay is one of the most common payroll schedules and is popular among employees. While accountants and bookkeepers save time by only running payroll every other week, the bi-weekly payroll schedule is slightly less preferable from an accounting and bookkeeping standpoint because it doesn’t line up as well with monthly reporting and benefit deductions may require adjustment.
Employees are paid twice a month (ex. on the 1st and 15th, or the 15th and 30th) and receive 24 paycheques per year. It’s important to note that adjustments will need to be made when a payday falls on a weekend or holiday. In these cases, most employers opt to pay their employees early.
Semi-monthly is also a popular payroll schedule and is preferred by most employees. Accountants and bookkeepers also prefer this method because it lines up nicely with monthly reporting. However, overtime is sometimes more difficult to calculate when using this payroll schedule.
Employees are paid once a month on a set date and receive 12 paycheques per year. This payroll schedule is not commonly used due to provincial payday regulations that require employers to pay their employees more frequently than once per month.
For companies that are able to run monthly payroll, this schedule is easy and inexpensive to manage. However, it is fairly unpopular among employees because it means longer periods of time between paydays.
Although there are technically four different payroll schedules to choose from, it's important to double check the labor laws for your province before choosing a payroll schedule. In some cases, provincial laws specify how often employees should be paid, meaning certain payroll schedules may not be an option for your company. For example, in British Columbia, “Pay periods cannot be longer than 16 days.” In this case, a monthly payroll schedule is not an option.
As a rule of thumb, remember that you can always pay more frequently, but not less. You can also choose to create different pay schedules for different employees (as long as you follow your province’s minimum pay period requirements). However, for simplicity’s sake, many small and medium size businesses with just a handful of employees choose to stick to one payroll schedule for everyone.
Step 2: Consider Your Business Needs
Now that you know the difference between the different pay periods, you’re probably thinking, “but how do I choose a payroll schedule that’s right for my business?” While there are no hard and fast rules when it comes to choosing a payroll schedule, you can narrow things down by taking the following factors into account:
Your Employees’ Preferences
When choosing a payroll schedule, it’s important to take your employee’s preferences and expectations into account. Remember that payroll schedules dictate how often employees are paid and what is appropriate for their position or job title. In certain industries, like construction or the service industry, employees expect to be paid more frequently. Make sure you take your employees into account when by setting up a pay period that suits their job and financial circumstances.
Your Break-Even Point
You’ll need to know the break-even point for your business in order to know how often you can afford to pay your employees. Remember, when benefits are factored in, that employee making $15 per hour may actually have a much higher total cost.
Similar to your break-even point, looking at your cash flow can also help you determine when it is best to pay your employees. For instance, if you charge clients at the beginning of each month, it might make sense to run payroll right after that because you know you’ll have plenty of cash on hand. However, keep in mind that clients don’t always pay on time, so it can be tricky to use cash flow as the deciding factor in choosing the right payroll schedule.
In some provinces, there are rules about how frequently you need to pay your employees. You need to take these provincial rules into account when choosing your payroll schedule. You also need to consider other compliance details such as overtime requirements, your monthly remittance period as assigned by the CRA, and more.
Your Payroll Provider
Lastly, but perhaps most importantly, you need to think about the cost and time commitment of running payroll and that often depends on which payroll provider you’re using. For example, some payroll providers charge every single time payroll is run, 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 payroll frequently or you find yourself running a lot of off-cycle payrolls. Similarly, some software can make the payroll process quick and easy, while other programs require more manual input.
Step 3: Choose Your Payroll Schedule
Having considered all the different pay period options, checked for provincial regulations, and then taken your own business needs into account, you’ve probably figured out which pay schedule is best for you. Now it's time to actually implement that payroll schedule.
If you’re working with a bookkeeper or accountant, they can recommend payroll software and help you set up your pay runs. Once set up, you can keep track of your paydays and pay run days with a Official Canadian Payroll Calendar for 2019. This free calendar not only gives you a month-by-month view of your payroll dates, but you can even sync the dates to your Google, Apple, or Outlook calendar so you always know when a pay run day is coming.
To learn more about payroll software and industry best practices, contact the accounting experts at Counttech.ca.