Paid in arrears is a common method of paying employees. Employers who know how this practice works may be able to improve their payroll process and manage transactions with clients and other third parties more effectively.
What is paid in arrears?
Paid in arrears, as opposed to in advance, means paying for a good or service after the date it is provided. In some cases, this is the specified payment arrangement, but in others, it’s the result of an error or an inability to pay on time.
What does in arrears mean for payroll?
In arrears payroll is the practice of paying employees for labor completed during a previous time frame. For instance, if a two-week pay period ends on a Friday, workers may not receive their paycheck until the following Friday. As long as payment is provided on the designated payday, in arrears payroll is not considered a late payment by the employer.
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Paid in current vs. paid in arrears
The opposite of paid in arrears, current pay allows employees to access their earned wages amid a pay cycle or on the day it ends. Employers using this payment method often have to estimate time and attendance totals, which can complicate the payroll process, particularly when unexpected absences occur. In some cases, subsequent paychecks must be adjusted to correct inaccurate projections.
Why run payroll in arrears
Many businesses pay their employees in arrears because it uses actual data rather than estimates. It also affords them more time to properly calculate all payroll variables – hourly wages, overtime wages, tips, commissions, tax deductions, paid time off, etc.
What are the advantages and disadvantages of paying employees in arrears?
In arrears payroll is simpler to process and more accurate than current payroll. The only drawback is employees usually prefer faster access to their wages. Often, however, they don’t realize that their payments reflect a previous pay period, especially if their work schedules are consistent. Employees whose hours fluctuate from week to week may need an explanation of what it means to be paid in arrears.
This guide is intended to be used as a starting point in analyzing paid in arrears and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
