Establishing a Pay Period

April 13, 2006

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A payroll period is the interval at which you pay your employees. It can be defined as the period of service for which a payment of wages is ordinarily made to an employee. The words "ordinarily" and "service" are key to this definition.

Payroll periods can be regular or "miscellaneous." Regular payroll periods are daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually. These correspond to the methods for withholding federal income tax. A miscellaneous payroll period is any payroll period other than a regular one (for example, a payroll period of 10 days). Sundays and holidays are included in computing the number of days in such payroll period, after which the daily withholding table is used to compute the tax on the wage payments.

The payroll period you establish triggers the date and timing of payments that you owe the government because of taxes you collected.

Some other questions that may pop up once you've established a payroll period are:

Can there be more than one payroll period? An employee can have only one payroll period for wages paid by any one employer. If an employee is paid a regular wage for a weekly payroll period and, in addition, is paid supplemental wages (a bonus, for example) determined for a different period, the payroll period is still weekly. Your payroll period will be determined by actual pay practices, rather than by a declaration of a payroll period that conflicts with actual practice.

What should I do if an employee doesn't work a whole pay period? The fact that an employee does not work an entire payroll period has no effect on the payroll period. This is true whether an employee starts work or is terminated during a payroll period. For example, Bill has an established weekly payroll period. He is usually paid $280. He is absent three days during one week, resulting in actual earnings for that week of $112. The tax to withhold is computed based on a weekly payroll period for the amount actually earned — $112. It is not computed by finding the tax due on $280 and taking 40 percent of that amount.

How should I handle occasional variations in payroll? If the payroll periods are all of uniform duration, there is no problem. If, however, there is an occasional variation, the payroll period and withholding requirements do not change. This is true even if that period does not coincide with the actual period for which a given payment is made. For example, the No-Return Travel Agency ordinarily pays its employees at the end of the week. However, when an employee was sent on a three-week trip, he was given a single paycheck for those three weeks when he came back. The payroll period is still weekly and, for withholding purposes, the payment must be treated as if it were three separate weekly wage payments.

How should I handle part-time employees' and temporary employees' pay periods? Ask the following questions to determine the payroll period of a part-time or temporary employee:

How many days per week does the employee work? Part-time workers who regularly work less than five days per week must have withholding computed on a miscellaneous (daily) basis, even if the part-time worker is paid every week or on some other regular basis. However, an employee who works five or six days a week and is ordinarily paid at regular weekly intervals is considered to have a weekly payroll period. An exception to this rule is available if the worker has only one employer.
Does the employee work for another employer? Many part-time employees have no other employment. Where these employees work less than five days a week, federal income tax withholding may be computed based on a weekly payroll period. However, for you to use this option, two conditions must first exist:
- You must be the only employer for whom the employee works during the week.
- The employee must give you a written statement that he is not working for any other employer and, if he begins working for another employer, he will notify you within 10 days after the additional employment begins. There is no particular form for this statement but it must contain or be verified by a declaration that it is made under penalties of perjury. If the employee notifies you that he is working for another employer, you must begin withholding based on a daily or miscellaneous payroll period as of the first payroll period ending, or the first payment of wages made without regard to a payroll period, within 30 days of receipt of the notice.
Does the employee work more than 245 days a year? If a part-time employee works more than 245 days in the year in one or more terms of continuous employment with all employers, the employee may request federal income tax to be withheld according to the part-year employment method.

Another consideration you must take into account when establishing a pay period is how often you are required to pay employees. While there are no federal laws that require you to pay employees each week or every two weeks, some state laws do, in fact, set out such requirements.