December 1, 2020

Employee Payday, Pay Cycle and Pay Period – Understand The Difference

Payday, pay cycle, and pay period are three commonly used terms in business payroll. Whether you are an employer or an employee, it is imperative that you understand the meaning of these terms. After all, they pertain to your payment, and when it comes to money, it’s always best to be as accurate as possible.

Some people make the mistake of using these terms interchangeably. But they mean very different things. Let’s understand them in detail.

Payday

As the name suggests, this refers to the day on which an employee is paid his wages. This is the date mentioned on an employee’s monthly paycheck. It is also known as the Paycheck Date.

The payday is a vital detail required while filing your income taxes.

Pay Cycle

The pay cycle refers to how often or the frequency at which an employee gets paid. This is predefined by a company for its employees and depends on its structure, requirements, and convenience. Different employees in a company may have different pay cycles as long as they have agreed upon by both parties. For example, an employee’s pay cycle can be weekly, bi-weekly, or monthly.

The pay cycle is not directly related to your taxes. You don’t have to mention the pay cycle in your tax returns.

Pay Period

A pay period refers to the time period over which an employee worked for the company to get his paycheck.

Let’s take an example. Suppose an employee worked for a company from May 1-31 and got a paycheck on June 1. Then, his payday is June 1. His pay period is May 1-31. His pay cycle is monthly.

Which of These is Important for Payroll and Taxes?

It can be a bit confusing to meddle with so many different fields of financial data. However, the only important data from a payroll and tax perspective is the Payday / Paycheck Date. This date determines the deadline for payroll tax deposits to the Internal Revenue Service (IRS). The Pay Cycle and Pay Period don’t have a direct impact on the deadlines for payroll tax deposits.

There are two deposit schedules to the IRS – monthly and semi-weekly. If you are a business owner, you need to determine your deposit schedule at the beginning of the calendar year (based on your total tax liability reported). After that, you’ll need to adhere to the deposit deadlines based on the payday for your employees.

  • If you have a monthly deposit schedule, you’ll need to deposit taxes on payments made during a month by the 15th of the following month.
  • If you have a semi-weekly deposit schedule, you’ll need to deposit taxes on payments made on Wed, Thurs and/or Fri by the following Wed, and for Sat, Sun, Mon, and Tue by the following Fri.

In both cases, you need to report your deposits quarterly or annually by filing Form 941 or 944.

Understanding the difference between payday, pay cycle, and pay period is crucial for both employees and business owners. As an employee, it helps you stay cued into your payment patterns and plan your expenditure and investment accordingly. As a business owner, it ensures you pay your team on time and adheres to the deadlines of payroll and tax deposits. Many business owners have been penalized for filing their tax deposits late. Staying up to date with payroll terminology and understanding its implications will help you avoid such a scenario.